Module II

Pricing Concepts
1 Learning Objective
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Discuss the
importance of
pricing decisions to
the economy and to
the individual firm.
1 The Importance of Price

To
To the
the seller...
seller... To
To the
the consumer...
consumer...
Price
Price is
is revenue
revenue Price
Price is
is the
the cost
cost
and
and profit
profit source
source of
of something
something

In
In the
the broadest
broadest sense,
sense,
price
price allocates
allocates resources
resources
in
in aa free-market
free-market economy
economy
1 What Is Price?

Price is that which is given

up in an exchange to
acquire a good or service.
 The Importance of Price
1
to Marketing Managers

The
The price
price charged
charged toto customers
customers
Revenue
Revenue multiplied
multiplied by
by the
the
number
number of
of units
units sold.
sold.

Profit
Profit Revenue
Revenue minus
minus expenses
expenses
1 The Importance of Price

Revenue = Unit Price  Number of units sold

 Revenue pays for every activity.

 What’s left over is Profit.

To earn a profit,
marketers must select a price
that is not too high
or not too low,
a price that equals
the perceived value to target consumers
1 Trends Influencing Price Setting

Flood
Floodof
ofnew
new
product
productintroductions
introductions

Increased
Increasedavailability
availabilityof
of
bargain-priced
bargain-pricedprivate
privateand
and
Trends
Trends generic
genericbrands
brands
in
in the
the
Market Price
Pricecutting
cuttingas
asaastrategy
strategyto
to
Market maintain
maintainor
orregain
regain
market
marketshare
share

AAgeneral
generaldecline
declineininconsumer
consumer
confidence
confidenceafter
afterterrorist
terroristattacks
attacks
2 Learning Objective

List and explain a

variety of pricing
objectives.
2 Pricing Objectives

Profit-Oriented
Profit-Oriented Pricing
Pricing Objectives
Objectives

Sales-Oriented
Sales-Oriented Pricing
Pricing Objectives
Objectives

Status
Status Quo
Quo Pricing
Pricing Objectives
Objectives
2 Profit-Oriented Pricing Objectives

Profit-Oriented
Profit-Oriented Pricing
Pricing Objectives
Objectives

Target
Target
Profit
Profit Satisfactory
Satisfactory Return
Return on
on
Maximization
Maximization Profits
Profits Investment
Investment
2 Profit Maximization

Setting prices so that

total revenue is as large
as possible relative
to total costs.
2 Return on Investment

Net profit after taxes

divided by total assets.

ROI = Net Profit after taxes

Total assets
2 Sales-Oriented Pricing Objectives

Sales-Oriented
Sales-Oriented Pricing
Pricing Objectives
Objectives

Market
Market Sales
Sales
Share
Share Maximization
Maximization
2 Market Share

A company’s product sales

as a percentage of total
sales for that industry.
2 Sales Maximization

 Short-term objective to maximize sales

 Ignores profits, competition, and the

marketing environment

 May be used to sell

off excess inventory
2 Status Quo Pricing Objectives
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Status
Status Quo
Quo Pricing
Pricing Objectives
Objectives

Maintain
Maintain Meet
Meet
existing
existing competition’s
competition’s
prices
prices prices
prices
3 Learning Objective

Explain the role of

demand in price
determination.
3 Demand and Supply

The
The quantity
quantity ofof aa product
product that
that
Demand
Demand will
will be
be sold
sold in
in the
the market
market atat various
various
prices
prices for
for aa specified
specified period.
period.

The
The quantity
quantity of of aa product
product
Supply
Supply that
that will
will be
be offered
offered toto the
the market
market
by
by aa supplier
supplier at at various
various prices
prices
for
for aa specific
specific period.
period.
3 The Demand Curve

2.50 D
2.00
Price

1.50
D
1.00

.50

0 20 40 60 80 100 120
Quantity demanded
3 On
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2.50 S

2.00
Price

1.50

1.00
S
.50

0 20 40 60 80 100 120
Quantity supplied
3 Price Equilibrium

The price at which demand

and supply are equal.
3 Equilibrium Price

2.50 S
D Surplus
2.00
Price
Price

1.50 Equilibrium
1.00
S Shortage
.50 D

0 20 40 60 80 100 120
Quantity demanded
3 Elasticity of Demand

Consumers’ responsiveness
or sensitivity to changes
in price.
3 Elasticity of Demand

 Consumers buy more or less

Elastic
Elastic of a product when the
Demand
Demand price changes

 An increase or decrease in
Inelastic
Inelastic price will not significantly
Demand
Demand affect demand

 An increase in sales exactly

Unitary
Unitary offsets a decrease in prices,
Elasticity
Elasticity and revenue is unchanged
3 Elasticity of Demand

Price
Price Goes...
Goes... Revenue
Revenue Goes...
Goes... Demand is...

Down Up Elastic

Down Down Inelastic

Up Up Inelastic

Up Down Elastic

Up or Down Stays the Same Unitary Elasticity

3 Elasticity of Demand

Elastic Demand Curve Inelastic Demand Curve

D
D
Price

Price
D

D
Quantity Quantity
 Factors that Affect
3
Elasticity of Demand
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Availability
Availability of
of Substitutes
Substitutes

Price
Price relative
relative to
to
purchasing
purchasing power
power

Product
Product durability
durability

A
A product’s
product’s other
other uses
uses
4 Learning Objective

Understand the
concept of yield
management
systems.
4 Yield Management Systems

A technique for adjusting

prices that uses complex
mathematical software
to profitably fill
unused capacity.
 Yield Management Systems
4
Price Adjustments

Discounting
Discounting
early
early purchases
purchases

Limiting
Limiting early
early sales
sales at
at
discounted
discounted prices
prices

Overbooking
Overbooking capacity
capacity
5 Learning Objective

Describe cost-oriented
pricing strategies.
5 The Cost Determinant of Price

Types
Types of
of Costs
Costs

Variable
Variable Fixed
Fixed Costs
Costs
Costs
Costs

Deviate
Deviate with
with changes
changes Do
Do not
not deviate
deviate
in
in level
level of
of output
output as
as level
level of
of output
output changes
changes
5 The Cost Determinant of Price

Markup
Markup pricing
pricing

Keystoning
Keystoning
Methods
Methods
Used
Used toto Profit
Profit Maximization
Maximization
Set
Set Prices
Prices Pricing
Pricing
Break-Even
Break-Even
Pricing
Pricing
Target-Return
Target-Return
Pricing
Pricing
5 Markup Pricing

The
The cost
cost of
of buying
buying the
the product
product from
from
Markup
Markup the
the producer
producer plus
plus amounts
amounts for
for
Pricing
Pricing profit
profit and
and for
for expenses
expenses not
not
otherwise
otherwise accounted
accounted for.
for.

The
The practice
practice of
of marking
marking up
up prices
prices
Keystoning
Keystoning by
by 100%,
100%, or
or doubling
doubling the
the cost.
cost.
5 Profit Maximization

A
A method
method of
of setting
setting prices
prices that
that
Profit
Profit occurs
occurs when
when marginal
marginal revenue
revenue
Maximization
Maximization equals
equals marginal
marginal cost.
cost.

The
The extra
extra revenue
revenue associated
associated with
with
Marginal
Marginal selling
selling an
an extra
extra unit
unit of
of output,
output, or
or
Revenue
Revenue the
the change
change inin total
total revenue
revenue with
with aa
one-unit
one-unit change
change in in output.
output.
5 Break-Even Pricing

Total Revenue fi t
Pro
4,000 Total Costs
Break-even point
Price

o ss
2,000 L
Fixed costs

0 1,000 2,000 3,000 4,000 5,000 6,000

Quantity
5 Break-Even Pricing

Break-Even Total Fixed Costs

=
Quantity Fixed cost Contribution

Fixed cost
= Price -- Avg. Variable Cost
Contribution
6 Learning Objective

Demonstrate how the

product life cycle,
competition, distribution
and promotion strategies,
customer demands, the
Internet and extranets,
and perceptions of
quality can affect price.
6 Other Determinants of Price

Stages
Stages of
of the
the
Product
Product Life
Life Cycle
Cycle

Competition
Competition

Distribution
Distribution Strategy
Strategy

Promotion
Promotion Strategy
Strategy

Perceived
Perceived Quality
Quality
 On
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Product Life Cycle
Introductory Growth Maturity Decline
Stage Stage Stage Stage

Rs. Rs. Rs. Rs.

High Stable Decrease Decrease

Stable

High
6 Distribution Strategy

Convincing
Convincing distributors
distributors
to
to carry
carry product
product

Offer
Offer aa larger
larger Give
Give dealers
dealers aa large
large
profit
profit margin
margin trade
trade allowance
allowance
6 Selling Against the Brand

Stocking well-known
branded items at high
prices in order to sell
store brands at
discounted prices.
6 Regaining Price Control

Exclusive
Exclusive
distribution
distribution system
system

Franchising
Franchising

Avoid
Avoid business
business with
with
price-cutting
price-cutting discounters
discounters
Package
Package marked
marked with
with
selling
selling price
price

Place
Place goods
goods on
on consignment
consignment

DEVELOP
DEVELOP
BRAND
BRAND LOYALTY
LOYALTY
6 On
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The Impact of the Internet
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 Buyers can compare products and prices

 Sellers can collect detailed customer data
 Online merchants can compare other
merchant’s prices and adjust their own easily
 Bargaining power is created between
buyers and sellers
6 Extranet

A private electronic network

that links a company
with its suppliers
and customers.
6 Prestige Pricing
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Charging a high price to

help promote a high-quality
image.
6 Prestige Dimensions of Quality

Performance

Serviceability

Durability

Versatility

Ease of Use