Principles of marketing MKTG 8e joe hair carl mcdaniel chapter 19

Pricing
Concepts

Chapter 19
2014-2015

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Lamb, Hair, McDaniel


1

Discuss the importance of pricing
decisions to the economy and to the
individual firm

2

List and explain a variety of pricing
objectives

3

Explain the role of demand in price
determination

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4

Understand the concept of yield
management systems

5

Describe cost-oriented pricing strategies

6

Demonstrate how the product life cycle,
competition, distribution and promotion
strategies, customer demands, the Internet
and extranets, and perceptions of quality
can affect price

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The Importance of Price

Discuss the importance of

pricing decisions to the
economy and to the
individual firm

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The Importance of Price

Price
Price allocates
allocates resources
resources
in
in aa free-market
free-market economy
economy

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What is Price?
• The Sacrifice Effect of Price

– Price is that which is sacrificed to get a
good or service.

• The Information Effect of Price
– People infer quality information based on
price.

• Value Is Based upon Perceived
Satisfaction
– “Reasonable price” means “perceived
reasonable value.”
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The Importance of Price to
Marketing Managers
Revenue
Revenue

The
Theprice
pricecharged
chargedto
to
customers
customersmultiplied
multipliedby

by
the
thenumber
numberof
ofunits
unitssold.
sold.

Profit
Profit

Revenue
Revenueminus
minusexpenses.
expenses.

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Trends Influencing Price
Flood
Floodof
ofnew
newproducts
products
Increased
Increasedavailability

availabilityof
ofbargain-priced
bargain-priced
private
privateand
andgeneric
genericbrands
brands
Price
Pricecutting
cuttingas
asaastrategy
strategyto
tomaintain
maintainor
or
regain
regainmarket
marketshare
share
Internet
Internetused
usedfor
forcomparison
comparisonshopping
shopping

1

U.S.

U.S.recession
recessionfrom
fromlate
late2007
2007to
to2009.
2009.
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Pricing Objectives

List and explain a
variety of pricing
objectives

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Pricing Objectives
Profit Oriented

Sales Oriented

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

Profit
Profit
Maximization
Maximization

Satisfactory
Satisfactory
Profits
Profits

Target
Target
Return
Returnon
on
Investment
Investment

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Profit Maximization
Setting prices so that total revenue is
as large as possible relative to total
costs.

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Return on Investment
(ROI)
Net profit after taxes divided by
total assets.
ROI = Net profit after taxes
Total assets

2
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Sales-Oriented Pricing Objectives
Sales-Oriented Pricing Objectives

Market
Market
Share
Share

Sales
Sales
Maximization
Maximization

2
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Market Share
A company’s product sales as
a percentage of total sales for
that industry.

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Sales Maximization
Rather than strive for market share,

sometimes companies try to maximize
sales.
Uses a short-term objective to
maximize sales
Ignores profits, competition, and the
marketing environment
May be used to sell off excess
inventory
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Status Quo Pricing Objectives
Status Quo Pricing Objectives

Maintain
Maintain
existing
existing
prices
prices

Meet
Meet
competition’s
competition’s
prices
prices

2
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The Demand
Determinant of Price

Explain the role of
demand in price
determination

18

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3


The Demand
Determinant of Price
Demand
Demand

Supply
Supply

The

Thequantity
quantityof
ofaaproduct
productthat
that
will
willbe
besold
soldininthe
themarket
marketat
atvarious
various
prices
pricesfor
foraaspecified
specifiedperiod.
period.

The
Thequantity
quantityof
ofaaproduct
productthat
thatwill
will
be
beoffered
offeredto
tothe

themarket
marketby
byaasupplier
supplier
at
atvarious
variousprices
pricesfor
foraaspecific
specificperiod.
period.

3
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Exhibit 19.2

Price per package of gourmet
cookies ($)

Packages of gourmet cookies demanded
per week

Price per package of gourmet
cookies ($)

Packages of gourmet cookies

demanded per week

3.00

35

1.50

85

2.50

50

1.00

120

2.00

65

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Exhibit 19.3

Price per package of gourmet

cookies ($)

Packages of gourmet cookies supplied
per week

Price per package of gourmet
cookies ($)

Packages of gourmet cookies
supplied per week

3.00

140

1.50

85

2.50

130

1.00

25

2.00

110

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How Demand and Supply
Establish Price
Price
Price
Equilibrium
Equilibrium

The
Theprice
priceat
atwhich
whichdemand
demand
and
andsupply
supplyare
areequal.
equal.

Elasticity
Elasticity
of
ofDemand
Demand

Consumers’
Consumers’responsiveness
responsiveness
or
orsensitivity
sensitivityto
tochanges
changes
in
inprice.
price.

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Exhibit 19.4

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Elasticity of Demand

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Elastic
Elastic
Demand
Demand

Consumers buy more or less
of a product when the
price changes.

Inelastic
Inelastic
Demand
Demand

An increase or a decrease in
price will not significantly
affect demand.

Unitary
Unitary
Elasticity
Elasticity

An increase in sales exactly
offsets a decrease in prices,
so total revenue remains the
same.

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Elasticity of Demand

If E > 1, demand is elastic.
If E < 1, demand is inelastic.
If E = 1, demand is unitary.

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