MKTG - 2ce - PPT - INST Ch18

NETA
PowerPoint
Slides
to accompany
MKTG
Second Canadian Edition
Prepared by
Janice Shearer,
Mohawk College
MKTG
Pricing Concepts
LO
18
Learning Outcomes
LO 1 Discuss the importance of pricing decisions to the economy
and to the individual firm
LO 2 List and explain a variety of pricing objectives
LO 3 Explain the role of demand in price determination
LO 4 Understand the concept of yield management systems
LO 5 Describe cost-oriented pricing strategies
LO 6 Demonstrate how price can be affected by the product life
cycle, competition, distribution, the Internet and extranets,
promotion strategy, customer demands, and perceptions of
quality
LO 1
Copyright 2013 by Nelson Education Ltd.
The Importance of Price
Discuss the importance of

pricing decisions to the
economy and to the
individual firm
LO 1
What Is Price?
That which is given up in an
exchange to acquire a good
or service
LO 1
What Is Price?
Price paid is based on the
satisfaction consumers expect to
receive from a product and not
necessarily on the satisfaction they
actually receive
LO 1
The Importance of Price to

Marketing Managers
Revenue
=Price Units
Unit
Profit = Revenue Expenses
LO 1

Marketing Managers
TrendsConsumer Market
Choice = buyers who carefully evaluate
price of one product against the value of
others
Increased availability of bargain-priced
and generic brands
Firms cutting price to grow or maintain
market share
Internet has enable easier comparison
shopping
LO 1

Marketing Managers
TrendsBusiness Market
Buyers are becoming more price
sensitive and better informed
Improved communication and the
increased use of direct marketing and
computer-aided selling
LO 1
Pricing Objectives
List and explain a variety

of pricing objectives
LO 2
10
Pricing Objectives
Specific
Measurable
Attainable
Relevant
Time-related
LO 2
11
Profit-Oriented Pricing
Objectives
Profit
Maximization:
Setting prices so
that total revenue
is as large as
possible relative to
total costs
Does not always
signify
unreasonably high
prices
LO 2
12
Profit-Oriented Pricing
Objectives
Satisfactory profits: Reasonable
profits
Satisfactory to the stockholders and
management
Target Return on Investment

(ROI):
Measures managements overall
effectiveness in generating profits
with the companys assets that have
come
from
its
investors
LO 2
13
Two Ways to Measure Market Share (Units and

Revenue)
Market share: Sales as a percentage of total
sales for that industry
Compan
y
Units
Sold
Unit
Price
Total
Revenue
1,000
200
4.00
C
D
Total
LO 2
$1.00 $1,000,00
0
Unit
Market
Share
Revenue
Market
Share
50%
25%
800,000
10%
20%
500
2.00 1,000,000
25%
25%
300
4.00 1,200,000
15%
30%
2000
$4,000,00
0
14
Sales-Oriented Pricing
Objectives
Sales maximization: Ignore profits,
competition, and the marketing
environment as long as sales are
rising
Maximization of cash should never
be a long-run objective
Cash maximization may mean little or
no profitability
LO 2
15
Status Quo Pricing Objectives

Maintain existing prices or meet the
competitions prices
Requires little planning
LO 2
16
The Demand Determinant

of Price
Explain the role of demand

in price determination
LO 3
17
The Demand Determinant

of Price
Must set specific prices to reach
pricing goals
Price depends mostly on :
1. Demand for the good or service
2. Cost to the seller for that good or
service
LO 3
18
The Nature of Demand

Demand is the
quantity of a
product that will be
sold
LO 3
19
The Nature of Demand

Supply is the
quantity of a
product that will be
offered to a market
by suppliers for a
specific period of
time
LO 3
20
How Demand and Supply

Establish Prices
Price equilibrium: When demand and supply are equal
LO 3
21
Elasticity of Demand
Elasticity of demand: Consumers
responsiveness or sensitivity to
changes in price
Elastic demand: Consumer demand is
sensitive to changes in price
Inelastic demand: Increase/decrease in
price will not significantly affect demand
Unitary demand: Total revenue stays
the same when prices change
LO 3
22
Percentage change in
Elasticity (E) =quantity demanded of good A
Percentage change in
price of good A
If E is greater than 1, demand is elastic
If E is less than 1, demand is inelastic
If E is equal to 1, demand is unitary
LO 3
23
Elasticity can be measured by
observing:
LO 3
24
LO 3
25
LO 3
26
LO 3
27
The Power of Yield Management

Systems
Understand the concept of

yield management systems
LO 4
28
The Power of Yield Management

Systems
When competitive pressures are
high, a company must know when it
can raise prices to maximize its
revenues
Yield management systems
(YMS): Use complex mathematical
software to profitably fill unused
capacity
LO 4
29
Yield ManagementGetting
People to the Game
LO 4
30
The Cost Determinant of Price
Describe cost-oriented
pricing strategies
LO 5
31

Variable cost: Varies with changes
in the level of output, such as the
cost of materials
Fixed cost: Does not change as
output is increased or decreased
LO 5
32

Average variable cost (AVC): Total
variable costs divided by quantity of
output
Average total cost (ATC): Total
costs divided by output
AVC and ATC are U-shaped curves
Average fixed cost (AFC) declines
continually as output increases because
total fixed costs are constant
LO 5
33

Marginal cost (MC): The change in
total costs associated with a one-unit
change in output
LO 5
34
LO 5
35
LO 5
36
Markup Pricing
Represents the cost of buying the
product from the producer, plus
amounts for profit and for expenses
not otherwise accounted for
The total determines the selling price
LO 5
37
Markup Pricing
Markup (cost) =$ Markup 100%
$ Cost
$0.40
100%
=
$1.80
= 22%
LO 5
38
Markup Pricing
Markup (selling) = $ Markup 100%
$ Retail selling price
=$0.40 100%
$2.20
=
18%
LO 5
39
Markup Pricing
Cost
Retail Price =
1 Desired return on sales
$1.80
=
1 0.18
= $2.20
If the retailer wants a 30 percent return, then:
Retail Price = $1.80
1 0.30
= $2.57
LO 5
40
Markup Pricing
Markups are often based on
experience
Price 2 = Keystoning
LO 5
41
Markup Pricing
Factors influencing markup
pricing:
LO 5
42
Profit Maximization
Pricing
Producers tend to use more
complicated methods of setting
prices than distributors use
One method is profit
maximization:
marginal revenue = marginal costs
LO 5
43
Profit Maximization
Pricing
LO 5
44
Profit Maximization
Pricing
LO 5
45
Break-Even Pricing
Break-even analysis
Determines the required sales volume
to be reached before the company
breaks even (its total costs equal total
revenue) and no profits are earned
LO 5
46
Break-Even Pricing
LO 5
47
BreakEven Analysis
LO 5
48
Break-Even Pricing
Break-even (quantity) = Total fixed costs
Price Variable costs
Total
foxed
costs
or
Fixed-cost contribution
BE (volume) = $12,000/ ($0.80)

$0.36)/kg
= 27,273 kg
LO 5
49
Break-Even Pricing
Limitations:
Price and average cost per unit are
assumed to be constant, but supply can
affect price
Difficult to know whether cost is fixed or
variable
Simple break-even analysis ignores
demand
LO 5
50
Other Determinants of
Price
Demonstrate how price can be
affected by the production life
cycle, competition, distribution
and promotion strategies,
customer demands, the Internet
and extranets, and perceptions
of quality
LO 6
51
Stages of the Product Life Cycle
LO 6
52
New Releases = Higher Prices!
LO 6
53
Competition
Intense competition can lead to price
wars
Need to strategize to ensure price
does not become the key variable
LO 6
54
Distribution
Effective distribution can become a
competitive differential advantage,
resulting in price becoming a nonissue in the purchase decision
Conveniencevalue
LO 6
55
Impact of Technology
LO 6
56
The Impact of the Internet and

Extranets
Enabling buyers to quickly and easily
compare products and prices
Puts them in a better bargaining position
Allows sellers to collect detailed data

about customers buying habits,
preferences, spending limits
Sellers can tailor their products and
prices
LO 6
57
Promotion Strategy
Price is often used as a promotional
tool to increase consumer interest
Pricing can also be a tool for trade
promotions
LO 6
58
Demands of Large Customers

Manufacturers find that their large
customers such as department
stores often make specific pricing
demands that the suppliers must
agree to
Wal-Mart!
LO 6
59
The Relationship of Price

to Quality
Reliance on price as an indicator of
quality seems to occur for all
products, but reveals itself more
strongly for some items than for
others
Prestige pricing
LO 6
60
Your Turn
In your own words, discuss how
technology can be used to both
positively and negatively affect a
marketing managers ability to set
prices.
LO
61
Your Turn
Would you use break-even analysis
to set your price? Why or why not?
LO
62

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Second Canadian Edition

Copyright 2013 by Nelson Education Ltd.

The Importance of Price

Discuss the importance of

Copyright 2013 by Nelson Education Ltd.

Copyright 2013 by Nelson Education Ltd.

Copyright 2013 by Nelson Education Ltd.

The Importance of Price to

Profit = Revenue Expenses

Copyright 2013 by Nelson Education Ltd.

The Importance of Price to

Copyright 2013 by Nelson Education Ltd.

The Importance of Price to

Copyright 2013 by Nelson Education Ltd.

List and explain a variety

Copyright 2013 by Nelson Education Ltd.

Copyright 2013 by Nelson Education Ltd.

Copyright 2013 by Nelson Education Ltd.

Target Return on Investment

Two Ways to Measure Market Share (Units and

Copyright 2013 by Nelson Education Ltd.

Status Quo Pricing Objectives

Copyright 2013 by Nelson Education Ltd.

The Demand Determinant

Explain the role of demand

Copyright 2013 by Nelson Education Ltd.

The Demand Determinant

Copyright 2013 by Nelson Education Ltd.

The Nature of Demand

Copyright 2013 by Nelson Education Ltd.

The Nature of Demand

Copyright 2013 by Nelson Education Ltd.

How Demand and Supply

Price equilibrium: When demand and supply are equal

Copyright 2013 by Nelson Education Ltd.

Copyright 2013 by Nelson Education Ltd.

Copyright 2013 by Nelson Education Ltd.

Copyright 2013 by Nelson Education Ltd.

Copyright 2013 by Nelson Education Ltd.

Copyright 2013 by Nelson Education Ltd.

Copyright 2013 by Nelson Education Ltd.

The Power of Yield Management

Understand the concept of

Copyright 2013 by Nelson Education Ltd.

The Power of Yield Management

Copyright 2013 by Nelson Education Ltd.

Copyright 2013 by Nelson Education Ltd.

The Cost Determinant of Price

Copyright 2013 by Nelson Education Ltd.

The Cost Determinant of Price

Copyright 2013 by Nelson Education Ltd.

The Cost Determinant of Price

Copyright 2013 by Nelson Education Ltd.

The Cost Determinant of Price

Copyright 2013 by Nelson Education Ltd.

The Cost Determinant of Price

Copyright 2013 by Nelson Education Ltd.

The Cost Determinant of Price

Copyright 2013 by Nelson Education Ltd.

Copyright 2013 by Nelson Education Ltd.

Copyright 2013 by Nelson Education Ltd.

Copyright 2013 by Nelson Education Ltd.