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  1. PRICING Key Concepts

  2. To the seller...Price is REVENUE To the consumer...Price is the COSTof something The Importance of Price Price allocates resources in a free-market economy

  3. What Is Price? Price Price is that which is given up in an exchange to acquire a good or service.

  4. Revenue The price charged to customers multiplied by the number of units sold. Profit Revenue minus expenses. The Importance of Price to Marketing Managers

  5. Flood of new products Increased availability of bargain-priced private and generic brands Price cutting as a strategy to maintain or regain market share Internet used for comparison shopping Trends Influencing Price

  6. Price X Sales Unit = Revenue Revenue – Costs = Profit Profit drives growth, salary increases, and corporate investment The Importance of Pricing Decisions

  7. Profit-Oriented Sales-Oriented Status Quo Pricing Objectives

  8. Profit-Oriented Profit Maximization Satisfactory Profits Target ROI Status Quo Sales-Oriented Market Share SalesMaximization Maintain Existing Price Pricing Objectives

  9. Profit-Oriented Pricing Objectives Profit Maximization SatisfactoryProfits Target Return on Investment Profit-Oriented Pricing Objectives

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

  11. Net profit after taxes divided by total assets. ROI = Net Profit after taxes Total assets Return on Investment Return on Investment

  12. Sales-Oriented Pricing Objectives Market Share Sales Maximization Sales-Oriented Pricing Objectives

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

  14. Sales Maximization • Short-term objective to maximize sales • Ignores profits, competition, and the marketing environment • May be used to sell off excess inventory

  15. Status Quo Pricing Objectives Maintain existing prices Meet competition’s prices Status Quo Pricing Objectives

  16. Demand The quantity of a product that will be sold in the market at various prices for a specified period. Supply The quantity of a product that will be offered to the market by a supplier at various prices for a specific period. The Demand Determinant of Price

  17. The Demand Curve

  18. The Supply Curve

  19. Tyson Foods, the world’s largest processor, has an oversupply of meat: Lower chicken consumption due to avian flu fears Export restrictions to Japan and South Koreadue to mad cow disease Mismatch between oversupply and reduced demand has created tremendous financial losses for the company. Tyson produces 25% of meats that Americans eat, and small price changes impact company profit significantly. To reverse trend, company is taking a commodity approach to the primary business, while marketing more value-added products. Tyson’s Meat Glut SOURCE: Richard Gibson, “Tyson Looks for Way Out of Meat Glut,” Wall Street Journal, June 28, 2006, B9A.

  20. Price Equilibrium The price at which demand and supply are equal. Elasticity of Demand Consumers’ responsiveness or sensitivity to changes in price. How Demand and Supply Establish Price

  21. Price Equilibrium

  22. Elasticity of Demand Elastic Demand • Consumers buy more or lessof a product when the price changes. InelasticDemand • An increase or decrease in price will not significantly affect demand. UnitaryElasticity • An increase in sales exactly offsets a decrease in prices, and revenue is unchanged.

  23. Price Goes... Revenue Goes... Demand is... Down Up Elastic Down Down Inelastic Up Up Inelastic Up Down Elastic Up or Down Stays the Same Unitary Elasticity Elasticity of Demand

  24. Elasticity of Demand

  25. Factors that Affect Elasticity of Demand Availability of substitutes Price relative to purchasing power Product durability A product’s other uses Rate of inflation

  26. Yield ManagementSystems Yield Management Systems A technique for adjusting prices that uses complex mathematical software to profitably fill unused capacity. E.g. Airfare changes closer to the flight date

  27. Discounting early purchases Limiting early sales at discounted prices Overbooking capacity How Yield Management Systems Work

  28. Yield Management Systems

  29. The Cost Determinant of Price Types of Costs Variable Cost Fixed Cost Varies with changes in level of output Does not change as level of output changes

  30. The Cost Determinant of Price Markup pricing Methods Used to Set Prices Keystoning – 2X Cost Profit Maximization Pricing Break-Even Pricing

  31. Profit Maximization Profit Maximization A method of setting prices that occurs when marginal revenue equals marginal cost. Marginal Revenue The extra revenue associated with selling an extra unit of output, or the change in total revenue with a one-unit change in output.

  32. Break-Even Pricing

  33. Break-Even Pricing Break-Even Quantity Fixed cost Contribution Total fixed costs Fixed cost contribution Price - Avg. Variable Cost = =

  34. Rental property landlords use yield management systems to raise rents at a faster pace. The M/PF Yield-Star Price Optimizer is similar to pricing systems used by airlines and car-rental companies. It uses data such as number of vacancies and forecasted market conditions to determine the optimal rent. Tenants can also take advantage of the technology. Yield Management Systems SOURCE: Kemba J.Dunham, “Technology Proves a Boon for Some Landlords,” Wall Street Journal, June 28, 2006, B10.

  35. Cost-Oriented Pricing Strategies

  36. Stages of the Product Life Cycle Competition Distribution Strategy Promotion Strategy Perceived Quality Other Determinants of Price

  37. Factors Affecting Price

  38. Introductory Stage Growth Stage Maturity Stage Decline Stage $ Decrease Stable High $ High $ Stable $ Decrease Stages in the Product Life Cycle

  39. The Competition • High prices may induce firms to enter the market • Competition can lead to price wars • Global competition may force firms to lower prices

  40. Distribution Strategy Manufacturers Wholesalers/Retailers • Offer a larger profit margin or trade allowance • Use exclusive distribution • Franchising • Avoid business with price-cutting discounters • Develop brand loyalty • Sell against the brand • Buy gray-market goods

  41. Stocking well-known branded items at high prices in order to sell store brands at discounted prices. E.g. Wal-Mart sells Equate brand drugs/lotions against Tylenol/Johnson & Johnson Distribution Strategy Selling againstthe brand

  42. Product selection Second opinions from expert sites Shopping bots Internet auctions The Impact of the Internet

  43. Charging a high price to help promote a high-quality image. The Relationship of Price to Quality Prestige Pricing

  44. Dimensions of Quality Ease of use Versatility Durability Serviceability Performance Prestige