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CONCEPT OF PRICING

The Importance of Price


To the seller... To the seller... Price is Price is revenue revenue and profit source and profit source To the consumer... To the consumer... Price is the cost WHAT IS PRICE? Price is the cost of something of something

Price is that which is given up in an exchange to acquire a good or service

Revenue Revenue Profit Profit

The price charged to customers The price charged to customers multiplied by the multiplied by the number of units sold. number of units sold. Revenue minus expenses Revenue minus expenses

The Importance of Price


Revenue = Unit Price Number of units sold Revenue pays for every activity Whats left over is 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

Trends Influencing Price Setting


High rate of High rate of new product introduction new product introduction Increased availability of Increased availability of bargain-priced dealer and bargain-priced dealer and generic brands generic brands Price cutting as a strategy to Price cutting as a strategy to maintain or regain maintain or regain market share market share More efficient and better More efficient and better informed buyers informed buyers

Trends Trends in the in the Market Market

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

Profit-Oriented Pricing Objectives


Profit-Oriented Pricing Objectives Profit-Oriented Pricing Objectives

Profit Profit Maximization Maximization

Satisfactory Satisfactory Profits Profits

Target Target Return on Return on Investment Investment

Profit Maximization: Setting prices so that total revenue is as large as possible relative to total costs Return on Investment: Net profit after taxes divided by total assets

ROI = Net Profit after taxes Total assets

Sales-Oriented Pricing Objectives


Sales-Oriented Pricing Objectives Sales-Oriented Pricing Objectives

Market Market Share Share

Sales Sales Maximization Maximization

Market Share: A companys product sales as a percentage of total sales for that industry Sales Maximization
Short-term objective to maximize sales Ignores profits, competition, and the marketing environment May be used to sell off excess inventory

Status Quo Pricing Objectives


Status Quo Pricing Objectives Status Quo Pricing Objectives

Maintain Maintain existing existing prices prices

Meet Meet competitions competitions prices prices

Role of demand in price determination


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

Supply Supply

The Demand Curve & Supply Curve


Price 2.50 2.00 Price 1.50 1.00 .50 0 20 40 60 80 100120 Quantity demanded D Price D 2.50 2.00 1.50 1.00 .50 S 0 20 40 60 80 100120 Quantity supplied S

Price Equilibrium
The price at which demand and supply are equal
2.50 2.00 D Surplus S Price Equilibrium S Shortage D

Price

1.50 1.00 .50

Elasticity of Demand
Consumers responsiveness or sensitivity to changes in price
Elastic Elastic Demand Demand Inelastic Inelastic Demand Demand
Consumers buy more or less of a product when the price changes An increase or decrease in price will not significantly affect demand An increase in sales exactly offsets a decrease in prices, and revenue is unchanged

Unitary Unitary Elasticity Elasticity

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

Yield Management Systems


A technique for adjusting prices that uses complex mathematical software to profitably fill unused capacity. Discounting Discounting early purchases early purchases YMS YMS Limiting early sales at Price Limiting early sales at Price discounted prices Adjustments discounted prices Adjustments Overbooking capacity Overbooking capacity

The Cost Determinant of Price


Types of Costs Types of Costs

Variable Variable Costs Costs

Fixed Costs Fixed Costs

Deviate with changes Deviate with changes in level of output in level of output

Do not deviate Do not deviate as level of output changes as level of output changes

Markup pricing Markup pricing Keystoning Keystoning

Methods Methods Used to Used to Set Prices Set Prices

Profit Maximization Profit Maximization Pricing Pricing Break-Even Break-Even Pricing Pricing Target-Return Target-Return Pricing Pricing

Other Determinants of Price


Stages of the Stages of the Product Life Cycle Product Life Cycle Other Factors Other Factors That That Influence Influence Price Price Competition Competition Distribution Strategy Distribution Strategy Promotion Strategy Promotion Strategy Perceived Quality Perceived Quality

Regaining Price Control


Exclusive Exclusive distribution system distribution system Franchising Franchising Avoid business with Avoid business with price-cutting discounters price-cutting discounters Package marked with Package marked with selling price selling price DEVELOP DEVELOP BRAND LOYALTY BRAND LOYALTY

Methods Methods Used to Used to Regain Regain Price Control Price Control

The Impact of the Internet


Allows price and product comparisons Prices are coming down Data collection allows sellers to tailor products and prices

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