Pricing Concepts: ©2003 South-Western 1

Pricing Concepts
©2003 South-Western 1
Learning Objectives
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.
Learning Objectives (continued)
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.
Learning Objectives
7. Describe the procedure for setting
the right price.
8. Identify the legal and ethical constraints

on pricing decisions.
9. Explain how discounts, geographic pricing,

and other special pricing tactics can be
used to fine-tune the base price.
1
Learning Objective
Discuss the importance of

pricing decisions to the economy
and to the individual firm.
1
The Importance of Price
To the seller... To the consumer...

Price is revenue What is Price? Price is the cost
and profit source of something
In the broadest sense, price allocates

resources in a free-market economy
Chapter 16 Version 3e ©2003 South-Western 6
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 price charged to customers

Revenue multiplied by the
number of units sold.
Profit Revenue minus expenses

1
The Importance of Price
Revenue = Unit Price  Number of units sold
 Revenue pays for every activity.

 What’s 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
1
Trends Influencing Price Setting
High rate of
new product introduction
Increased availability of
bargain-priced dealer and
Trends generic brands
in the
Market Price cutting as a strategy to
maintain or regain
market share
More efficient and better

informed buyers
2
Learning Objective
List and explain a variety

of pricing objectives.

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

2
Target
Profit Satisfactory
Return on
Maximization Profits
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
Market Sales
Share 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
Maintain Meet
existing competition’s
prices prices

3
Learning Objective
Explain the role of demand

in price determination.

3
Demand and Supply
The quantity of a product that

Demand will be sold in the market at various
prices for a specified period.
The quantity of a product

that will be offered to the market
Supply by a supplier at various prices
for a specific period.

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

3
Elastic  Consumers buy more or less
of a product when the
Demand price changes
Inelastic  An increase or decrease in

price will not significantly
Demand affect demand

3
Price Goes... Revenue Goes... Demand is...
Down Up Elastic
Down Down Inelastic
Up Up Inelastic
Up Down Elastic

3
Factors that Affect Elasticity
Availability of Substitutes
Price relative to
Purchasing Power
Factors Product Durability

That Affect
Elasticity
of Product’s Other Uses
Demand
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.

4
Yield Management Systems
Discounting
early purchases
YMS
Price Limiting early sales at
Adjustments discounted prices
Overbooking capacity

5
Learning Objective
Describe cost-oriented pricing strategies.

5
The Cost Determinant of Price
Types of Costs
Variable
Fixed Costs
Costs
Deviate with changes Do not deviate

in level of output as level of output changes

5
The Cost Determinant of Price
Methods used to set price
Markup pricing Break-even pricing

5
Markup Pricing
The cost of buying the product from
Markup the producer plus amounts for
Pricing profit and for expenses not
otherwise accounted for.
Example:
If a pen costs $1.80 and sells for is
$2.20, the markup is $.40, or 22% of
cost

5
Break-Even Pricing
Total Revenue
4,000 Total Costs
Break-even point
Price
2,000
Fixed costs
0 1,000 2,000 3,000 4,000 5,000 6,000

Quantity
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 of the
Product Life Cycle
Competition
Other Factors
That
Influence Distribution Strategy
Price
Promotion Strategy
Perceived Quality
6
Stages in the Product Life Cycle
Introductory Growth Maturity Decline
Stage Stage Stage Stage
$ $ $ $
High Stable Decrease Decrease
Stable
High

6
Distribution Strategy
Convincing Distributors
to Carry Product
Offer a larger Give dealers a large

profit margin trade allowance

6
The Impact of the Internet
 Allows price and product comparisons
 Prices are coming down
 Data collection allows sellers to tailor

products and prices

6
Extranet
A private electronic network

that links a company
with its suppliers
and customers.

6
Prestige Pricing
Charging a high price to

help promote a high-quality
image.

6
Indicators of Quality
Retailer
Reputation
Appearance
Price
Brand Name

7
Learning Objective
Describe the procedure for

setting the right price.

7
Steps in Setting the Right Price
Establish pricing goals
Estimate demand, costs, and profits
Choose a price strategy
Fine tune with pricing tactics
Results lead to the right price

7
Pricing Objectives

7
Price Strategy
A basic, long-term pricing
framework, which
establishes the initial price
for a product and the
intended direction for
price movements over the
product life cycle.

7
Choosing a Price Strategy
Price Skimming
Basic Strategies
for Penetration Pricing
Setting Prices
Status Quo Pricing

7
Price Skimming
Inelastic Demand
Situations Superior Product

when
Price Legal Protection of Product
Skimming
is
Successful Technological Breakthrough
Limited Production
7
Penetration Pricing
A pricing policy whereby

a firm charges a relatively
low price for a product
initially as a way to
reach the mass market.

7
Penetration Pricing
Advantages Disadvantages
 Discourages or blocks  Requires gear up for

competition from mass production
market entry
 Selling large volumes
at low prices
 Strategy to gain
market share may fail

7
Status Quo Pricing
Advantages Disadvantages
 Simplicity  Strategy may ignore

demand or cost
 Safest route to long-
term survival for small
firms

8
Learning Objective
Identify the legal and ethical constraints

on pricing decisions.

The Legality and Ethics of 8
Price Strategy
Unfair Trade Practices
Price Fixing
Issues Price Discrimination

That Limit
Pricing
Decisions Predatory Pricing

8
Unfair Trade Practice Acts
Laws that prohibit

wholesalers and retailers
from selling below cost.

8
Price Fixing
An agreement between two

or more firms on the
price they will charge
for a product.

8
Price Discrimination
The Robinson-Patman Act of 1936:
 Prohibits any firm from selling to two or

more different buyers at different prices
if the result would lessen competition

8
Robinson-Patman Act Defenses
Seller Defenses
Market
Cost Competition
Conditions

8
Predatory Pricing
The practice of charging a

very low price for a product
with the intent of driving
competitors out of business
or out of a market.

9
Learning Objective
Explain how discounts, geographic

pricing, and other special
pricing tactics can be used to
fine-tune the base price.

Tactics for Fine-Tuning 9
the Base Price
Discounts
Fine-Tuning
Pricing Geographic Pricing
Tactics
Special Pricing
Tactics

Tactics for Fine-Tuning 9
the Base Price
Quantity Discounts
Cash Discounts
Functional Discounts
Seasonal Discounts
Common Promotional Allowances
Tactics
for Rebates
Fine-Tuning
the Base Price Value-Based Pricing

9
Value-Based Pricing
The price is set at a level

that seems to the customer
to be a good price
compared to the prices of
other options.

9
Trade Loading
The practice of temporarily

lowering the price to
induce wholesalers and
retailers to buy more
goods than can be sold
in a reasonable time.

9
Geographic Pricing
FOB Pricing
Uniform Delivered
Pricing
Common
Methods of
Geographic Zone Pricing
Pricing
Freight Absorption
Pricing
Basing-Point
Pricing
9
Geographic Pricing
The buyer absorbs the freight

FOB Origin
costs from the shipping point
Pricing (“free on board”).
Uniform The seller pays the freight charges

Delivered and bills the purchaser an
Pricing identical flat freight charge.

9
Geographic Pricing
The U.S. is divided into zones and
Zone Pricing a flat freight rate is charged to
customers in a given zone.
Freight The seller pays for all or part of

Absorption the freight charges and does not
Pricing pass them on to the buyer.
The seller designates a location as

Basing-Point
a basing point and charges all buyers
Pricing the freight costs from that point.
9
Special Pricing Tactics
Single-Price Tactic All goods offered at the same price
Flexible Pricing Different customers pay different price
Professional Used by professionals with experience,
Services Pricing training or certification
Leader Pricing Sell product at near or below cost
Lure customers through false or misleading
Bait Pricing price advertising
Odd-number prices imply bargain
Odd-Even Pricing Even-number prices imply quality
Combining two or more products in a
Price Bundling single package
Two-Part Pricing Two separate charges to consume a single good

9
Consumer Penalties
Businesses Impose
Consumer Penalties if...
An irrevocable Additional
loss of revenue transaction costs
is suffered are incurred

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Pricing Concepts

2. List and explain a variety of pricing

3. Explain the role of demand in price

5. Describe cost-oriented pricing strategies.

6. Demonstrate how the product life cycle,

8. Identify the legal and ethical constraints

9. Explain how discounts, geographic pricing,

Discuss the importance of

To the seller... To the consumer...

In the broadest sense, price allocates

Price is that which is given

Chapter 16 Version 3e ©2003 South-Western 7

The price charged to customers

Profit Revenue minus expenses

Chapter 16 Version 3e ©2003 South-Western 8

Revenue = Unit Price  Number of units sold

 Revenue pays for every activity.

Marketers must select a price

More efficient and better

List and explain a variety

Chapter 16 Version 3e ©2003 South-Western 11

Profit-Oriented Pricing Objectives

Sales-Oriented Pricing Objectives

Status Quo Pricing Objectives

Chapter 16 Version 3e ©2003 South-Western 12

Profit-Oriented Pricing Objectives

Chapter 16 Version 3e ©2003 South-Western 13

Setting prices so that

Chapter 16 Version 3e ©2003 South-Western 14

Net profit after taxes

ROI = Net Profit after taxes

Chapter 16 Version 3e ©2003 South-Western 15

Sales-Oriented Pricing Objectives

Chapter 16 Version 3e ©2003 South-Western 16

A company’s product sales

Chapter 16 Version 3e ©2003 South-Western 17

 Short-term objective to maximize sales

 Ignores profits, competition, and the

 May be used to sell

Chapter 16 Version 3e ©2003 South-Western 18

Status Quo Pricing Objectives

Chapter 16 Version 3e ©2003 South-Western 19

Explain the role of demand

Chapter 16 Version 3e ©2003 South-Western 20

The quantity of a product that

The quantity of a product

Chapter 16 Version 3e ©2003 South-Western 21

Chapter 16 Version 3e ©2003 South-Western 22

Inelastic  An increase or decrease in

Chapter 16 Version 3e ©2003 South-Western 23

Down Down Inelastic

Chapter 16 Version 3e ©2003 South-Western 24

Factors Product Durability

Understand the concept of

Chapter 16 Version 3e ©2003 South-Western 26

A technique for adjusting

Chapter 16 Version 3e ©2003 South-Western 27

Chapter 16 Version 3e ©2003 South-Western 28

Describe cost-oriented pricing strategies.