Chapter 19 ♦ Pricing Concepts 19-1
CHAPTER 19 Pricing Concepts
CHAPTER FEATURES
Chapter Features
Key Points
✓ Marketing & You
Students are given a survey to determine their prestige sensitivity.
✓ Marketing Metrics
To determine production strategy, distribution, shelf space,
promotional needs, sales force, and a variety of other aspects of the
marketing mix, a marketing manager needs to be familiar with the
chain ration method to estimate product demand.
✓ Company Clips
Staking a position as a prestige product in the antacid market,
Acid+All has packaged its tiny little pills in a tin and priced them
much higher than its competitor’s products.
USING THIS MANUAL
Chapter nineteen includes six learning outcomes that help students become more familiar with pricing concepts. The
chapter outline provides detailed analysis of these learning outcomes, listing PowerPoint slides and review questions as
clothing chains like Zara.
✓ Application Exercise
Students calculate the price-quality coefficient for canned goods.
other.
19-2 Chapter 19 ♦ Pricing Concepts
LEARNING OUTCOMES
1 Discuss the importance of pricing decisions to the economy and to the individual firm
Pricing plays an integral role in the U.S. economy by allocating goods and services among consumers, governments, and
2 List and explain a variety of pricing objectives
Establishing realistic and measurable pricing objectives is a critical part of any firm’s marketing strategy. Pricing
3 Explain the role of demand in price determination
Demand is a key determinant of price. When establishing prices, a firm must first determine demand for its product. A
4 Understand the concept of yield management systems
Yield management systems use complex mathematical software to profitably fill unused capacity. The software uses
5 Describe cost-oriented pricing strategies
The other major determinant of price is cost. Marketers use several cost-oriented pricing strategies. To cover their own
6 Demonstrate how the product life cycle, competition, distribution and promotion
strategies, guaranteed price matching, customer demands, the Internet, and perceptions
of quality can affect price
The price of a product normally changes as it moves through the life cycle and as demand for the product and
Chapter 19 ♦ Pricing Concepts 19-3
CHAPTER OUTLINE
1 Discuss the importance of pricing decisions to the economy
and to the individual firm
PowerPoint 19-5
The Importance of Price
PowerPoint 19-6
What is Price?
I. The Importance of Price
To the consumer, price is the cost of something. To the seller, price is revenue.
A. What Is Price?
1. The sacrifice effect of price: Price is that which is given in an
exchange to acquire a good or service.
Review Question 1.1
PowerPoint 19-7
The Importance of Price to
Marketing Managers
Review Question 1.2
PowerPoint 19-8
Trends Influencing Price
B. The Importance of Price to Marketing Managers
Prices are the key to company revenues.
1. Prices charged to customers multiplied by the number of units sold
equals revenue for the firm. Revenue pays for every activity of the
firm. Whatever is left over after paying for company activities is
profit.
2. If a price is too high in the minds of consumers, sales will be lost. If a
price is too low, revenues may not meet the company’s goals for return
on investment.
3. Trying to set the right price can be one of the most stressful and
pressure-filled tasks for a marketing manager, as trends in the
consumer market attest:
a. A flood of new products
19-4 Chapter 19 ♦ Pricing Concepts
sensitive and better informed.
2 List and explain a variety of pricing objectives
PowerPoint 19-11
Pricing Objectives
Review Question 2.1
II. Pricing Objectives
Companies set pricing objectives that are specific, attainable, and measurable. These
goals require periodic monitoring to determine the effectiveness of the strategy.
PowerPoint 19-12
Profit Oriented Pricing
Objectives
Review Question 2.2
A. Profit-Oriented Pricing Objectives
1. Profit maximization means setting prices so total revenue is as large as
possible relative to total costs for a given item. Competitors’ prices
and the product’s perceived value mediate profit-oriented pricing.
Status Quo Pricing
PowerPoint 19-15
Sales-Oriented Pricing
Objectives
PowerPoint 19-16
Market Share
B. Sales-Oriented Pricing Objectives
1. Market share refers to a company’s product sales as a percentage of
total sales for that industry. Market share can be expressed in dollars of
sales or units of product.
3 Explain the role of demand in price determination
III. The Demand Determinant of Price
The price that is set depends both on pricing goals and the demand for the good
or service, the cost to the seller for that good or service, and other factors.
Review Questions 3.1, 3.2
A. The Nature of Demand
PowerPoint 19-14
PowerPoint 19-22
The Demand Curve
increases.
a. The demand curve graphs the demand for a product at various
prices. The line usually curves down and to the right.
b. The demand schedule is a chart that shows quantity demanded at
selected prices.
PowerPoint 19-24
How Demand and Supply
Establish Price
B. How Demand and Supply Establish Prices
1. When supply and demand are equal, a state called equilibrium is
achieved. At equilibrium there is no inclination for prices to rise or fall.
PowerPoint 19-26, 19-27,
19–28, 19-29
Review Question 3.3
C. Elasticity of Demand
2. Elastic demand occurs when consumers are sensitive to price
changes, whereas inelastic demand means that an increase or
decrease in price will not significantly affect demand for a product.
PowerPoint 19-30
Factors that Affect
3. Unitary elasticity means an increase in sales exactly offsets a
decrease in price so that total revenue remains the same.
4. Factors affecting elasticity are:
19-6 Chapter 19 ♦ Pricing Concepts
4 Understand the concept of yield management systems
Review Questions 4.1,
4.2, 4.3
PowerPoint 19-34, 19-35,
19–36
Yield Management
Systems
IV. The Power of Yield Management Systems
When competitive pressures are high a company must know when it can raise
prices to maximize revenues.
1. Yield Management Systems use complex mathematical software to
profitably fill unused capacity by discounting early purchases, limiting
early sales at these discounted prices, and overbooking capacity.
5 Describe cost-oriented pricing strategies
PowerPoint 19-39, 19-40
The Cost Determinant of
Price
V. The Cost Determinant of Price
Some companies price their products largely or solely on the basis of costs. It is a
method that can lead to overpricing and lost sales or to underpricing and lower
returns on sales than necessary. Costs usually serve as a floor below which a
good must not be priced.
Review Question 5.1
A. Types of Costs
1. Variable costs are those that vary with changes in the level of output,
for example, the cost of materials.
4. Marginal cost is the change in total cost associated with a one-unit
change in output.
PowerPoint 19-41
B. Markup Pricing
Chapter 19 ♦ Pricing Concepts 19-7
Markup Pricing
1. Markup pricing is the cost of buying the product from the producer
plus amounts for profit and for expenses not otherwise accounted for.
4. Keystoning refers to markups that are double the cost.
C. Profit Maximization Pricing
1. Profit maximization pricing occurs when marginal revenue equals
marginal cost.
PowerPoint 19-43, 19–44
Break-Even Pricing
Review Question 5.2
D. Break-Even Pricing
1. Break-even analysis determines what sales volume must be reached for
a product before the company breaks even and no profits are earned.
Break-even = Total fixed costs / Fixed cost contributions
2. Fixed cost contribution is the price minus the average variable cost.
6 Demonstrate how the product life cycle, competition,
distribution and promotion strategies, guaranteed price
matching, customer demands, the Internet, and perceptions
of quality can affect price
PowerPoint 19-47
Other Determinants of
Price
VI. Other Determinants of Price
A. Stages in the Product’s Life Cycle
PowerPoint 19-48
Stages of the Product Life
Cycle
1. Introductory stage: Prices are usually high to recover development
costs and take advantage of high demand originating in the core of the
market.
PowerPoint 19-49
The Competition
B. The Competition
1. High selling prices can attract other firms to enter a profitable market,
usually at a slightly lower price.
2. When a firm enters a market, it has to decide whether to price at,
below, or above market prices.
a. A firm can price its product below the market price to gain quick
Global Perspectives
Carrefour Moves to a Low Price Strategy in Hypermarkets to Fight Discounters
Carrefour, the world’s second largest retailer, changes its pricing strategies to compete
with low-price discounters such as Aldi and clothing chains like Zara. Part of this
strategy is to offer a larger variety of products as the Carrefour brand, priced lower
than manufacturer’s brands, as well as provided high level of service not generally
associated with discount stores.
The Class Activity asks
students to perform price
comparisons at local
retail outlets.
C. Distribution Strategy
1. Adequate distribution depends on convincing distributors to carry the
product. It can be accomplished by:
2. Manufacturers have been losing control of the distribution channel to
Chapter 19 ♦ Pricing Concepts 19-9
PowerPoint 19-52
The Impact of the Internet
PowerPoint 19-53
Promotion Strategy/Price
Guarantee
3. Purchasing goods through unauthorized channels allows wholesalers
and retailers to obtain higher-than-normal margins.
4. Manufacturers try to maintain price control by using:
D. The Impact of the Internet
1. The Internet, corporate networks, and wireless setups are linking
2. While the Internet helps drive down prices by making it easier for
3. Shopping bots, which are programs that search the Web for the best
price for a particular item, theoretically give pricing power to the
4. Internet auctions continue to be big business. The future, however,
belongs to B2B auctions, whereby consumers can trade directly with
each other.
E. Promotion Strategy
Price is often used as a promotional tool. Sales and coupons can increase
consumer interest. Pricing can be a tool for sales promotion as well.
F. Guaranteed Price Matching
G. Demands of Large Customers
Large customers of manufacturers often make specific pricing demands.
1. Shrinking the goods
19–10 Chapter 19 ♦ Pricing Concepts
to Quality
PowerPoint 19-55
The Dimensions of
Quality
H. Relationship of Price to Quality
1. Consumers tend to rely on a high price as a predictor of good quality
3. Consumers expect dealer or store brands to be cheaper than national
brands. But if the savings are too great, consumers tend to believe that
the dealer brand is inferior in quality.
4. Dimensions of quality include:
a. Ease of use
KEY TERMS
average total cost (ATC)
marginal cost (MC)
return on investment (ROI)
average variable cost (AVC)
marginal revenue (MR)
revenue
break-even analysis
market share
selling against the brand
demand
markup pricing
status quo pricing
elastic demand
prestige pricing
supply
elasticity of demand
price
unitary elasticity
fixed cost
price equilibrium
variable cost
inelastic demand
profit
yield management systems (YMS)
keystoning
profit maximization
Suggested Homework:
• The end of each chapter contains numerous questions that can be assigned or used as the basis for longer
investigations into marketing.
Chapter 19 ♦ Pricing Concepts 19–11
REVIEW AND APPLICATIONS
1.1 Why is pricing so important to the marketing manager?
1.2 How does price allocate goods and services?
Price sets the image of the good. In conjunction with quality, price is part of the formula for value. Even though
2.1 Give an example of each major type of pricing objective.
Pricing objectives are commonly classified into three categories and students are to come up with one example of
each:
2.2 Why do many firms not maximize profits?
One reason that firms do not maximize profits is that they can only charge a price that equates to a perceived value.
3.1 Explain the role of supply and demand in determining price.
The price that is set depends on pricing goals and the demand for the good or service, the cost to the seller for that
3.2 If a firm can increase its total revenue by raising its price, shouldn’t it do so?
It may only increase revenue in the short run. In the long run buyers may find substitutes for the good, or
3.3 Explain the concepts of elastic and inelastic demand. Why should managers understand these concepts?
Elasticity of demand refers to consumers’ responsiveness or sensitivity to changes in price. Elastic demand occurs