C H A P T E R

PRICING CONCEPTS FOR ESTABLISHING VALUE

13

McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

13-2

L E A R N I N G O B J E C T I V E S

Pricing Concepts for Establishing Value

LO1 List the four pricing orientations.

LO2 Explain the relationship between price and quantity sold.

LO3 Explain price elasticity.

LO4 Describe how to calculate a product’s break-even point.

LO5 Indicate the four types of price competitive levels.

13-3

Price and Value

What’s the most you will pay for a nice hotel?

©Uden Graham/Redlink/Corbis

13-4

Price

Benefits

Sacrifice

13-5

Bottled vs. Tap Water

13-6

Price is a Signal

Prices can be both too high and too low

Price set too low may signal poor quality

Price set too high might signal low value

http://www.PriceGrabber.com Website

©Brand X Pictures/PunchStock

13-7

The Role of Price in the Marketing Mix

Price is the only marketing mix element that generates revenue

Price is usually ranked as one of the most important factors in purchase decisions

Ch

ad B

ake

r/R

yan

McV

ay/G

ett

y Im

age

s

13-8

The 5 C’s of Pricing

13-9

1st C: Company Objectives

13-10

Profit Orientation

Profit Orientation

Target return pricing

Target profit

pricing

Maximizing profits

13-11

Sales Orientation

Focus on increasing sales

More concerned

with overall market share

Does not always imply setting low

prices

13-12

Competitor Orientation

• Competitive parity

• Status quo pricing

• Value is not part of this pricing strategy

Ro

z W

oo

dw

ard

/Ge

tty

Imag

es

13-13

=

Focus on customer expectations by matching prices to customer expectations

http://www.automotive.com Website

Customer Orientation

C Borland/PhotoLink/Getty Images Don Farrall/Getty Images

13-14

What are they trying to accomplish with this ad?

13-15

2nd C: Customers

13-16

Demand Curves and Pricing

Knowing demand curve enables to see relationship

between price and demand

Photo by Simon Frederick/Getty Images

13-17

Demand Curves

Not all are downward sloping

Prestigious products or services have upward sloping

curves

13-18

Price Elasticity of Demand

Elastic (price sensitive)

Inelastic (price insensitive)

Consumers are less sensitive to price

increases for necessities

©PhotoLink/Getty Images

13-19

Price Elasticity of Demand

©Dennis MacDonald/PhotoEdit, Inc. ©Bill Aron/PhotoEdit, Inc.

13-20

Factors Influencing Price Elasticity of Demand

Wal-Mart Commercial

Income

effect

Substitution

effect

Cross-

price

elasticity

13-21

Substitution Effect

• Meet Pete, college student on a budget:

• Old Spice Sport Deodorant user

• At the store he notices that Old Spice is more expensive

• Pete decides to give another brand a try and save money

BananaStock/JupiterImages

13-22

Cross-Price Elasticity

• Meet Kendra, self-supporting college student:

• Buys a new printer on sale for a great price

• Learns it requires special ink cartridges that cost more than the printer

Getty Images/Digital Vision

13-23

3rd C: Costs

• Variable Costs

– Vary with production volume

• Fixed Costs

– Unaffected by production volume

• Total Cost

– Sum of variable and fixed costs

Michael Rosenfeld/Stone/Getty Images

13-24

Break Even Analysis and Decision Making

13-25

Break Even Analysis

Total Variable Cost = Variable Cost per unit X Quantity

Total Cost = Fixed Cost + Total Variable Cost

Total Revenue = Price X Quantity

Fixed Costs

Contribution per unitBreak-Even Point (units) =

13-26

4th C: Competition

Subway Commercial

13-27

Wal-Mart vs. Target

13-28

5th C: Channel Members

• Manufacturers, wholesalers and retailers can have different perspectives on pricing strategies

• Manufactures must protect against gray market transactions

13-29

Check Yourself

1. What are the five Cs of pricing?

2. Identify the four types of company objectives.

3. What is the difference between elastic versus inelastic demand?

4. How does one calculate the break-even point in units?

13-30

Macro Influences on Pricing

• The Internet

• Increased price sensitivity

• Growth of online auctions

Ryan McVay/Getty Images

13-31

Economic Factors

Local economic conditions

Increasing disposable

income Cross- shopping

Increasing status

consciousness

Increasing globalization

13-32

1. How have the Internet and economic factors affected the way people react to prices?

Check Yourself