Gilbert A. Churchill, Jr. J. Paul PeterGilbert A. Churchill, Jr. J. Paul Peter

Chapter 12

Fundamentals of Pricing

Marketing

The amount of money, good, or services that must be given up to acquire ownership or use of a product.

Sample Demand CurveSample Demand CurveSlide12-1

Figure12.1

10

20

30

40

50

60

10,000 20,000 30,000 40,000 50,000

Price per Unit

Quantity Demanded in Units

A graphical representation of the quantity of a product demanded at various prices.

• How many potential buyers are in the market?

• What is the location of potential buyers?

• Are they organizational buyers or consumers?

• What is the consumption rate of potential buyers?

• What is the financial condition of potential buyers?

• What is the general trend in the industry?

Estimating Demand - Demographic Estimating Demand - Demographic Pricing FactorsPricing Factors

Slide12-2

• Will potential buyers use price as an indicator of the product’s quality?

• Will potential buyers be favorably attracted by odd pricing such as 99 cents instead of $1, or $177 instead of $180?

• Will potential buyers perceive the price to be too high relative to what the product offers?

• Are potential buyers concerned enough with prestige to pay more for the product?

• How much will potential buyers be willing to pay for the product?

Estimating Demand - Psychological Estimating Demand - Psychological Pricing FactorsPricing Factors

Slide12-3

Demand Curves Showing Demand Curves Showing Different Price ElasticitiesDifferent Price Elasticities

Slide12-4

Figure12.2

Priceper trip

Priceper gallon

Quantity Demanded(Number of Trips)

Quantity Demanded(Gallons)

Elastic Demand:European Vacations

Inelastic Demand:Gasoline

TermsTerms

Total Revenues

Total Costs

DefinitionDefinition

Key TermsKey TermsSlide12-5

The total amount of money received from the sale of all units of a product.

The total amount of money spent in the sale of all units of a product.

Profits The positive difference between total revenues and total costs.

Marginal Analysis

The technique for finding the greatest profits by measuring the economic effect of producing and selling each additional unit of a product.

Marginal Revenues The change in total revenues that results from selling one additional units of a product

Marginal Costs The net addition to a firm’s total costs that result from the reduction of one additional unit of a product

Marginal Analysis RelationshipsMarginal Analysis RelationshipsSlide12-6

Figure12.4

DollarsProfit

Quantity Produced and Sold

Dollars

Quantity Produced and Sold

Total Cost

Total Revenue

Marginal Cost

Marginal Revenue

Pricing Based on CostPricing Based on CostSlide12-7

Markup on cost pricing a pricing approach that adds a percentage of the cost price to the producer’s cost in order to arrive at a selling price.

Markup on selling price a pricing approach that adds a percentage of the selling price to the producer’s cost in order to arrive at a selling price.

Cost-plus pricing a markup pricing approach that adds on a dollar amount to the producer’s cost in order to arrive at a selling price.

Rate of return pricing a pricing approach that involves total costs and then adding a desired rate of return to them to determine the selling price.

Breakeven analysis a technique for determining the sales volume needed to cover all costs at a specific rate.

Breakeven AnalysisBreakeven AnalysisSlide12-8

Figure12.5

Dollars

Quantity Produced and Sold

Total Cost

BreakevenPoint

Total Revenue

Loss

Profit

Breakeven point - the level of sales at which total revenues = total costs

Pricing Based on CompetitionPricing Based on CompetitionSlide12-9

Pricing Below Competition pricing to gain market share and attract cost-

conscious buyers. Especially useful to

companies with low cost positions.

Matching Competition pricing at competitor’s levels with the intent

of distinguishing the product in other ways.

Common in oligopolies.

Pricing Above Competition pricing for products that offer greater value,

quality, convenience or prestige.

Sealed-Bid Pricing pricing in which the buyer asks potential

sellers to submit sealed bids containing the

seller’s pricing and availabilities.

Pricing Based on Customer ValuePricing Based on Customer ValueSlide12-10

Reference Price the price that buyers use to compare the offered price of a product or service.

Demand-backward Pricing a pricing approach that involves setting a price by starting with the estimated price customers will pay and working backwards with retail and wholesale margins.

Value Pricing a pricing approach that involves setting prices so that the exchange value is higher than the value of competing exchanges.

AdvantageAdvantage

Easy to use

Intuitively appealing

Used when you have many different products

LimitationsLimitations

Comparison of the various pricing Comparison of the various pricing approachesapproaches

Slide12-11

Do not take into consideration the effects of price on consumer demand

Does not take into account competitor’s prices

Cost-based Pricing

Competition-based pricing

Value-based pricing

Intuitively appealing

Try to offer customers greater value

Since costs are not considered, at what price can the firm generate profits

Does not take into account what customers value most

Ideal if a match can be found between what customers value most and it does well

Offer customers greater value

Does not take both costs and competitors into account

Laws Limiting Pricing PracticesLaws Limiting Pricing PracticesSlide12-12

Table12.3

LawLaw

Price Fixing

Resale Price Maintenance

Deceptive Pricing Practices

Price discrimination that lessens or damages competition; discrimination in the use of promotional pricing

Dumping

Pricing PracticesPricing Practices

Sherman Antitrust Act

Consumer Goods Pricing Act

Federal Trade Commission Act

Robinson-Patman Act

Laws of most countries

Illegal Pricing PracticesIllegal Pricing PracticesSlide12-13

Table12.3

DefinitionDefinition

Price Fixing

Deceptive Pricing

Price Discrimination

Predatory Pricing

Dumping

Bait and switch

Pricing PracticesPricing PracticesAn illegal agreements among competitors to set the price of a product

An illegal pricing tactic that involves misleading customers about the relative goodness of an asking price

The illegal practice of charging different prices to buyers that do not reflect cost differences to the seller

An illegal pricing approach that involves setting very low prices in order to hurt competitors.

The illegal practice of pricing products below its costs or below the going rate in a market.

An illegal pricing tactic by which customers are attracted to a store by an advertised low-priced product that is then reported to be out-of-stock in order to sell a more expensive product