Marketing 333

Chapter 17

Price Setting in the Business World

Exhibit 17-1

Markup chainin channels

17-3

Key Factors That Influence Price SettingPricing

objectives

Discounts andallowances

Legal environment

Price flexibility

Geographicpricing terms

Demand

Cost

Price of otherproducts in the line

Competition

Pricesettin

g

Markup

An amount added to the cost of a product that results in the price

May be calculated as a percentage on selling price or on cost

Relationship between markup and turnover

Markup in the Channel of Distribution

ManufacturerCost $20.0020% MU $ 5.00 Selling price $25.00

WholesalerCost $25.0015% MU 4.41Selling price $29.41

RetailerCost $29.4141% MU $20.59Selling price $50.00

Six Types of Costs

Total Cost

AverageFixed Cost

Total VariableCost

AverageVariable Cost

Total FixedCost

Average Cost

17-5

Types of Costs

PricePrice

QuantityQuantity

DemandDemand

Marginal revenueMarginal revenue

Marginal costMarginal cost Average costAverage cost

Marginal Analysis

Method for determining the costs and revenues associated with the production and sale of each additional unit of product

Intersection of Marginal Cost and Marginal Revenue

Co

st a

nd

rev

enu

eC

ost

an

d r

even

ue

Units produced and soldUnits produced and sold

Cost greaterCost greaterthan revenuethan revenue

MRMR

MCMC

Cost lessCost lessthan revenuethan revenue

Marginal cost =Marginal cost =marginal revenuemarginal revenue

Break Even Analysis

Quantity units produced & soldQuantity units produced & sold

Re

ven

ue

& c

os

tR

ev

enu

e &

co

st

Total RevenuesTotal Revenues

Total CostsTotal Costs

Fixed CostsFixed CostsBreakBreakevenevenpointpoint

LossLoss

LossLoss

Profit

Profit

Demand Curve

Relationship between various prices and the Relationship between various prices and the quantities of product demanded.quantities of product demanded.

$2,500

$3,000

$3,500

$4,000

$4,500

$5,000

$5,500

Demand

8,000 13,000 18,000 23,000 28,000

Evaluating a Customer’s Price Sensitivity

Are there substitute ways of meeting a need? Is it easy to compare prices? Who pays the bill? How great is the total expenditure? How significant is the end benefit? Is there already a sunk investment related to

the purchase?

17-10

Price Elasticity

Measures the effect of a change in price on the quantity demanded– Price elasticity– Price inelasticity– Perfect price elasticity– Perfect price inelasticity– Cross elasticity

Demand-Oriented Pricing

17-11

Odd-Even

Prestige Value-in-Use

Reference

Leader

Psychological Types ofDemand-Oriented

Pricing

Full-Line Pricing

Product-BundlingPricing?

Product-BundlingPricing?

ComplementaryPricing?

ComplementaryPricing?

Market- or FirmOriented?

Market- or FirmOriented???????????

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17-12

Bid pricing means offering a specific price for each

possible job. Determining costs is a complicated

process.

Negotiated pricing involves setting a price as the result

of a bargaining process between the buyer and

seller.

17-13

Bid and Negotiated Pricing

Pricing and Social Responsibility

Some legal pricing strategies create ethical dilemmas

– Corporate profit goals– SR often increases price– Business self-interest

versus society’s best interest