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CHAPTER EIGHTEENCHAPTER EIGHTEEN

For use only withPerreault/Cannon/McCarthy or Perreault/McCarthy texts.© 2008 McGraw-Hill Companies, Inc.McGraw-Hill/Irwin

Price Setting in the Business World Price Setting in the Business World

When we finish this lecture you should

1. Understand how most wholesalers and retailers set their prices by using markups.

2. Understand why turnover is so important in pricing.

3. Understand the advantages and disadvantages of average-cost pricing.

4. Know how to use break-even analysis to evaluate possible prices.

When we finish this lecture you should

5. Understand the advantages of marginal analysis and how to use it for price setting.

6. Understand the various factors that influence customer price sensitivity.

7. Know the many ways that price setters use demand estimates in their pricing.

8. Understand how bid pricing and negotiated prices work.

Marketing Strategy Planning Process

Price Setting and Strategy Planning (Exhibit 18-1)

CH 18: Price Setting in the Business World

CH 17: Pricing CH 17: Pricing Objectives and Objectives and PoliciesPolicies

Cost-oriented price Cost-oriented price setting approachessetting approaches

Demand-oriented price Demand-oriented price setting approachessetting approaches

Other price-setting Other price-setting issuesissues

Some Firms Just Use Markups (Exhibit 18-2)

It costs a producer of coffee makers $44 to

make each one. The producer charges wholesale

distributors $55 for each coffee maker purchased.

The producer’s markup in dollars is ________, and

in percentage terms, is ________.

A. $99; 44%.

B. $11; 20%.

C. $11; 25%.

D. $99; 20%

E. $55; 25%.

Checking your knowledge

A retailer charged $300 for a man’s suit after

getting it from the wholesaler for $150. The

retailer’s markup percentage is:

A. 33%.

B. 100%.

C. 133%.

D. 50%.

E. Cannot be determined from the information

provided.

Checking your knowledge

High Markups Don’t Always Mean Big Profits

Average Cost Pricing Is Common and Can Be Dangerous (Exhibit 18-3)

Total Fixed Cost

Total Fixed Cost

Total Fixed Cost

Total Fixed Cost

AverageFixed Cost

AverageFixed CostAverage

Fixed Cost

Average CostAverage CostAverage Cost

Total CostTotal CostTotal Cost

Total Variable Cost

Total Variable Cost

Total Variable Cost

Average Variable Cost

Average Variable Cost

The Marketing Manager Must Consider Various Kinds of Costs

Average Fixed Cost in Action

An Example Shows Cost Relations (Exhibit 18-4)

Target Return Pricing

Target Return Pricing

Target Return Pricing

Target Return Pricing

Long-Run Target Return

Pricing

Long-Run Target Return

Pricing

Some Firms Add a Target Return to Cost

Break-Even Analysis Can Evaluate Possible Prices (Exhibit 18-8)

© 2008 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin

Interactive Exercise: Break-Even Analysis

A company has total fixed cost of $500,000. Its per

unit variable cost is $5.00, and its price per unit is

$10.00. What is the break-even point in sales

dollars?

A. $100,000.

B. $2,500,000.

C. $1,000,000.

D. $33,000.

E. Cannot be determined from the information provided

Checking your knowledge

Marginal Analysis Considers Both Costs and Demand (Exhibit 18-9)

© 2008 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin

Interactive Exercise: Cost and Demand

Profit Maximization with Total Revenue and Total Cost Curves (Exhibit 18-10)

Demand-Oriented Approaches for Setting Prices

© 2008 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin

Focusing on Cost and Demand

Types ofDemand-Oriented

Pricing

Types ofDemand-Oriented

Pricing

Value-in-UseValue-in-UseValue-in-UseValue-in-Use

AuctionsAuctionsAuctionsAuctions

Sequential ReductionsSequential ReductionsSequential ReductionsSequential Reductions

ReferenceReferenceReferenceReference

Leader & Bait

Leader & Bait

More Demand-Oriented Methods

Types ofDemand-Oriented

Pricing

Types ofDemand-Oriented

Pricing

Demand-BackwardDemand-Backward

Price LiningPrice LiningPrice LiningPrice Lining

Odd-EvenOdd-EvenOdd-EvenOdd-Even

PsychologicalPsychologicalPsychologicalPsychological

Value-in-UseValue-in-Use

AuctionsAuctions

Sequential ReductionsSequential Reductions

ReferenceReference

Leader & Bait

Leader & Bait

PrestigePrestige

Demand-BackwardDemand-Backward

More Demand-Oriented Methods

Market-OrientedMarket-OrientedMarket-OrientedMarket-Oriented

Firm-Oriented

Firm-Oriented

Firm-Oriented

Firm-Oriented

Costs Are ComplicatedCosts Are

ComplicatedCosts Are

ComplicatedCosts Are

Complicated

Full-Line PricingFull-Line PricingFull-Line PricingFull-Line Pricing

Complementary Product Pricing

Complementary Product Pricing

Pricing a Full Line

© 2008 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin

Product-Bundle Pricing

Leonard Stevens, a senior citizen living in Florida,

says that he always buys the highest-priced

product in a given product category. “You get what

you pay for,” he says. Leonard would appear to be

a good target for:

A. prestige pricing.

B. price fixing.

C. price lining.

D. odd-even pricing.

E. value-in-use pricing

Checking your knowledge

A store advertised a special sale on new, commercial quality sewing machines and offered an exceptionally low price. Jasmine Tetreault, who loved to sew, went to the store to purchase one of the machines. When she got there, the salesperson used high-pressure tactics to try and get her to buy a higher-priced model. When Jasmine insisted on looking at the advertised machine, the salesperson said that the advertised machine was not in stock. Jasmine left the store, concluding that the store was engaged in:

A. leader pricing.B. value-in-use pricing.C. price lining. D. odd-even pricing.E. bait pricing.

Checking your knowledge

New Prices for Every JobNew Prices

for Every JobNew Prices

for Every JobNew Prices

for Every Job

Ethical IssuesEthical IssuesEthical IssuesEthical Issues

Consider DemandConsider DemandConsider DemandConsider Demand

Negotiated PricesNegotiated Prices

Bid Pricing and Negotiated Pricing Depend Heavily on Costs

You now

1. Understand how most wholesalers and retailers set their prices by using markups.

2. Understand why turnover is so important in pricing.

3. Understand the advantages and disadvantages of average-cost pricing.

4. Know how to use break-even analysis to evaluate possible prices.

You now

5. Understand the advantages of marginal analysis and how to use it for price setting.

6. Understand the various factors that influence customer price sensitivity.

7. Know the many ways that price setters use demand estimates in their pricing.

8. Understand how bid pricing and negotiated prices work.

Key Terms

• Markup

• Markup (percent)

• Markup chain

• Stockturn rate

• Average-cost pricing

• Total fixed cost

• Total variable cost

• Total cost

• Average cost (per unit)

• Average fixed cost (per unit)

• Average variable cost (per unit)

• Target return pricing

• Long-run target return pricing

• Break-even analysis

• Break-even point (BEP)

• Fixed-cost (FC) contribution per unit

Key Terms

• Marginal analysis

• Marginal revenue

• Marginal cost

• Rule for maximizing profit

• Marginal profit

• Price leader

• Value-in-use pricing

• Reference price

• Leader pricing

• Bait pricing

• Psychological pricing

• Odd-even pricing

• Price lining

• Demand-backward pricing

• Prestige pricing

• Full-line pricing

• Complementary product pricing

• Product-bundle pricing

• Bid pricing

• Negotiated price