Basic Marketing - Chapter 18: Price Setting in the Business World

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1. Chapter 18: Price Setting in the Business World For use only with Perreault and McCarthy texts. © The McGraw-Hill Companies, Inc., 1999 Irwin/McGraw-Hill
2. Chapter 18 Objectives When you finish this chapter, you should 1. Understand how most wholesalers 5. Understand the advantages of and retailers set their prices— marginal analysis and how to using markups. use it for price setting. 2. Understand why turnover is so 6. Understand the various factors important in pricing. that influence customer price sensitivity. 3. Understand the advantages and disadvantages of average-cost 7. Know the many ways that price pricing. setters use demand estimates in their pricing. 4. Know how to use break-even analysis to evaluate possible 8. Understand the important new prices. terms. For use only with Perreault and McCarthy texts. 18-2 © The McGraw-Hill Companies, Inc., 1999 Irwin/McGraw-Hill
3. Key Factors That Influence Price Setting Pricing objectives Price of other Price flexibility products in the line Discounts and Demand Price allowances settin g Cost Legal environment Geographic Competition pricing terms Markup chain in channels Exhibit 18-1 For use only with Perreault and McCarthy texts. 18-3 © The McGraw-Hill Companies, Inc., 1999 Irwin/McGraw-Hill
4. Markups 50.00 30.00 24.00 Markup = 20.00 = 40% Markup = 6.00 = 20% Markup = 2.40 = 10% Cost = 30.00 = 60% Cost = 24.00 = 80% Cost = 21.60 = 90% Producer Wholesaler Retailer Exhibit 18-2 For use only with Perreault and McCarthy texts. 18-4 © The McGraw-Hill Companies, Inc., 1999 Irwin/McGraw-Hill
5. Six Types of Costs Total Cost Total Fixed Total Variable Cost Cost Average Average Fixed Cost Variable Cost Average Cost For use only with Perreault and McCarthy texts. 18-5 © The McGraw-Hill Companies, Inc., 1999 Irwin/McGraw-Hill
6. Prices Along the Demand Curve $3.00 Total revenue = Price x Quantity $30,000 = $3.00 x 10,000 $40,000 = $2.00 x 20,000 $57,000 = $1.90 x 30,000 $66,000 = $1.65 x 40,000 $75,000 = $1.50 x 50,000 $72,000 = $1.20 x 60,000 2.00 1.90 Price per unit 1.65 1.50 1.20 10 20 30 40 50 60 70 Exhibit 18-6 Quantity (000) For use only with Perreault and McCarthy texts. 18-6 © The McGraw-Hill Companies, Inc., 1999 Irwin/McGraw-Hill
7. Summary of Relationships Affecting Price Estimated quantity to ? be sold Quantity demanded Average fixed cost at selling price per unit Variable cost per unit Cost-oriented selling Average total cost price per unit per unit Profit per unit Exhibit 18-7 For use only with Perreault and McCarthy texts. 18-7 © The McGraw-Hill Companies, Inc., 1999 Irwin/McGraw-Hill
8. Break-even Analysis Higher Profit Area Total Revenue Curve Total Cost Curve Break-Even Point Loss Area Total Variable Costs Total Revenue and Cost Total Fixed Costs 0 More Units of Production Exhibit 18-8 For use only with Perreault and McCarthy texts. 18-8 © The McGraw-Hill Companies, Inc., 1999 Irwin/McGraw-Hill
9. Marginal Analysis 800 Total cost 700 600 500 400 300 Total revenue 200 Best profit = $106 for quantity = 6 Dollars 100 at best price = $79 0 2 4 6 8 Quantity -100 -200 -300 -400 Total profit Exhibit 18-10 Note: curves here are approximate (you can’t sell part of a unit!) For use only with Perreault and McCarthy texts. 18-9 © The McGraw-Hill Companies, Inc., 1999 Irwin/McGraw-Hill
10. Evaluating a Customer’s Price Sensitivity lAre there substitute ways of meeting a need? lIs it easy to compare prices? lWho pays the bill? lHow great is the total expenditure? lHow significant is the end benefit? lIs there already a sunk investment related to the purchase? For use only with Perreault and McCarthy texts. 18-10 © The McGraw-Hill Companies, Inc., 1999 Irwin/McGraw-Hill
11. Demand-Oriented Pricing Psychological Odd-Even Bait Prestige Types of Demand-Oriented Leader Pricing Price Lining Demand- Value-in-Use Backward Reference For use only with Perreault and McCarthy texts. 18-11 © The McGraw-Hill Companies, Inc., 1999 Irwin/McGraw-Hill
12. Full-Line Pricing Market- or Firm ????? Oriented? ????? Complementary ????? Pricing? ????? Product-Bundling ????? Pricing? For use only with Perreault and McCarthy texts. 18-12 © The McGraw-Hill Companies, Inc., 1999 Irwin/McGraw-Hill
13. Bid and Negotiated Pricing 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. For use only with Perreault and McCarthy texts. 18-13 © The McGraw-Hill Companies, Inc., 1999 Irwin/McGraw-Hill
14. Key Terms Markup Break-Even Analysis Psychological Markup (percent) Break-Even Point (BEP) Pricing Markup Chain Fixed-Cost (FC) Odd-Even Pricing Stockturn Rate Contribution per Unit Price Lining Average-Cost Pricing Marginal Analysis Demand-Backward Total Fixed Cost Marginal Revenue Pricing Total Variable Cost Marginal Cost Prestige Pricing Total Cost Rule for Maximizing Full-Line Pricing Average Cost Profit Complementary Average Fixed Cost Marginal Profit Product Pricing Average Variable Cost Price Leader Product-Bundle Experience Curve Value in Use Pricing Pricing Pricing Reference Price Bid Pricing Target Return Pricing Leader Pricing Negotiated Price Long-Run Target Bait Pricing Return Pricing For use only with Perreault and McCarthy texts. 18-14 © The McGraw-Hill Companies, Inc., 1999 Irwin/McGraw-Hill