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McGraw-Hill/Irwin
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
Learning Objectives
LEARNING OBJECTIVES

Why should firms pay more attention to setting prices?

What is the relationship between price and quantity sold?

Why is it important to know a product’s break-even
point?

Who wins in a price war?

How has the Internet changed the way some people use
price to make purchasing decisions?
13-2
Price and Value
What’s the most you
will pay for a pair of
jeans?
13-3
Price
13-4
Bottled vs. Tap Water
13-5
Price is the ________ a consumer is willing to
make to acquire a specific product or service.
A.
financial expenditure
B.
total cost
C.
durable fixed cost
D.
target return
E.
overall sacrifice
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
PriceGrabber.com Website
13-7
The Role of Price in the Marketing Mix
Price is usually ranked as one of the most
important factors in purchase decisions
Price is the only marketing mix element that
generates revenue
13-8
While most consumers rank low price as an
important factor, they would rather purchase a
product or service of:
A.
high value.
B.
status quo variation.
C.
profit orientation.
D.
inelastic income demand.
E.
gray market efficiency.
13-9
The 5 C’s of Pricing
13-10
1st C: Company Objectives
13-11
Profit Orientation
Target
profit
Target
pricing
Maximizing
return
profits
pricing
Profit
Orientation
13-12
Sales Orientation
Focus on
increasing sales
Does not
always imply
low setting
low prices
More
concerned
with overall
market share
13-13
Competitor Orientation

Competitive parity

Status quo pricing

Value is not part of this pricing strategy
13-14
Customer Orientation
=
Focus on customer expectations by matching
prices to customer expectations
automotive.com Website
13-15
What are they trying to accomplish
with this ad?
13-16
2nd C: Customers
13-17
Demand Curves and Pricing
Knowing demand
curve enables to see
relationship between
price and demand
13-18
Demand Curves
Not all are downward
sloping
Prestigious products or
services have upward
sloping curves
13-19
Price Elasticity of Demand

Elastic (price sensitive)

Inelastic (price
insensitive)

Consumers are less
sensitive to price
increases for
necessities
13-20
Price Elasticity of Demand
13-21
Factors Influencing
Price Elasticity of Demand
Cross-
Income
price
effect
elasticity
Substitution
effect
Wal-Mart Commercial
13-22
Price elasticity of demand measures
consumers’:
A.
cross-price elasticity responsiveness.
B.
sensitivity to price changes.
C.
response to a change in income.
D.
break-even satisfaction point.
E.
demand price parity.
13-23
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
13-24
Cross-Price Elasticity

Meet Kendra, selfsupporting college
student:

Buys a new printer on
sale for a great price

Learns it requires
special ink cartridges
that cost more than
the printer
13-25
3rd C: Costs

Variable Costs


Fixed Costs


Vary with production volume
Unaffected by production
volume
Total Cost

Sum of variable and fixed costs
13-26
Break Even Analysis and
Decision Making
13-27
Break Even Analysis
Total Variable Cost = Variable Cost per unit X Quantity
Total Cost = Fixed Cost + Total Variable Cost
Total Revenue = Price X Quantity
Break-Even Point (units)
=
Fixed Costs
Contribution per unit
13-28
4th C: Competition
Subway Commercial
13-29
Wal-Mart vs. Target
13-30
5th C: Channel Members

Manufacturers,
wholesalers and
retailers can have
different perspectives
on pricing strategies

Manufactures must
protect against gray
market transactions
13-31
Which of the following is NOT one of the
Five C’s of Pricing?
A.
Customers.
B.
Channel members.
C.
Cost.
D.
Customization.
E.
Company objectives.
13-32
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?
13-33
Macro Influences on Pricing

The Internet

Increased price
sensitivity

Growth of online
auctions
13-34
Economic Factors
Local
economic
conditions
Increasing
disposable
income
Increasing
status
consciousness
Crossshopping
Increasing
globalization
13-35
Check Yourself
1.
How have the Internet and economic
factors affected the way people react to
prices?
13-36
Glossary
Break-even analysis enables managers to examine
the relationships among cost, price, revenue, and
profit over different levels of production and
sales.
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13-37
Glossary
Cross-price elasticity is the percentage change in
the quantity of Product A demanded compared
with the percentage change in price in Product B.
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13-38
Glossary
Fixed costs are those costs that remain essentially
at the same level, regardless of any changes in the
volume of production.
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13-39
Glossary
Income effect is the change in the quantity of a
product demanded by consumers due to a change
in their income.
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13-40
Glossary
The maximizing profits strategy assumes that if a
firm can accurately specify a mathematical model
that captures all the factors required to explain
and predict sales and profits, it should be able to
identify the price at which its profits are
maximized.
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13-41
Glossary
Price is the overall sacrifice a consumer is willing to
make to acquire a specific product or service.
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13-42
Glossary
The substitution effect refers to consumers’ ability
to substitute other products for the focal brand.
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13-43
Glossary
Target profit pricing is implemented by firms to
meet a targeted profit objective. The firms use
price to stimulate a certain level of sales at a
certain profit per unit.
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13-44
Glossary
Target return pricing occurs when firms employ
pricing strategies designed to produce a specific
return on their investment, usually expressed as a
percentage of sales.
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13-45
Glossary
The total cost is the sum of the variable and fixed
costs.
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13-46
Glossary
Variable costs are the costs that vary with
production value.
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13-47