Download LO 19-3

Chapter 19
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LO 19-1 Summarize why price is important to the
marketing mix
LO 19-2 Compare price competition with nonprice
competition
LO 19-3 Explain the importance of demand curves
and the price elasticity of demand
LO 19-4 Describe the relationships among demand,
costs, and profits
LO 19-5 Describe eight key factors that may
influence marketers’ pricing decisions
LO 19-6 Identify seven methods companies can
use to price products for business
markets
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O The purpose of marketing is to
facilitate satisfying exchange
relationships between buyer and
seller
O Price – The value paid for a product in a
marketing exchange
O Barter – The trading of products
O The oldest form of exchange
O Corporate barter still occurs and amounts to an
estimated $12 billion in annual U.S. sales
LO 19-1
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O Price is a key element in the
marketing mix because it relates
directly to the generation of total
revenue
Profit = Total Revenue – Total Costs
Profit = (Price x Quantity Sold) – Total Costs
O Because price has a psychological
impact on customers, marketers can
use it symbolically
O Pricing high – emphasizes quality
LO 19-1
O Pricing low – emphasizes a bargain
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O Price competition – Emphasizing
price as an issue and matching or
beating competitors’ prices
O To compete effectively on a price basis, a firm
should be the low-cost seller
O Must be willing and able to change prices
frequently to meet competitors’ pricing
O May lead to price wars
LO 19-2
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otherwise on a password-protected website for classroom use.
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O Nonprice competition – Emphasizing
factors other than price to distinguish
a product from competing brands
O A major advantage is a firm can build customer
loyalty
O Only effective if:
O A company can distinguish its brand from others
O Buyers are able to perceive these distinguishing
characteristics and view them as important
O The company promotes the brand to establish its
superiority
LO 19-2
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otherwise on a password-protected website for classroom use.
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O Demand curve – A graph of the
quantity of products expected to be
sold at various prices if other factors
remain constant – D1
O Demand depends on other factors in the
marketing mix including quality, promotion and
distribution
O An improvement in any of these factors may
cause a shift to demand curve D2
LO 19-3
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otherwise on a password-protected website for classroom use.
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LO 19-3
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O Many types of demand exist and not
all conform to the classic demand
curve
O Prestige products tend to sell better
at high prices, partly because the
expense makes the buyers feel elite
O For a certain price range, P1 to P2, demand goes
up
O After a certain point, raising the price backfires
and demand goes down – P2 to P3
LO 19-3
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LO 19-3
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O Factors that can influence demand
O Changes in buyers’ needs
O Variations in the effectiveness of other
marketing mix variables
O The presence of substitutes
O Dynamic environment
LO 19-3
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otherwise on a password-protected website for classroom use.
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O Changes in demand for some
products is predictable but with other
products demand may be less
predictable
O Some organizations anticipate
demand fluctuations and develop
new products and prices to meet
customers’ changing needs
LO 19-3
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 Read the following examples. Which of
these activities increases demand, and
which of these activities increases the
quantity demanded?
 Procter & Gamble releases a new
advertising campaign for its razor, which
results in more people becoming aware
of the razor and purchasing it.
 Sales at Dairy Queen shoot up in the
summer, particularly on hot days.
 As summer approaches, Macy’s lowers
the prices on all of its sweaters.
 A food manufacturer has developed an
egg substitute that tastes more like real
eggs, convincing more people to adopt
its product.
LO 19-3
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O Price elasticity of demand – A
measure of the sensitivity of demand
to changes in price
O Demand for electricity is inelastic, when price
increases from P1 to P2, demand decreases a
small amount
O Demand for recreational vehicles is elastic,
when price goes up from P1 to P2, quantity
demanded decreases a great deal
LO 19-3
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LO 19-3
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otherwise on a password-protected website for classroom use.
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LO 19-3
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O If marketers can determine the price
elasticity of demand, setting a price is
much easier
O By analyzing total revenues as prices change,
marketers can determine whether a product is
price elastic
O If demand is elastic, a change in price causes and
opposite change in total revenue
O If demand is inelastic, total revenue changes in the
same direction
Price elasticity of demand = % change in quantity demanded
%change in price
LO 19-3
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 Read the following examples. Which of
the products are relatively elastic, and
which are relativity inelastic?
 Refrigerator
 Gasoline
 Internet service
 Pair of jeans
 Diamond
 Scarves
 Orange juice
 Salt
 Computer
 Concert tickets
LO 19-3
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O Analysis of demand, cost and profit is
important
O Customers are becoming less tolerant of price
increases, forcing manufacturers to find new
ways to control costs
O Companies must set prices that not only cover
its costs but also meet customers’ expectations
O Two approaches to understanding demand,
cost and profit relationships are:
O Marginal analysis
O Break-even analysis
LO 19-3
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O Marginal analysis examines what
happens to a firm’s costs and
revenues when production (or sales
volume) changes by one unit
O Fixed costs – costs that do not vary with changes in
the number of units produced or sold
O Average fixed cost – the fixed cost per unit
produced
O Variable cost – costs that vary directly with changes
in the number of units produced or sold
O Average variable cost – the variable cost per unit
produced
LO 19-4
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O Total cost – the sum of average fixed and
average variable costs times the quantity
produced
O Average total cost – the sum of the average
fixed cost and the average variable cost
O Marginal cost (MC) – the extra cost incurred by
producing one more unit of a product
O Marginal revenue (MR) – the change in total
revenue resulting from the sale of an additional
unit of product
LO 19-4
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O Any unit for which MR exceeds MC
adds to a firm’s profits
O Any unit for which MC exceeds MR
subtracts from profits
O The firm should produce at the point where MR
equals MC because that is the most profitable
level of production
O However, marginal analysis is only a model
O Marginal analysis offers little help in pricing new
products
LO 19-4
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LO 19-4
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otherwise on a password-protected website for classroom use.
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LO 19-4
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otherwise on a password-protected website for classroom use.
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LO 19-4
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otherwise on a password-protected website for classroom use.
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LO 19-4
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otherwise on a password-protected website for classroom use.
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LO 19-4
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otherwise on a password-protected website for classroom use.
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LO 19-4
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O Knowing the number of units
necessary to break-even is important
in setting the price
O If a product priced at $100 per unit
O Has an average variable cost of $60 per unit
O The contribution to fixed cost is $40
O If total fixed costs are $120,000, the break-even
point in units is determined as follows…
LO 19-4
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Break-even point
=
fixed costs
per-unit contribution to
fixed costs
=
fixed costs
price – variable costs
=
=
LO 19-4
$120,000
$40
3,000 units
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O To use break-even analysis effectively,
a marketer should determine the
break-even point for each of several
alternative prices
O This makes it possible to compare the effects
on total revenue, total costs and the break-even
point for each price
O This approach assumes the quantity
LO 19-4
demanded is basically fixed and the
major task is to set prices to recover
costs
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O Pricing decisions can be complex
because of the number of factors to
consider
O There is considerable uncertainty about the
LO 19-5
reactions to price among buyers, channel
members and competitors
O Price is an important consideration in marketing
planning, market analysis and sales forecasting
O Price is a major issue when assessing a brand’s
position relative to competing brands
O Most factors that affect pricing decisions can be
grouped into one of eight categories
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LO 19-5
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O Organizational and Marketing
Objectives
O Prices should be consistent with the
organization’s goals, mission and
marketing objectives
O Pricing Objectives
O The pricing objectives a marketer uses have
considerable bearing on determination of prices
LO 19-5
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O Costs
O A marketer should analyze all costs so they can
be included in the total cost associated with a
product
O Other Marketing Mix Variables
O All marketing mix variables are highly
interrelated
O Channel Member Expectations
O A marketer must consider what members of the
distribution channel expect such as discounts
for large orders and prompt payment
LO 19-5
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O Customers’ Interpretation and
Response
O Marketers must consider this question: How
will our customers interpret our prices and
respond to them?
O Interpretation refers to what the price means or what
it communicates to customers
O Customer response refers to whether the price will
move customers closer to purchase and the degree
that price enhances their satisfaction with the
purchase and after the purchase
LO 19-5
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otherwise on a password-protected website for classroom use.
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O Customers’ Interpretation and
Response
O Customers compare prices with
internal or external reference prices
O Internal reference price – a price developed in
the buyer’s mind through experience with the
product
O External reference price – a comparison price
provided by others
LO 19-5
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O Relative to price, consumers can be
characterized according their degree
of
O Value consciousness – concerned about price
and quality of a product
O Price consciousness – striving to pay low prices
O Prestige sensitivity – drawn to products that
signify prominence and status
LO 19-5
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O Competition
O A marketer must know competitors’ prices,
adjust their own prices and assess how
competitors will respond
O Legal and Regulatory Issues
O Price discrimination is employing price
differentials that injure competition by giving
one or more buyers a competitive advantage, is
prohibited by law
LO 19-5
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otherwise on a password-protected website for classroom use.
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O Establishing prices for business
markets sometimes differs from
setting prices for consumers
O Differences in the size of purchases, geographic
factors and transportation considerations
require sellers to adjust prices
O There are several issues unique to pricing
business products:
O Discounts
O Geographic pricing
O Transfer pricing
LO 19-6
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LO 19-6
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O Trade (functional) discounts – a
reduction off the list price a producer
gives to an intermediary for
performing certain functions
O Quantity discounts – Deductions from
the list price for purchasing in large
quantities
LO 19-6
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O Quantity discounts can be either:
O Cumulative discounts which are quantity
discounts aggregated over a stated time period
O Noncumulative discounts which are one-time
price reductions based on the number of units
purchased, the dollar value of the order, or the
product mix purchased
LO 19-6
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otherwise on a password-protected website for classroom use.
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O Cash discounts – price reduction
given to buyers for prompt payment
or cash payment
O Seasonal discounts – price reduction
given to buyers for purchasing goods
or services out of season
O Allowances – concession in price to
achieve a desired goal
LO 19-6
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otherwise on a password-protected website for classroom use.
 A clothing manufacturer offers JCPenney a
 Read the following
examples. Identify the
type of price discount
described:




discount on swimsuits at the end of the
summer.
Apple wants a company to upgrade to a new
Mac computer, so it allows the company to
trade in their older Macs and get the new
ones at a reduced price.
A warehouse is given a discount from the
manufacturer for agreeing to transport the
inventory using its own trucks.
Red Lobster receives a deduction in list price
when it purchases large quantities of
lobsters.
Lynn’s Electronics takes advantage of her
suppliers’ policy of giving discounts for
prompt payment.
LO 19-6
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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O Geographic pricing – reductions for
transportation and other costs
related to the physical distance
between buyer and seller
O F.O.B. factory – is the price of merchandise at
the factory before shipment
O F.O.B. destination – is a price indicating the
producer is absorbing shipping costs
O Uniform geographic pricing – is charging all
customers the same price, regardless of
geographic location
LO 19-6
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O Geographic pricing strategy is used to
improve market penetration and
retain a hold in an increasingly
competitive market
O Zone pricing – is pricing based on
LO 19-6
transportation costs within major geographic
zones
O Base-point pricing – is geographic pricing that
combines factory price and freight charges
from the base point nearest the buyer
O Freight absorption pricing – is absorption of all
or part of actual freight costs by the seller
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otherwise on a password-protected website for classroom use.
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O Transfer pricing – Prices charged in
sales between an organization’s units
O Four methods to determine price:
O Actual full cost is calculated by dividing all fixed and
LO 19-6
variable expenses for a period into the number of units
produced
O Standard full cost is calculated based on what it would
cost to produce the goods at full plant capacity
O Cost plus investment is calculated as full cost plus the
cost of a portion of the selling units’ assets used for
internal needs
O Market-based cost is calculated at the market price less
a small discount to reflect the lack of sales effort and
other expenses
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otherwise on a password-protected website for classroom use.
 It is illegal in many states to add a
surcharge to credit purchases, but
companies are allowed to offer discounts
for purchases paid in cash.
 Many gas stations, as
well as other companies,  The reason is that companies accepting
credit cards have to pay 2 to 3 percent of
set a lower price for cash
the amount charged in credit card fees.
purchases than
 Companies argue that this is fair because
purchases made by
of the fees involved. But customers may
credit.
be lured by the discount only to realize
later that it is only for cash purchases.
 Some believe it is more fair to set one
price that covers additional fees and only
offer cash discounts on large or luxury
purchases.
LO 19-6
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.