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Marketing
Chapter 12
Fundamentals of Pricing
Gilbert A. Churchill, Jr.
Irwin/McGraw-Hill
J. Paul Peter
© The McGraw-Hill Companies, Inc., 1998
Slide
12-1
Figure
12.1
Sample Demand Curve
Price per Unit
60
50
40
30
20
10
10,000
20,000
30,000
40,000
50,000
Quantity Demanded in Units
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1998
Slide
12-2
Demographic Pricing Factors
• How many potential buyers are in the
market?
• What is the location of potential buyers?
• Are they organizational buyers or
consumers?
• What is the consumption rate of potential
buyers?
• What is the financial condition of potential
buyers?
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1998
Slide
12-3
Psychological Pricing Factors
• Will potential buyers use price as an indicator
of the product’s quality?
• Will potential buyers be favorably attracted by
odd pricing such as 99 cents instead of $1, or
$177 instead of $180?
• Will potential buyers perceive the price to be
too high relative to what the product offers?
• Are potential buyers concerned enough with
prestige to pay more for the product?
• How much will potential buyers be willing to
pay for the product?
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1998
Slide
12-4
Figure
12.2
Demand Curves Showing
Different Price Elasticities
Elastic Demand:
European Vacations
Price
per
trip
Price
per
gallon
Quantity Demanded
(Number of Trips)
Irwin/McGraw-Hill
Inelastic Demand:
Gasoline
Quantity Demanded
(Gallons)
© The McGraw-Hill Companies, Inc., 1998
Slide
12-5
Figure
12.4
Marginal Analysis Relationships
Dollars
Profit
Total Cost
Total Revenue
Quantity Produced and
Sold
Dollars
Marginal Cost
Marginal Revenue
Quantity Produced and Sold
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1998
Slide
12-6
Pricing Based on Cost
Markup pricing
a pricing approach that adds a
percentage to the producer’s cost in
order to arrive at a selling price.
Rate of return pricing
a pricing approach that involves total
costs and then adding a desired rate
of return to them to determine the
selling price.
Breakeven analysis
a technique for determining the sales
volume needed to cover all costs at a
specific rate.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1998
Slide
12-7
Figure
12.5
Breakeven Analysis
Dollar
s
Total Revenue
Total Cost
Profit
Breakeven
Point
Loss
Quantity Produced and Sold
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1998
Slide
12-8
Pricing Based on Competition
Pricing Below Competition
pricing to gain market share and attract
cost-conscious buyers. Especially useful
to companies with low cost positions.
Matching Competition
pricing at competitor’s levels with the
intent of distinguishing the product in
other ways. Common in oligopolies.
Pricing Above Competition pricing for products that offer greater
value, quality, convenience or prestige.
Sealed-Bid Pricing
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pricing in which the buyer asks potential
sellers to submit sealed bids containing
the seller’s pricing and availabilities.
© The McGraw-Hill Companies, Inc., 1998
Slide
12-9
Pricing Based on Customer Value
Dominant Backward Pricing a pricing approach that involves
setting a price by starting with
the estimated price customers
will pay and working backwards
with retail and wholesale
margins.
Value Pricing
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a pricing approach that involves
setting prices so that the
exchange value is higher than
the value of competing
exchanges.
© The McGraw-Hill Companies, Inc., 1998
Slide
12-10
Table
12.3
Laws Limiting Pricing Practices
Law
Sherman Antitrust Act
Consumer Goods
Pricing Act
Federal Trade
Commission Act
Robinson-Patman Act
Laws of most countries
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Pricing
Practices
Price Fixing
Resale Price Maintenance
Deceptive Pricing
Practices
Price discrimination that
lessens or damages
competition;
discrimination in the use
of promotional pricing
Dumping
© The McGraw-Hill Companies, Inc., 1998