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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 Irwin/McGraw-Hill 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 Irwin/McGraw-Hill 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 Irwin/McGraw-Hill 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