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Marketing
Chapter 12
Fundamentals of Pricing
Gilbert A. Churchill, Jr.
J. Paul Peter
The amount of money, good, or services that must be
given up to acquire ownership or use of a product.
Slide
12-1
Figure
12.1
Sample Demand Curve
A graphical representation of the quantity
of a product demanded at various prices.
Price per Unit
60
50
40
30
20
10
10,000
20,000
30,000
40,000
50,000
Quantity Demanded in Units
Slide
12-2
Estimating Demand - 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?
• What is the general trend in the industry?
Slide
12-3
Estimating Demand - 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?
Slide
12-4
Figure
12.2
Demand Curves Showing
Different Price Elasticities
Elastic Demand:
European Vacations
Price
per
trip
Inelastic Demand:
Gasoline
Price
per
gallon
Quantity Demanded
(Number of Trips)
Quantity Demanded
(Gallons)
Slide
12-5
Key Terms
Terms
Definition
Total Revenues
The total amount of money received from the sale of all units
of a product.
Total Costs
The total amount of money spent in the sale of all units of a
product.
Profits
The positive difference between total revenues and total costs.
Marginal Analysis The technique for finding the greatest profits by measuring the
economic effect of producing and selling each additional unit
of a product.
Marginal Revenues The change in total revenues that results from selling one
additional units of a product
Marginal Costs
The net addition to a firm’s total costs that result from the
reduction of one additional unit of a product
Slide
12-6
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
Slide
12-7
Pricing Based on Cost
Markup on cost pricing a pricing approach that adds a percentage
of the cost price to the producer’s cost in
order to arrive at a selling price.
Markup on selling price a pricing approach that adds a percentage
of the selling price to the producer’s cost in
order to arrive at a selling price.
Cost-plus pricing
a markup pricing approach that adds on a
dollar amount 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.
Slide
12-8
Figure
12.5
Breakeven Analysis
Dollars
Total Revenue
Total Cost
Profit
Breakeven
Point
Loss
Quantity Produced and Sold
Breakeven point - the level of sales at which total revenues = total costs
Slide
12-9
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
pricing in which the buyer asks potential
sellers to submit sealed bids containing the
seller’s pricing and availabilities.
Slide
12-10
Pricing Based on Customer Value
Reference Price
the price that buyers use to compare the
offered price of a product or service.
Demand-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
a pricing approach that involves setting
prices so that the exchange value is
higher than the value of competing
exchanges.
Slide
12-11
Comparison of the various pricing
approaches
Advantage
Easy to use
Intuitively appealing
Limitations
Cost-based Pricing
Do not take into consideration the effects
of price on consumer demand
Used when you have many different
products
Does not take into account competitor’s
prices
Competition-based pricing
Intuitively appealing
Since costs are not considered, at what
price can the firm generate profits
Try to offer customers greater value
Does not take into account what
customers value most
Value-based pricing
Ideal if a match can be found
Does not take both costs and competitors
between what customers value most
into account
and it does well
Offer customers greater value
Slide
12-12
Table
12.3
Laws Limiting Pricing Practices
Law
Sherman Antitrust Act
Pricing
Practices
Price Fixing
Consumer Goods Pricing
Act
Resale Price Maintenance
Federal Trade
Commission Act
Deceptive Pricing
Practices
Robinson-Patman Act
Price discrimination that
lessens or damages
competition;
discrimination in the use
of promotional pricing
Laws of most countries
Dumping
Slide
12-13
Table
12.3
Illegal Pricing Practices
Pricing Practices
Definition
Price Fixing
An illegal agreements among competitors to set the
price of a product
Deceptive Pricing
An illegal pricing tactic that involves misleading
customers about the relative goodness of an asking
price
Price Discrimination
The illegal practice of charging different prices to
buyers that do not reflect cost differences to the
seller
Predatory Pricing
An illegal pricing approach that involves setting
very low prices in order to hurt competitors.
Dumping
The illegal practice of pricing products below its
costs or below the going rate in a market.
Bait and switch
An illegal pricing tactic by which customers are
attracted to a store by an advertised low-priced
product that is then reported to be out-of-stock in
order to sell a more expensive product