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McGraw-Hill/Irwin
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
LEARNING OBJECTIVES (LO)
AFTER READING CHAPTER 12, YOU SHOULD BE ABLE TO:
LO1
LO2
LO3
Describe the nature and importance of
pricing and the approaches used to
select an approximate price level.
Explain what a demand curve is and
the role of revenues in pricing
decisions.
Explain the role of costs in pricing
decisions and describe how various
combinations of price, fixed cost, and
unit variable cost affect a firm’s
breakeven point.
12-2
LEARNING OBJECTIVES (LO)
AFTER READING CHAPTER 12, YOU SHOULD BE ABLE TO:
LO4
LO5
Recognize the objectives a firm has in
setting prices and the constraints that
restrict the range of prices a firm can
charge.
Describe the steps taken in setting a
final price.
12-3
VIZIO, INC.—WHERE VISION
MEETS VALUE™ IN HDTV
12-4
NATURE AND IMPORTANCE OF PRICE
LO1
WHAT IS A PRICE?: THE PRICE EQUATION

Price

Barter

Price Equation
Final Price = List Price Š (Incentives + Allowances) + Extra Fees
12-5
FIGURE 12-1 The “price” a buyer pays can
take different names depending on what is
purchased
12-6
LO1
NATURE AND IMPORTANCE OF PRICE
PRICE: AS AN INDICATOR OF VALUE; IN THE MKT MIX

Value
Value =
$

Perceived Benefits
Price
=
$
Profit Equation
Profit = Total Revenue Š Total Costs
= (Unit Price  Quantity Sold) Š (Fixed Cost + Variable Cost)
12-7
FIGURE 12-2 Four approaches for selecting
an approximate price level
12-8
LO1
GENERAL PRICING APPROACHES
DEMAND-ORIENTED PRICING APPROACHES


Skimming
Pricing
Prestige
Pricing


Penetration
Pricing
Odd-Even
Pricing
$500.00
vs.
$499.99
12-9
MARKETING MATTERS
LO1
Energizer’s Lesson in Price Perception—
Value Lies in the Eye of the Beholder
12-10
LO1
GENERAL PRICING APPROACHES
DEMAND-ORIENTED PRICING APPROACHES

Target Pricing

Bundle Pricing

Yield Management Pricing
12-11
LO1
GENERAL PRICING APPROACHES
COST-ORIENTED PRICING APPROACHES

Standard
Markup
Pricing

Cost-Plus
Pricing
12-12
FIGURE 12-A Markups for a manufacturer,
wholesaler, and retailer on a home appliance
sold to consumers for $100
12-13
LO1
GENERAL PRICING APPROACHES
PROFIT-ORIENTED PRICING APPROACHES

Target Profit Pricing

Target Return-on-Sales Pricing

Target Return-on-Investment
(ROI) Pricing
12-14
GENERAL PRICING APPROACHES
LO1
COMPETITION-ORIENTED PRICING APPROACHES

Customary Pricing

Above-, At- or Below-Market Pricing

Loss-Leader Pricing
12-15
USING MARKETING DASHBOARDS
LO1
Are Cracker Jack Prices
Above, At, or Below the Market?
Price Premium (%)


Dollar Sales ($) Market Share for a Brand
Price Premium (%) = 
Š1
 Pound Volume (Units or #) Market Share for a Brand 
12-16
LO2
ESTIMATING DEMAND AND REVENUE
FUNDAMENTALS OF ESTIMATING DEMAND

Demand Curve
• Consumer Tastes
• Price and Availability
of Similar Products
• Consumer Income
• Demand Factors
12-17
FIGURE 12-3 Demand curves for Newsweek
showing the effect on annual sales (quantity
demanded per year) by a change in price
caused by (A) a movement along and
(B) a shift of the demand curve
12-18
FIGURE 12-3A Demand curve for Newsweek
showing the effect on annual sales by a
change in price caused by a movement
along the demand curve
12-19
FIGURE 12-3B Demand curve for Newsweek
showing the effect on annual sales by a
change in price caused by a shift of the
demand curve
12-20
LO2
ESTIMATE DEMAND AND REVENUE
FUNDAMENTALS OF ESTIMATING DEMAND

Price Elasticity of Demand
Price Elasticity of Demand (E) =
Percentage Change in Quantity Demanded
Percentage Change in Price
• Elastic Demand
• Inelastic Demand
12-21
LO2
ESTIMATE DEMAND AND REVENUE
FUNDAMENTALS OF ESTIMATING DEMAND

Price Elasticity of Demand
• Product Substitutes
• Necessities
• Large Cash Outlays
12-22
FIGURE 12-4 Fundamental revenue concepts

Total Revenue
Total Revenue = (Unit Price  Quantity Sold)
TR = (P  Q)
Total Profit = Total Revenue Š Total Cost
12-23
FIGURE 12-5 Fundamental cost concepts

Total Cost (TC)
Total Cost (TC) = Fixed Cost (FC) + Variable Cost (VC)
Unit Variable Cost (UVC) =
Variable Cost (VC)
Quantity (Q)
12-24
LO3
DETERMINING COST, VOLUME,
AND PROFIT RELATIONSHIPS
BREAK-EVEN ANALYSIS AND BEP

Break-Even Analysis

Break-Even Point (BEP)
BEPQuantity
Fixed Cost
FC


Unit Price Š Unit Variable Cost
P Š UVC
12-25
FIGURE 12-6 Calculating a break-even point
for the picture frame store shows its profit
starts at 400 framed pictures per year
12-26
LO6
STEP 3: DETERMINE COST, VOLUME,
AND PROFIT RELATIONSHIPS
BREAK-EVEN ANALYSIS

Break-Even Chart

Applications of
Break-Even Analysis
12-27
FIGURE 12-7 Break-even analysis chart for
a picture frame store shows the break-even
point at 400 pictures
12-28
LO4
PRICING OBJECTIVES AND CONSTRAINTS
IDENTIFYING PRICING OBJECTIVES

Pricing Objectives
• Profit
 Managing for Long-Run Profits
 Managing for Current Profit
 Target Return (ROI)
12-29
FIGURE 12-8 Where each dollar of your
movie ticket goes
12-30
LO4
PRICING OBJECTIVES AND CONSTRAINTS
IDENTIFYING PRICING OBJECTIVES

Pricing Objectives
• Sales ($)
• Survival
• Market Share ($ or #)
• Social
Responsibility
• Unit Volume (#)
12-31
LO4
PRICING OBJECTIVES AND CONSTRAINTS
IDENTIFYING PRICING CONSTRAINTS

Pricing Constraints
• Demand for the
Product Class (Cars),
Product (Sports Cars),
and Brand (Tesla Roadster)
• Newness of the
Product: Stage in the
Product Life Cycle
12-32
LO4
PRICING OBJECTIVES AND CONSTRAINTS
IDENTIFYING PRICING CONSTRAINTS

Pricing Constraints
• Cost of Producing and
Marketing a Product
• Competitors’ Prices
• Legal and Ethical Considerations
12-33
FIGURE 12-B Several pricing practices are
affected by legal and regulatory restrictions,
which benefit both consumers and business
12-34
FIGURE 12-C Five most common deceptive
pricing practices
12-35
LO5
SETTING A FINAL PRICE

Step 1: Select an Approximate Price Level

Step 2: Set the List or Quoted Price
• One-Price Policy/
Fixed Pricing
• Flexible Price
Policy
12-36
MAKING RESPONSIBLE DECISIONS
LO5
Flexible Pricing—Is There Discrimination
in Bargaining for a New Car?
Buying a New Car: Some Folks Pay More
12-37
LO5

SETTING A FINAL PRICE
Step 3: Make Special Adjustments
to the List or Quoted Price
• Discounts
 Quantity
 Trade (Functional)
 Seasonal
 Cash
12-38
LO5

SETTING A FINAL PRICE
Step 3: Make Special Adjustments
to the List or Quoted Price
• Allowances
 Trade-In
 Promotional
 Everyday Low Pricing (EDLP)
12-39
LO5

SETTING A FINAL PRICE
Step 3: Make Special Adjustments
to the List or Quoted Price
• Geographical Adjustments
 FOB Origin
Pricing
 Uniform Delivered
Pricing (Multiple Zone)
12-40
VIDEO CASE 12
WASHBURN GUITARS:
USING BREAK-EVEN POINTS
TO MAKE PRICING DECISIONS
12-41
VIDEO CASE 12
WASHBURN GUITARS
1. What factors are most likely to
affect the demand for the lines
of Washburn guitars (a) bought by
a first-time guitar buyer and
(b) bought by a sophisticated
musician who wants a signature
model?
12-42
VIDEO CASE 12
WASHBURN GUITARS
2. For Washburn, what are
examples of (a) shifting the
demand curve to the right to get
a higher price for a guitar line
(movement of the demand curve)
and (b) pricing decisions involving
moving along a demand curve?
12-43
VIDEO CASE 12
WASHBURN GUITARS
3. In Washburn’s factory, what is
the break-even point for the new
line of guitars if the retail price is
(a) $349, (b) $389, and (c) $309?
Also, (d) if Washburn achieves
the sales target of 2,000 units at
the $349 retail price, what will its
profit be?
12-44
VIDEO CASE 12
WASHBURN GUITARS
4. Assume that the merger with
Parker leads to the cost
reductions projected in the case.
What will be the (a) new breakeven point at a $349 retail price
for this line of guitars and (b) new
profit if it sells 2,000 units?
12-45
VIDEO CASE 12
WASHBURN GUITARS
5. If for competitive reasons,
Washburn eventually has to
move all its production back to
Asia, (a) which specific fixed and
variable costs might be lowered
and (b) what additional fixed and
variable costs might it expect to
incur?
12-46
Price (P)
A price (P) is the money or other
considerations (including other
products and services) exchanged
for the ownership or use of a
product or service.
12-47
Value
Value is the ratio of perceived
benefits to price; or Value =
(Perceived benefits ÷ Price).
12-48
Profit Equation
The profit equation is:
Profit = Total revenue − Total cost; or
Profit = (Unit price × Quantity sold) −
(Fixed cost + Variable cost).
12-49
Demand Curve
A demand curve is a graph
relating the quantity sold and the
price, which shows the maximum
number of units that will be sold
at a given price.
12-50
Price Elasticity of Demand
The price elasticity of demand
is the percentage change in
quantity demanded relative to a
percentage change in price.
12-51
Total Revenue (TR)
Total revenue (TR) is the total
money received from the sale
of a product; the unit price of a
product multiplied by the quantity
sold.
12-52
Total Cost (TC)
Total cost (TC) is the total
expenses incurred by a firm in
producing and marketing a
product; total cost is the sum
of fixed costs and variable costs.
12-53
Break-Even Analysis
Break-even analysis is a
technique that analyzes the
relationship between total
revenue and total cost to
determine profitability at various
levels of output.
12-54
Pricing Objectives
Pricing objectives are
expectations that specify the role
of price in an organization’s
marketing and strategic plans.
12-55
Pricing Constraints
Pricing constraints are factors
that limit the range of prices a
firm may set.
12-56