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C H A P T E R
PRICING CONCEPTS FOR ESTABLISHING VALUE
13
McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
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L E A R N I N G O B J E C T I V E S
Pricing Concepts for Establishing Value
LO1 List the four pricing orientations.
LO2 Explain the relationship between price and quantity sold.
LO3 Explain price elasticity.
LO4 Describe how to calculate a product’s break-even point.
LO5 Indicate the four types of price competitive levels.
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Price and Value
What’s the most you will pay for a nice hotel?
©Uden Graham/Redlink/Corbis
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Price
Benefits
Sacrifice
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Bottled vs. Tap Water
13-6
Price is a Signal
Prices can be both too high and too low
Price set too low may signal poor quality
Price set too high might signal low value
http://www.PriceGrabber.com Website
©Brand X Pictures/PunchStock
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The Role of Price in the Marketing Mix
Price is the only marketing mix element that generates revenue
Price is usually ranked as one of the most important factors in purchase decisions
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The 5 C’s of Pricing
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1st C: Company Objectives
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Profit Orientation
Profit Orientation
Target return pricing
Target profit
pricing
Maximizing profits
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Sales Orientation
Focus on increasing sales
More concerned
with overall market share
Does not always imply setting low
prices
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Competitor Orientation
• Competitive parity
• Status quo pricing
• Value is not part of this pricing strategy
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Focus on customer expectations by matching prices to customer expectations
http://www.automotive.com Website
Customer Orientation
C Borland/PhotoLink/Getty Images Don Farrall/Getty Images
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What are they trying to accomplish with this ad?
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2nd C: Customers
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Demand Curves and Pricing
Knowing demand curve enables to see relationship
between price and demand
Photo by Simon Frederick/Getty Images
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Demand Curves
Not all are downward sloping
Prestigious products or services have upward sloping
curves
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Price Elasticity of Demand
Elastic (price sensitive)
Inelastic (price insensitive)
Consumers are less sensitive to price
increases for necessities
©PhotoLink/Getty Images
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Price Elasticity of Demand
©Dennis MacDonald/PhotoEdit, Inc. ©Bill Aron/PhotoEdit, Inc.
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Factors Influencing Price Elasticity of Demand
Wal-Mart Commercial
Income
effect
Substitution
effect
Cross-
price
elasticity
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Substitution Effect
• Meet Pete, college student on a budget:
• Old Spice Sport Deodorant user
• At the store he notices that Old Spice is more expensive
• Pete decides to give another brand a try and save money
BananaStock/JupiterImages
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Cross-Price Elasticity
• Meet Kendra, self-supporting college student:
• Buys a new printer on sale for a great price
• Learns it requires special ink cartridges that cost more than the printer
Getty Images/Digital Vision
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3rd C: Costs
• Variable Costs
– Vary with production volume
• Fixed Costs
– Unaffected by production volume
• Total Cost
– Sum of variable and fixed costs
Michael Rosenfeld/Stone/Getty Images
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Break Even Analysis and Decision Making
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Break Even Analysis
Total Variable Cost = Variable Cost per unit X Quantity
Total Cost = Fixed Cost + Total Variable Cost
Total Revenue = Price X Quantity
Fixed Costs
Contribution per unitBreak-Even Point (units) =
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Wal-Mart vs. Target
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5th C: Channel Members
• Manufacturers, wholesalers and retailers can have different perspectives on pricing strategies
• Manufactures must protect against gray market transactions
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Check Yourself
1. What are the five Cs of pricing?
2. Identify the four types of company objectives.
3. What is the difference between elastic versus inelastic demand?
4. How does one calculate the break-even point in units?
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Macro Influences on Pricing
• The Internet
• Increased price sensitivity
• Growth of online auctions
Ryan McVay/Getty Images
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Economic Factors
Local economic conditions
Increasing disposable
income Cross- shopping
Increasing status
consciousness
Increasing globalization
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1. How have the Internet and economic factors affected the way people react to prices?
Check Yourself