CHAPTER PRICINGPRODUCTS AND SERVICES
AFTER READING THIS CHAPTERYOU SHOULD BE ABLE TO: • Identify the elements that make up a price. • Describe how to establish the initial approximate price level usingdemand-oriented, cost-oriented,profit-oriented, and competition-oriented approaches.
AFTER READING THIS CHAPTERYOU SHOULD BE ABLE TO: • Explain what a demand curve is and the role of revenues in pricing decisions. • Explain the role of costs in pricing decisions. • Describe how various combinations of price, fixed cost, and unit variable cost affect a firm’s break-even point.
AFTER READING THIS CHAPTERYOU SHOULD BE ABLE TO: • 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.
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NATURE AND IMPORTANCEOF PRICE • The Many Names of Price • What Is a Price? • Price • Barter • Price Equation
NATURE AND IMPORTANCEOF PRICE • Price as an Indicator of Value • Value Pricing • Price in the Marketing Mix • Profit Equation
GENERAL PRICING APPROACHES • Demand-Oriented Approaches • Skimming Pricing • Penetration Pricing • Prestige Pricing • Odd-Even Pricing • Target Pricing • Bundle Pricing • Yield Management Pricing
Nintendo GameCube andSears Craftsman Radial SawWhat pricing approach is used by each and why?
Concept Check 1. What is the profit equation? A: The profit equation is:Profit = Total revenue – Total cost= (Unit price × Quantity sold) – Total cost
Concept Check 2. What is the difference between skimming and penetration pricing? A: A firm introducing a new product can use either skimming pricing to set the highest initial price that customers desiring the product are willing to pay or penetration pricing to set a low initial price to appeal immediately to the mass market.
Concept Check 3. What is odd-even pricing? A: Odd-even pricing involves setting prices a few dollars or cents under an even number ($599.99 vs. $600.00). Psychologically, the $599.99 price feels lower than $600.00, even though the difference is 1¢.
GENERAL PRICING APPROACHES • Cost-Oriented Approaches • Standard Markup Pricing • Cost-Plus Pricing • Profit-Oriented Approaches • Target Profit Pricing • Target Return-on-Sales Pricing • Target Return-on-Investment Pricing
GENERAL PRICING APPROACHES • Competition-Oriented Approaches • Customary Pricing • Above-, At-, or Below-Market Pricing • Loss-Leader Pricing
ESTIMATING DEMANDAND REVENUE • Fundamentals of Estimating Demand • The Demand Curve • Consumer Tastes • Price and Availability of Similar Products • Consumer Income • Demand Factors
FIGURE 12-3 Illustrative demand curves for Newsweek Demand curve underinitial conditions Shift in the demandcurve with morefavorable conditions
FIGURE 12-3A Illustrative demand curve for Newsweek (initial conditions)
ESTIMATING DEMANDAND REVENUE • Fundamentals of Estimating Demand • Movement Along versus Shift of a Demand Curve • Price Elasticity of Demand • Elastic Demand • Inelastic Demand
Concept Check 1. What is loss-leader pricing? A: Loss-leader pricing involves deliberately selling a product below its customary price not to increase sales, but to attract customers’ attention in hopes that they will buy other products as well.
Concept Check 2.What are the three demand factors besides the product’s price that determine consumers’ willingness and ability to buy the product? A: They are consumer tastes, availability of similar products, and consumer income.
Concept Check 3. What is the difference between movement along a demand curve and a shift in a demand curve? A: A movement along a demand curve occurs when the price is lowered and the quantity demanded increases (and vice versa), assuming that other factors remain unchanged. However, if these factors change, then the demand curve will shift.
ESTIMATING DEMANDAND REVENUE • Fundamentals of Estimating Revenue • Total Revenue (TR)
DETERMINING COST, VOLUME, AND PROFIT RELATIONSHIPS • The Importance of Controlling Costs • Total Cost (TC) • Fixed Cost (FC) • Variable Cost (VC) • Unit Variable Cost (UVC)
DETERMINING COST, VOLUME, AND PROFIT RELATIONSHIPS • Break-Even Analysis • Break-Even Point (BEP) • Calculating a Break-Even Point • Break-Even Chart • Applications of Break-Even Analysis
Concept Check 1. What is the difference between fixed costs and variable costs? A: Fixed cost is the sum of the expenses of the firm that are stable and do not change with the quantity of the product that is produced and sold. Variable cost is the sum of the expenses of the firm that vary directly with the quantity of the product that is produced and sold.
Concept Check 2. What is a break-even point? A: A break-even point (BEP) is the quantity at which total revenue and total cost are equal.
PRICING OBJECTIVES AND CONSTRAINTS • Identifying Pricing Objectives • Profit • Managing for Long-Run Profits • Maximizing Current Profit • Target Return
PRICING OBJECTIVES AND CONSTRAINTS • Identifying Pricing Objectives • Sales Revenue • Market Share • Unit Volume • Survival • Social Responsibility
PRICING OBJECTIVES AND CONSTRAINTS • Identifying Pricing Constraints • Demand for the Product Class, Product, and Brand • Newness of the Product: Stage in the Product Life Cycle • Cost of Producing and Marketing the Product • Competitors’ Prices
Ichiro Bobble HeadWhat constraints affect this “collectible’s” price?
PRICING OBJECTIVES AND CONSTRAINTS • Identifying Pricing Constraints • Legal and Ethical Considerations • Price Fixing • Horizontal Price Fixing • Vertical Price Fixing • Price Discrimination • Deceptive Pricing • Bait and Switch • Predatory Pricing
Concept Check 1. What is the difference between pricing objectives and pricing constraints? A: Pricing objectives specify the role of price in an organization’s marketing and strategic plans. Pricing constraints are factors that limit the range of price a firm may set.
Concept Check 2. Explain what bait and switch is and why it is an example of deceptive pricing. A: This occurs when a firm offers a very low price on a product (the bait) to attract customers to a store, who then are persuaded to purchase a higher-priced item (the switch). Misleading consumers is both illegal and unethical.
SETTING A FINAL PRICE • Step 1: Set an Approximate Price Level • Step 2: Set the List or Quoted Price • One-Price Policy • Flexible-Price Policy
SETTING A FINAL PRICE • Step 3: Make Special Adjustments to the List or Quoted Price • Discounts • Quantity Discounts • Seasonal Discounts • Trade (Functional) Discounts • Cash Discounts
SETTING A FINAL PRICE • Allowances • Trade-In Allowances • Promotional Allowances • Everyday Low Pricing • Geographical Adjustments • FOB Origin Pricing • Uniform Delivered Pricing
Concept Check 1. What are the three steps in setting a final price? A: They are: (1) select an appropriate price level; (2) set the list or quoted price; and (3) make special adjustments to the list or quoted price.
Concept Check 2. What is the purpose of (a) quantity discounts and (b) promotional allowances? A: (a) Quantity discounts encourage customers to buy larger quantities of a product. (b) Promotional allowances are used to encourage sellers to undertake certain advertising or selling activities to promote a product.