Transcript Essentials of Marketing, 8th Edition
Chapter 17:
Price Setting in the Business World
For use only with Perreault and McCarthy texts.
© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill
17-2
Chapter 17 Objectives
When you finish this chapter, you should
1.
Understand how most wholesalers and retailers set their prices— using markups. 5.
Understand the advantages of marginal analysis and how to use it for price setting.
2.
4.
Understand why turnover is so important in pricing.
3.
Understand the advantages and disadvantages of average-cost pricing. Know how to use break-even analysis to evaluate possible prices. 6.
Understand the various factors that influence customer price sensitivity.
7.
Know the many ways that price setters use demand estimates in their pricing. 8.
Understand the important new terms.
For use only with Perreault and McCarthy texts.
© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill
Key Factors That Influence Price Setting
Pricing objectives Price of other products in the line Price flexibility Demand Discounts and allowances
Price settin g
Cost Competition Legal environment Geographic pricing terms Markup chain in channels
Exhibit 17-1 17-3
For use only with Perreault and McCarthy texts.
© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill
Markups
50.00
30.00
24.00
Markup = 20.00 = 40% Markup = 6.00 = 20% Markup = 2.40 = 10% Cost = 21.60 = 90% Producer Exhibit 17-2 17-4 Cost = 24.00 = 80% Cost = 30.00 = 60% Wholesaler Retailer
For use only with Perreault and McCarthy texts.
© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill
Six Types of Costs
Total Cost Total Fixed Cost Total Variable Cost 17-5 Average Fixed Cost Average Cost Average Variable Cost
For use only with Perreault and McCarthy texts.
© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill
Prices Along the Demand Curve
$3.00
Total revenue = Price x Quantity $30,000 = $3.00 x 10,000 $40,000 = $2.00 x 20,000 $57,000 = $1.90 x 30,000 $66,000 = $1.65 x 40,000 $75,000 = $1.50 x 50,000 $72,000 = $1.20 x 60,000 2.00
1.90
1.65
1.50
1.20
Exhibit 17-6 17-6 10 20 30 40 Quantity (000) 50 60 70
For use only with Perreault and McCarthy texts.
© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill
Summary of Relationships Affecting Price ?
Estimated quantity to be sold Quantity demanded at selling price Average fixed cost per unit Variable cost per unit Exhibit 17-7 17-7 Cost-oriented selling price per unit Average total cost per unit Profit per unit
For use only with Perreault and McCarthy texts.
© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill
Break-even Analysis
Higher Profit Area Break-Even Point Loss Area Total Revenue Curve Total Cost Curve Total Variable Costs Exhibit 17-8 17-8 0 Units of Production Total Fixed Costs More
For use only with Perreault and McCarthy texts.
© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill
Marginal Analysis
800 700 600 500 400 300 200 100 0 -100 -200 -300 -400 Exhibit 17-10 17-9 2 4 6 Best profit for quantity at best price 8
Note: curves here are approximate (you can’t sell part of a unit!)
Total cost Total revenue = $106 = 6 = $79 Quantity Total profit
For use only with Perreault and McCarthy texts.
© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill
Evaluating a Customer’s Price Sensitivity 17-10
Are there substitute ways of meeting a need?
Is it easy to compare prices?
Who pays the bill?
How great is the total expenditure?
How significant is the end benefit?
Is there already a sunk investment related to the purchase?
For use only with Perreault and McCarthy texts.
© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill
Demand-Oriented Pricing
Prestige Value-in-Use Demand Backward Price Lining Types of Demand-Oriented Pricing Reference Leader Odd-Even Bait Psychological 17-11
For use only with Perreault and McCarthy texts.
© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill
17-12
Full-Line Pricing
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Market- or Firm Oriented?
Complementary Pricing?
Product-Bundling Pricing?
For use only with Perreault and McCarthy texts.
© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill
Bid and Negotiated Pricing
Bid pricing means offering a specific price for each possible job. Determining costs is a complicated process.
17-13 Negotiated pricing involves setting a price as the result of a bargaining process between the buyer and seller.
For use only with Perreault and McCarthy texts.
© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill
Key Terms
Markup Markup (percent) Markup Chain Stockturn Rate Average-Cost Pricing Total Fixed Cost Total Variable Cost Total Cost Average Cost Average Fixed Cost Average Variable Cost Break-Even Analysis Break-Even Point (BEP) Fixed-Cost (FC) Contribution per Unit Marginal Analysis Value in Use Pricing Reference Price Leader Pricing Bait Pricing Psychological Pricing Odd-Even Pricing Price Lining Demand-Backward Pricing Prestige Pricing Full-Line Pricing Complementary Product Pricing Product-Bundle Pricing Bid Pricing Negotiated Price 17-14
For use only with Perreault and McCarthy texts.
© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill