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C H A P T E R

Pricing Concepts for Establishing Value

14

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L E A R N I N G O B J E C T I V E S

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List the four pricing orientations.

Explain the relationship between price and quantity sold.

Explain price elasticity.

Describe how to calculate a product’s break-even point.

Indicate the four types of price competitive levels.

Pricing Concepts for Establishing Value

LO1

LO2

LO3

LO4

LO5

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Price

Benefits

Sacrifice

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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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2nd C: Customers

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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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Factors Influencing Price Elasticity of Demand

Income

effect

Substitution

effect

Cross-

price

elasticity

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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 costsMichael 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 QuantityTotal Cost = Fixed Cost + Total Variable Cost

Total Revenue = Price X Quantity

Fixed CostsContribution per unit

Break-Even Point (units) =

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4th C: Competition

Less Price Competition More Price Competition

FewerFirms

ManyFirms

OligopolyA handful of firms control the market

Ingram Publishing/SuperStock.

MonopolyOne firm controls the market

©Brand X Pictures/PunchStock.

Monopolistic Comp.Many firms selling differentiated products at different prices

Steve Cole/Getty Images.

Pure CompetitionMany firms selling commodities for the same prices

©Corbis – All Rights Reserved.

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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

Courtesy Apple, Inc.

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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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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

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Break-even analysis enables managers to examine the relationships among cost, price, revenue, and profit over different levels of production and sales.

Glossary

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Cross-price elasticity is the percentage change in the quantity of Product A demanded compared with the percentage change in price in Product B.

Glossary

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Fixed costs are those costs that remain essentially at the same level, regardless of any changes in the volume of production.

Glossary

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Income effect is the change in the quantity of a product demanded by consumers due to a change in their income.

Glossary

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The maximizing profits strategy assumes that if a firm can accurately specify a mathematical model that captures all the factors required to explain and predict sales and profits, it should be able to identify the price at which its profits are maximized.

Glossary

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Price is the overall sacrifice a consumer is willing to make to acquire a specific product or service.

Glossary

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The substitution effect refers to consumers’ ability to substitute other products for the focal brand.

Glossary

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Target profit pricing is implemented by firms to meet a targeted profit objective. The firms use price to stimulate a certain level of sales at a certain profit per unit.

Glossary

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Target return pricing occurs when firms employ pricing strategies designed to produce a specific return on their investment, usually expressed as a percentage of sales.

Glossary

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The total cost is the sum of the variable and fixed costs.

Glossary

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Variable costs are the costs that vary with production value.

Glossary