Lecture Marketing: The core (5/e): Chapter 11 – Kerin, Hartley, Rudelius

Chapter 11: Pricing products and services. When you finish this chapter, you should: 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.

LEARNING OBJECTIVES (LO)

AFTER READING CHAPTER 11, YOU SHOULD BE ABLE TO:

LO1 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

LEARNING OBJECTIVES (LO)

AFTER READING CHAPTER 11, YOU 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.

LO4

LO5

VIZIO, INC.—WHERE VISION

MEETS VALUE™ IN HDTV

NATURE AND IMPORTANCE OF PRICE

WHAT IS A PRICE?: THE PRICE EQUATION

Fighter Drag Race

Euro-FIGURE 11-1 The “price” a buyer pays can

take different names depending on what is

purchased

NATURE AND IMPORTANCE OF PRICE

PRICE AS AN INDICATOR OF VALUE

Profit = Total Revenue Š Total Costs

= (Unit Price Quantity Sold) Š (Fixed Cost + Variable Cost)

FIGURE 11-2 Four approaches for selecting

an approximate price level

GENERAL PRICING APPROACHES

DEMAND-ORIENTED PRICING APPROACHES

LO1

 Skimming

Pricing

 Penetration Pricing

 Prestige

Pricing

 Odd-Even Pricing

$500.00 vs.

$499.99

MARKETING MATTERS

Energizer’s Lesson in Price Perception—

Value Lies in the Eye of the Beholder

LO1

GENERAL PRICING APPROACHES

DEMAND-ORIENTED PRICING APPROACHES

LO1

 Bundle Pricing

 Yield Management Pricing

 Target Pricing

GENERAL PRICING APPROACHES

COST-ORIENTED PRICING APPROACHES

FIGURE 11-A Markups for a manufacturer,

wholesaler, and retailer on a home appliance

sold to consumers for $100

GENERAL PRICING APPROACHES

COST-ORIENTED PRICING APPROACHES

 Target Profit Pricing

 Target Return-on-Sales Pricing

 Target Return-on-Investment

(ROI) Pricing

GENERAL PRICING APPROACHES

PROFIT-ORIENTED PRICING APPROACHES

LO1

GENERAL PRICING APPROACHES

COMPETITION-ORIENTED PRICING APPROACHES

LO1

 Above-, At- or Below-Market Pricing

 Loss-Leader Pricing

 Customary Pricing

USING MARKETING DASHBOARDS

Are Red Bull Prices Above, At, or Below the Market?

Price Premium (%) LO1

Price Premium (%) = Dollar Sales ($) Market Share for a Brand

Unit Volume (#) Market Share for a Brand – 1

ESTIMATING DEMAND AND REVENUE

FUNDAMENTALS OF ESTIMATING DEMAND

FIGURE 11-3 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

FIGURE 11-3A Demand curve for Newsweek

showing the effect on annual sales by a

change in price caused by a movement

along the demand curve

FIGURE 11-3B Demand curve for Newsweek

showing the effect on annual sales by a

change in price caused by a shift of the

demand curve

 Price Elasticity of Demand

Price Elasticity of Demand (E) = Percentage Change in Quantity Demanded

Percentage Change in Price

• Elastic Demand • Inelastic Demand

ESTIMATE DEMAND AND REVENUE

FUNDAMENTALS OF ESTIMATING DEMAND

FIGURE 11-B Fundamental revenue concepts

FIGURE 11-4 Fundamental cost concepts

DETERMINING COST, VOLUME, AND PROFIT RELATIONSHIPS

BREAK-EVEN ANALYSIS AND BEP

LO3

 Break-Even Point (BEP)

Unit Price Š Unit Variable Cost

FC

P Š UVC

FIGURE 11-5 Calculating a break-even point

for the picture frame store shows its profit

starts at 400 framed pictures per year

STEP 3: DETERMINE COST, VOLUME,

AND PROFIT RELATIONSHIPS

FIGURE 11-6 Break-even analysis chart for

a picture frame store shows the break-even

point at 400 pictures

PRICING OBJECTIVES AND CONSTRAINTS

IDENTIFYING PRICING OBJECTIVES

LO4

• Profit

 Managing for Current Profit

 Managing for Long-Run Profits

 Target Return (ROI)

FIGURE 11-7 Where each dollar spent by

consumers for designer denim jeans goes

• Sales ($)

• Social Responsibility

• Market Share ($ or #)

• Unit Volume (#)

• Survival

PRICING OBJECTIVES AND CONSTRAINTS

IDENTIFYING PRICING OBJECTIVES

LO4

• Demand for the Product Class (Cars), Product (Sports Cars), and Brand (Bugatti Veyron)

PRICING OBJECTIVES AND CONSTRAINTS

IDENTIFYING PRICING CONSTRAINTS

LO4

• Newness of the Product: Stage in the Product Life Cycle

• Cost of Producing and Marketing a Product

PRICING OBJECTIVES AND CONSTRAINTS

IDENTIFYING PRICING CONSTRAINTS

LO4

• Competitors’ Prices

PRICING OBJECTIVES AND CONSTRAINTS

IDENTIFYING PRICING CONSTRAINTS

FIGURE 11-C Several pricing practices are

affected by legal and regulatory restrictions,

which benefit both consumers and firms

FIGURE 11-D Five most common deceptive

pricing practices

PRICING OBJECTIVES AND CONSTRAINTS

IDENTIFYING PRICING CONSTRAINTS

FIGURE 11-E Pricing, product, and

advertising strategies available to firms in

four types of competitive markets

SETTING A FINAL PRICE

SET THE LIST PRICE: CHOOSING A PRICE POLICY

LO5

CarMax Ad

MAKING RESPONSIBLE DECISIONS

Flexible Pricing—Is There Discrimination

in Bargaining for a New Car?

Buying a New Car: Some Folks Pay More

LO5

SETTING A FINAL PRICE

ADJUST THE LIST PRICE: DISCOUNTS

FIGURE 11-F The structure of trade

discounts affects the manufacturer’s selling

price and the margins made by resellers in

the marketing channel

SETTING A FINAL PRICE

ADJUST THE LIST PRICE: ALLOWANCES

LO5

SETTING A FINAL PRICE

ADJUST THE LIST PRICE: GEOGRAPHY

LO5

SETTING A FINAL PRICE

ADJUST THE LIST PRICE: GEOGRAPHY

LO5

U.S Postal Service Priority Mail Flat Rate Prices from Denver

to anywhere in the U.S.

 Envelope: $5.15

 Small Box: $5.35

 Medium Box: $11.35

 Large Box: $15.45

SETTING A FINAL PRICE

ADJUST THE LIST PRICE: GEOGRAPHY

LO5

SETTING A FINAL PRICE

ADJUST THE LIST PRICE: GEOGRAPHY

LO5