CHAPTER

PRICING CONCEPTS FOR ESTABLISHING VALUE

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McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

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LEARNING OBJECTIVES

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

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Bottled vs. Tap Water

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Price is a Signal

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 the only marketing mix element that generates revenue

Price is usually ranked as one of the most important factors in purchase decisions

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

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Sales Orientation

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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

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

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Price Elasticity of Demand

©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

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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 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

Subway Commercial

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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

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1. How have the Internet and economic factors affected the way people react to prices?

Check Yourself