Chapter Fourteen
Creating and
Pricing Products
that Satisfy
Customers
Pricing Products
• How Firms Set Their Prices
– Supply
• The quantity of a product that producers are willing to
sell at each of various prices
• Quantity supplied by producers increases as the price
increases
– Demand
• The quantity of a product that buyers are willing to
purchase at each of various prices
• Quantity demanded increases as the price decreases
– Equilibrium
• Where the supply and demand curves intersect and
quantity and price for buyers and sellers are equal
Supply and Demand Curves
Assumption is that all competing products are indistinguishable
Elasticity of Demand
Consumers’ sensitivity to changes in price.
Elastic
Demand
 Consumers buy more or less
of a product when the
price changes
Inelastic
Demand
 An increase or decrease in
price will not significantly
affect demand
Factors that Affect
Elasticity of Demand
Availability of Substitutes
Price relative to
purchasing power
Product durability
Pricing Products in the Real Economy
1) Producers gain control over price by differentiating
products
• Differentiation - The process of developing and promoting
differences between one’s product and all similar products
2) Producers also gain control over price through
advertising. The idea is to increase demand so you
can raise prices.
3) Producers can also reduce prices to obtain a
competitive edge. Lower the price to increase
purchase volume and thus achieve more profit
Pricing Objectives
Profit-Oriented Pricing Objectives-
Sales-Oriented Pricing Objectives-
Status Quo Pricing Objectives-
Profit-Oriented Pricing Objectives
Profit-Oriented Pricing Objectives
Profit
Maximization
Satisfactory
Profits
Target
Return on
Investment
Sales-Oriented Pricing Objectives
Sales-Oriented Pricing Objectives
Market
Share
A company’s sales as a
percentage of total sales
for that industry
Sales
Maximization
Sales Maximization
• Short-term objective to maximize sales
• Ignores profits, competition, and the
marketing environment
• May be used to sell
off excess inventory
Status Quo Pricing Objectives
Status Quo Pricing Objectives
Maintain
existing
prices
Meet
competition’s
prices
Pricing Strategies
• New-Product Strategies
– Price Skimming
• Charging the highest possible price for a
product during the introduction stage of its life
cycle
– Penetration Pricing
• Setting a low price for a new product to quickly
build market share and discourage competitors
Breakeven analysis
– Fixed cost
• A cost incurred no matter how many units are sold-rent
– Variable cost
• A cost that depends on the number of units produced-raw
materials
– Total cost
• The sum of the fixed costs and the variable costs
– Breakeven quantity
• The number of units that must be sold for total revenue
(total sales) to equal total cost
Pricing Methods
• Cost-Based Pricing
– the total cost of producing one unit product then
adds an amount to cover overhead and profit.
• i.e.-$10(costs)+$2(markup)=$12/shirt =selling price
– Markup is calculated as a percentage of total costs.
• i.e.-20% markup yields a $12/shirt price
– Easy to apply and commonly used by retailers and
wholesalers, but it ignores demand and pricing
inputs from other business functions
Pricing Methods
• Demand-Based Pricing
– Based on the level of customer demand for
the product
– Product prices are high when demand is high
and low when demand is weak
• Competition-Based Pricing
– Meet competitors’ prices in markets. Used
when products are very similar like produce
Some Pricing “Buzzwords”
– Captive pricing
• Pricing the basic product low, but pricing related
items at a higher profit level – like printers and ink
– Price leaders (loss leaders)
• Selected products priced below the usual markup,
near cost, or below cost
– Price lining
• Setting a limited number of prices for selected
groups or lines of merchandise
More Pricing “Buzzwords”
– Comparison discounting
• Setting a price at a specific level and comparing it
with a higher price-like a Marshall’s price tag
– Periodic discounting
• Temporary reduction of prices on a patterned or
systematic basis