Ch011.01
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McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
LEARNING OBJECTIVES (LO)
AFTER READING CHAPTER 11, YOU SHOULD BE ABLE TO:
LO1
LO2
LO3
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.
11-2
LEARNING OBJECTIVES (LO)
AFTER READING CHAPTER 11, YOU SHOULD BE ABLE TO:
LO4
LO5
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.
11-3
VIZIO, INC.
—WHERE VISION
MEETS VALUE
™
IN HDTV
VIZIO (founded in 2002)
• Motto – “ Where Vision Meets
Value”; “Everybody deserves the latest technology”
• Why Costco?
• Manufacturing – in Taiwan
(AmTran Technology)
• Product Development &
Marketing – US
• In 2012, entered PCs, tablet, laptop, stereo, …
11-4
LO1
NATURE AND IMPORTANCE OF PRICE
WHAT IS A PRICE?: THE PRICE EQUATION
Veyron vs.
Euro-
Fighter
Drag
Race
Barter
Price Equation
Final Price = List Price – (Incentives + Allowances) + Extra Fees
11-5
FIGURE 11-1 The “ price ” a buyer pays can take different names depending on what is purchased
11-6
LO1
NATURE AND IMPORTANCE OF PRICE
PRICE AS AN INDICATOR OF VALUE
Value =
Perceived Benefits
Price
$ = $
Profit = Total Revenue Š Total Costs
= (Unit Price
Quantity Sold) Š (Fixed Cost + Variable Cost)
11-7
FIGURE 11-2 Four approaches for selecting an approximate price level
11-8
LO1
GENERAL PRICING APPROACHES
DEMAND-ORIENTED PRICING APPROACHES
Skimming
Pricing
Penetration
Pricing
Prestige
Pricing
Odd-Even
Pricing
$500.00 vs.
$499.99
11-9
LO1
MARKETING MATTERS
Energizer ’ s Lesson in Price Perception —
Value Lies in the Eye of the Beholder
11-10
LO1
GENERAL PRICING APPROACHES
DEMAND-ORIENTED PRICING APPROACHES
Target Pricing
Bundle Pricing
Yield Management Pricing
11-11
LO1
GENERAL PRICING APPROACHES
COST-ORIENTED PRICING APPROACHES
Standard Markup
Pricing
• Cost
• Selling Price
11-12
FIGURE 11-A Markups for a manufacturer, wholesaler, and retailer on a home appliance sold to consumers for $100
11-13
LO1
GENERAL PRICING APPROACHES
COST-ORIENTED PRICING APPROACHES
Cost-Plus Pricing
• Percentage of Cost
• Fixed Fee
11-14
LO1
GENERAL PRICING APPROACHES
PROFIT-ORIENTED PRICING APPROACHES
Target Profit Pricing
Target Return-on-Sales Pricing
Target Return-on-Investment
(ROI) Pricing
11-15
LO1
GENERAL PRICING APPROACHES
COMPETITION-ORIENTED PRICING APPROACHES
Customary Pricing
Above-, At- or Below-Market Pricing
Loss-Leader Pricing
11-16
LO1
USING MARKETING DASHBOARDS
Are Red Bull Prices
Above, At, or Below the Market?
Price Premium (%)
Price Premium (%) =
Dollar Sales ($) Market Share for a Brand
Unit Volume (#) Market Share for a Brand
– 1
11-17
LO2
ESTIMATING DEMAND AND REVENUE
FUNDAMENTALS OF ESTIMATING DEMAND
• Consumer Tastes
• Price and Availability of Similar Products
• Consumer Income
• Demand Factors
11-18
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
11-19
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
11-20
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
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LO2
ESTIMATE DEMAND AND REVENUE
FUNDAMENTALS OF ESTIMATING DEMAND
Price Elasticity of Demand (E) =
Percentage Change in Quantity Demanded
Percentage Change in Price
• Elastic Demand • Inelastic Demand
• Product Substitutes • Necessities
• Large Cash Outlays
11-22
FIGURE 11-B Fundamental revenue concepts
11-23
FIGURE 11-4 Fundamental cost concepts
11-24
LO3
DETERMINING COST, VOLUME,
AND PROFIT RELATIONSHIPS
BREAK-EVEN ANALYSIS AND BEP
Break-Even Point (BEP)
BEP
Quantity
Fixed Cost
Unit Price Š Unit Variable Cost
FC
P Š UVC
11-25
FIGURE 11-5 Calculating a break-even point for the picture frame store shows its profit starts at 400 framed pictures per year
11-26
LO3
STEP 3: DETERMINE COST, VOLUME,
AND PROFIT RELATIONSHIPS
BREAK-EVEN ANALYSIS
Break-Even Chart
Applications of
Break-Even Analysis
11-27
FIGURE 11-6 Break-even analysis chart for a picture frame store shows the break-even point at 400 pictures
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LO4
PRICING OBJECTIVES AND CONSTRAINTS
IDENTIFYING PRICING OBJECTIVES
• Profit
Managing for Long-Run Profits
Managing for Current Profit
Target Return (ROI)
11-29
FIGURE 11-7 Where each dollar spent by consumers for designer denim jeans goes
11-30
LO4
PRICING OBJECTIVES AND CONSTRAINTS
IDENTIFYING PRICING OBJECTIVES
• Sales ($) • Survival
• Market Share ($ or #) • Social
Responsibility
• Unit Volume (#)
11-31
LO4
PRICING OBJECTIVES AND CONSTRAINTS
IDENTIFYING PRICING CONSTRAINTS
• Demand for the
Product Class (Cars),
Product (Sports Cars), and Brand (Bugatti Veyron)
• Newness of the
Product: Stage in the
Product Life Cycle
11-32
LO4
PRICING OBJECTIVES AND CONSTRAINTS
IDENTIFYING PRICING CONSTRAINTS
• Cost of Producing and
Marketing a Product
• Competitors’ Prices
11-33
LO4
PRICING OBJECTIVES AND CONSTRAINTS
IDENTIFYING PRICING CONSTRAINTS
• Legal and Ethical Considerations
Price Fixing
Price Discrimination
Deceptive Pricing
Predatory Pricing
11-34
FIGURE 11-C Several pricing practices are affected by legal and regulatory restrictions, which benefit both consumers and firms
11-35
FIGURE 11-D Five most common deceptive pricing practices
11-36
LO4
PRICING OBJECTIVES AND CONSTRAINTS
IDENTIFYING PRICING CONSTRAINTS
• Cost of Changing Prices and Time Period They Apply
• Type of Competitive Market
Pure Competition
Monopolistic Competition
Oligopoly
Pure Monopoly
11-37
FIGURE 11-E Pricing, product, and advertising strategies available to firms in four types of competitive markets
11-38
LO5
SETTING A FINAL PRICE
SET THE LIST PRICE: CHOOSING A PRICE POLICY
CarMax
Ad
One-Price Policy
Flexible Price Policy
11-39
LO5
MAKING RESPONSIBLE DECISIONS
Flexible Pricing —Is There Discrimination in Bargaining for a New Car?
Buying a New Car: Some Folks Pay More
11-40
LO5
SETTING A FINAL PRICE
ADJUST THE LIST PRICE: DISCOUNTS
Quantity
Seasonal
Trade (Functional)
Cash
11-41
FIGURE 11-F The structure of trade discounts affects the manufacturer ’ s selling price and the margins made by resellers in the marketing channel
11-42
LO5
SETTING A FINAL PRICE
ADJUST THE LIST PRICE: ALLOWANCES
Trade-In
Promotional
Every Day Low Pricing (EDLP)
11-43
LO5
SETTING A FINAL PRICE
ADJUST THE LIST PRICE: GEOGRAPHY
FOB Origin Pricing
11-44
LO5
SETTING A FINAL PRICE
ADJUST THE LIST PRICE: GEOGRAPHY
Uniform Delivered Pricing: Single Zone
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
11-45
LO5
SETTING A FINAL PRICE
ADJUST THE LIST PRICE: GEOGRAPHY
Uniform Delivered Pricing: Multiple-Zone
11-46
LO5
SETTING A FINAL PRICE
ADJUST THE LIST PRICE: GEOGRAPHY
Uniform Delivered Pricing: Basing-Point
11-47
VIDEO CASE 11
WASHBURN GUITARS:
USING BREAK-EVEN POINTS
TO MAKE PRICING DECISIONS
11-48
VIDEO CASE 11
WASHBURN GUITARS
1.
What factors are most likely to affect the demand for the lines of Washburn guitars ( a ) bought by a first-time guitar buyer and
( b ) bought by a sophisticated musician who wants a signature model?
11-49
VIDEO CASE 11
WASHBURN GUITARS
2.
For Washburn, what are examples of ( a ) shifting the demand curve to the right to get a higher price for a guitar line
(movement of the demand curve) and ( b ) pricing decisions involving moving along a demand curve?
11-50
VIDEO CASE 11
WASHBURN GUITARS
3.
In Washburn ’ s factory, what is the break-even point for the new line of guitars if the retail price is
( a ) $349, ( b ) $389, and ( c ) $309?
Also, ( d ) if Washburn achieves the sales target of 2,000 units at the $349 retail price, what will its profit be?
11-51
VIDEO CASE 11
WASHBURN GUITARS
4.
Assume that the merger with
Parker leads to the cost reductions projected in the case.
What will be the ( a ) new breakeven point at a $349 retail price for this line of guitars and ( b ) new profit if it sells 2,000 units?
11-52
VIDEO CASE 11
WASHBURN GUITARS
5.
If for competitive reasons,
Washburn eventually has to move all its production back to
Asia, ( a ) which specific fixed and variable costs might be lowered and ( b ) what additional fixed and variable costs might it expect to incur?
11-53
Price (P)
A price (P) is the money or other considerations (including other products and services) exchanged for the ownership or use of a product or service.
11-54
Value
Value is the ratio of perceived benefits to price; or
Value = (Perceived benefits divided by Price).
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Profit Equation
The profit equation is:
Profit = Total revenue − Total cost; or
Profit = (Unit price × Quantity sold) −
(Fixed cost + Variable cost).
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Demand Curve
A demand curve is a graph relating the quantity sold and price, which shows the maximum number of units that will be sold at a given price.
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Price Elasticity of Demand
The price elasticity of demand is the percentage change in quantity demanded relative to a percentage change in price.
11-58
Total Revenue (TR)
Total revenue (TR) is the total money received from the sale of a product.
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Total Cost (TC)
Total cost (TC) is the total expense incurred by a firm in producing and marketing a product. Total cost is the sum of fixed cost and variable cost.
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Break-Even Analysis
Break-even analysis is a technique that analyzes the relationship between total revenue and total cost to determine profitability at various levels of output.
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Pricing Objectives
Pricing objectives specify the role of price in an organization ’ s marketing and strategic plans.
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Pricing Constraints
Pricing constraints are factors that limit the range of prices a firm may set.
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