Part Eight
Pricing Decisions
21. Pricing Concepts
22. Setting Prices
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Chapter 21
Pricing Decisions
Objectives
• Understand nature and importance of price
• Identify characteristics of price and nonprice
competition
• Explore demand curves and price elasticity of
demand
• Examine relationships among demand, costs,
and profits
• Describe key factors that may influence pricing
decisions
• Consider issues affecting pricing of products for
business markets
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The Nature of Price
The value exchanged for products in a
marketing exchange
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Terms Used To Describe Price
•
•
•
•
•
•
•
Tuition
Premium
Fine
Fee
Fare
Toll
Rent
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•
•
•
•
•
•
Commission
Dues
Deposit
Tips
Interest
Taxes
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The Importance of
Price to Marketers
Profit = Total Revenue – Total Costs
Profits = (Price x Quantity Sold) – Total Costs
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Price and Nonprice Competition
• Price Competition
 Emphasizes price as an issue and matches
or beats competitors’ price
 To compete effectively- firm should be the
low-cost seller
 Standardized products
 Frequent price changes
 Provides flexibility
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Nonprice Competition
 Emphasizes distinctive product:
•
•
•
•
•
Features
Quality
Promotion
Packaging
Other
 Distinction must be effective
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Analysis Of Demand
• Demand Curve
• Demand Fluctuations
• Assessing Price Elasticity
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Demand Curve
A graph of the quantity expected to be
sold at various prices if other factors
remain constant
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Demand Curve, Price-Quantity
Relationship and Increase in Demand
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Demand Curve, Relationship Between
Price and Quantity for Prestige Products
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Demand Fluctuations
• Changes in buyers’ needs
• Variations in effectiveAness of other
marketing mix variables
• Presence of substitutes
• Environment factors
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Elasticity Of Demand
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Price/Demand Elasticity
 Elastic- change in price causes opposite
change in total revenue
• Price  = Total Revenue 
• Price  = Total Revenue 
 Inelastic- change in price causes same
change in total revenue
• Price  = Total Revenue 
• Price  = Total Revenue 
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Price Elasticity Of Demand
Price
Elasticity of
Demand
=
(% Change In Quantity Demanded)
% Change in Price
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Demand, Cost,
and Profit Relationships
• Marginal Analysis
–
–
–
–
–
–
–
–
Fixed costs
Average fixed cost
Variable costs
Average variable cost
Total cost
Average total cost
Marginal cost (MC)
Marginal revenue (MR)
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Costs And
Their Relationships
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Typical Marginal Costs And
Average Total Cost Relationship
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Typical Marginal Revenue And
Average Revenue Relationship
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Marginal Analysis Method For
Determining Most Profitable Price
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Combining Marginal Cost And Marginal
Revenue Concepts For Optimal Profit
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Demand, Cost,
and Profit Relationships
• Break-Even Analysis
– Break-even point – point at which the costs of
producing a product equal the revenue made
from selling the product
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Determining The
Break-Even Point
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Breakeven Point
Breakeven
Point
=
Fixed Costs
Per-Unit Contribution to Fixed Costs
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(Price – Variable Costs)
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Factors That
Affect Pricing Decisions
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Organizational And
Marketing Objectives
• Set prices consistent with organization’s
goals and mission
• Pricing decisions should be compatible
with firm’s marketing objectives
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Costs
• Why price below cost?
– Match competition
– Generate cash flow
– Increase market share
• Focus on cost reduction
• Costs shared with others in product line
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Pricing Decisions
Influence Other Mix Variables
• Demand
• Distribution
– Intensive
– Selective
– Exclusive
• Promotion
– Premium = little advertising, personal selling
– Complex = potential buyer confusion
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Channel Member Expectations
• Profit
• Competing product
• Time/resources required
• Discounts
• Support activities- associated costs
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Reference Prices
• Internal- developed in buyer’s mind
through experience with product
• External- comparison price provided by
others
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Context Of PriceBuyers Characterized
• Value-conscious - concerned about price
and quality
• Price-conscious - want to pay low prices
• Prestige-sensitive - purchase products that
signify prominence and status
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Competition
• Monopoly
– Whatever market will bear
– Government regulation
• Oligopoly
– Barriers to entry
– Little advantage in price cuts
• Monopolistic Competition
– Distinguishable product
– Usually nonprice competition
• Perfect competition
– All products the same
– No flexibility in pricing
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Business-To-Business
Price Discounting
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Trade (Functional) Discount
A reduction off the list price by a producer
to an intermediary for performing certain
functions
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Quantity Discount
Deduction from list price that reflect(s) the
economies of purchasing in large quantities
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Cumulative Discount
A quantity discount aggregated over a
stated time period
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Noncumulative Discounts
A one-time price reduction based on the
number of units purchased, the dollar value
of the order, or the product mix purchased
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Cash Discount
A price reduction given to buyer for prompt
payment or cash payment
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Seasonal Discount
A price reduction to buyers that purchase
goods or services out of season
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Allowance
A concession in price to achieve a
desired goal
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Geographic Pricing
• F.O.B.
– Factory
– Destination
•
•
•
•
Uniform geographic (Postage-Stamp)
Zone
Base-point
Freight Absorption
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