chapter
fourteen
pricing concepts for
establishing value
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
LEARNING OBJECTIVES
LO 14-1 List the four pricing orientations.
LO 14-2 Explain the relationship between price and quantity sold.
LO 14-3 Explain price elasticity.
LO 14-4 Describe how to calculate a product’s break-even point.
LO 14-5 Indicate the four types of price competitive levels.
LO 14-6 Describe the difference between an everyday low price
strategy (EDLP) and a high/low strategy.
LO 14-7 Explain the difference between a price skimming and a
market penetration pricing strategy.
LO 14-8 List pricing practices that have the potential to deceive
customers.
14-2
The 5 C’s of Pricing
14-3
1st C: Company Objectives
Company Objective
Examples of Pricing Strategy Implications
Profit-oriented
Institute a companywide policy that all products must
provide for at least an 18 percent profit margin to reach a
particular profit goal for the firm.
Sales-oriented
Set prices very low to generate new sales and take sales
away from competitors, even if profits suffer.
Competitor-oriented
To discourage more competitors from entering the market,
set prices very low.
Customer-oriented
Target a market segment of consumers who highly value a
particular product benefit and set prices relatively high
(referred to as premium pricing).
Profit-oriented
Institute a companywide policy that all products must
provide for at least an 18 percent profit margin to reach a
particular profit goal for the firm.
14-4
Profit Orientation
Target
profit
pricing
Target
return
pricing
Maximizing
profits
Profit
Orientation
14-5
Sales Orientation
Focus on
increasing sales
Does not
always imply
setting low
prices
More
concerned
with overall
market share
14-6
Competitor Orientation
Roz Woodward/Getty Images
• Competitive parity
• Status quo pricing
• Value is not part of this pricing strategy
14-7
Customer Orientation
=
C Borland/PhotoLink/Getty Images
Don Farrall/Getty Images
Focus on customer expectations by matching prices to customer expectations
automotive.com Website
14-8
2nd C: Customers
14-9
Demand Curves
Not all are downward
sloping
Prestigious products
or services have
upward sloping
curves
14-10
Price Elasticity of Demand
Elastic
(price sensitive)
Inelastic
(price insensitive)
Consumers are less
sensitive to price
increases for
necessities
©PhotoLink/Getty Images
14-11
Factors Influencing
Price Elasticity of Demand
Cross-
Income
price
effect
elasticity
Substitution
effect
Walmart Commercial
14-12
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
14-13
Break Even Analysis and
Decision Making
14-14
4th C: Competition
Subway Commercial
14-15
5th C: Channel Members
• Manufacturers,
wholesalers and
retailers can have
different perspectives
on pricing strategies
• Manufactures must
protect against gray
market transactions
14-16
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?
14-17
Everyday Low Pricing vs..
High/Low Pricing
Create value in different ways
EDLP saves search costs of finding lowest overall prices
High/low provides the thrill of the chase for the lowest price
High/low pricing
Everyday low pricing (EDLP)
vs..
Photodisc Collection/Getty Images
©Lars A Niki
14-18
New Product Pricing Strategies
Market Penetration
Pricing
Price skimming
14-19
check yourself
1. Explain the difference between EDLP and
high/low pricing.
2. What is the difference between a market
penetration pricing strategy and a price
skimming pricing strategy?
14-20
Legal Aspects and Ethics of Pricing
Deceptive or
illegal price
advertising
Predatory
pricing
Legal Aspects
and Ethics of
Pricing
Price
discrimination
Price
fixing
14-21
check yourself
1. What common pricing practices are
considered to be illegal or unethical?
14-22
