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LEARNING OBJECTIVES

Learning Objectives

Why should firms pay more attention to setting prices?

What is the relationship between price and quantity sold?

Why is it important to know a product’s break-even point?

Who wins in a price war?

How has the Internet changed the way some people use price to make purchasing decisions?

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Price and Value

What’s the most you will pay for a pair of jeans?

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Price

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Price is a Signal

PriceGrabber.com Website

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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

automotive.com Website

Customer Orientation

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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

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Demand Curves

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Price Elasticity of Demand

Elastic (price sensitive)

Inelastic (price insensitive)

Consumers are less sensitive to price increases for necessities

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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

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Break Even Analysis and Decision Making

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4th C: Competition

Subway Commercial

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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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Macro Influences on Pricing

The Internet Increased price

sensitivity Growth of online

auctions

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Review Only

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Economic Factors

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What are they trying to accomplish with this ad?

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Price Elasticity of Demand

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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

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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

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

Check Yourself

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Glossary

Break-even analysis enables managers to examine the relationships among cost, price, revenue, and profit over different levels of production and sales.

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Glossary

Cross-price elasticity is the percentage change in the quantity of Product A demanded compared with the percentage change in price in Product B.

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Glossary

Fixed costs are those costs that remain essentially at the same level, regardless of any changes in the volume of production.

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Glossary

Income effect is the change in the quantity of a product demanded by consumers due to a change in their income.

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Glossary

The maximizing profits strategy assumes that if a firm can accurately specify a mathematical model that captures all the factors required to explain and predict sales and profits, it should be able to identify the price at which its profits are maximized.

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Glossary

Price is the overall sacrifice a consumer is willing to make to acquire a specific product or service.

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Glossary

The substitution effect refers to consumers’ ability to substitute other products for the focal brand.

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Glossary

Target profit pricing is implemented by firms to meet a targeted profit objective. The firms use price to stimulate a certain level of sales at a certain profit per unit.

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Glossary

Target return pricing occurs when firms employ pricing strategies designed to produce a specific return on their investment, usually expressed as a percentage of sales.

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Glossary

The total cost is the sum of the variable and fixed costs.

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Glossary

Variable costs are the costs that vary with production value.

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