chapter

pricing concepts for establishing value

fourteen

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14-2

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.

14-3

The 5 C’s of Pricing

14-4

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.

14-5

Profit Orientation

Profit Orientati

on

Targetreturn pricing

Targetprofit pricing

Maximizing

profits

14-6

Sales Orientation

Focus on increasing

sales

More concerned

with overall market share

Does not always imply

setting low prices

14-7

Competitor Orientation

• Competitive parity• Status quo pricing• Value is not part of this pricing strategy

Roz

Wood

ward

/Gett

y Im

ag

es

14-8

=

Focus on customer expectations by matching prices to customer expectations

automotive.com Website

Customer Orientation

C Borland/PhotoLink/Getty Images Don Farrall/Getty Images

14-9

2nd C: Customers

14-10

Demand Curves

Not all are downward sloping

Prestigious products or

services have upward sloping

curves

14-11

Price Elasticity of Demand

Elastic (price sensitive)

Inelastic (price

insensitive)

Consumers are less sensitive to price increases for necessities

©PhotoLink/Getty Images

14-12

Factors Influencing Price Elasticity of Demand

Income effect

Substitution

effect

Cross-price

elasticity

Walmart Commercial

14-13

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

14-14

Break Even Analysis and Decision Making

14-15

4th C: Competition

Subway Commercial

14-16

5th C: Channel Members

• Manufacturers, wholesalers and retailers can have different perspectives on pricing strategies

• Manufactures must protect against gray market transactions

check yourself

14-17

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?

14-18

vs..

Everyday low pricing (EDLP) High/low pricing

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

Photodisc Collection/Getty Images©Lars A Niki

14-19

New Product Pricing Strategies

Market Penetration Pricing

Price skimming

check yourself

14-20

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?

14-21

Legal Aspects and Ethics of Pricing

Deceptive orillegal priceadvertising

Predatorypricing

Pricediscrimination

Pricefixing

Legal Aspects

and Ethics of Pricing

check yourself

14-22

1.What common pricing practices are considered to be illegal or unethical?