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14-1
CHAPTER
PRICING CONCEPTS FOR ESTABLISHING VALUE
14
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
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L E A R N I N G O B J E C T I V E S
List the four pricing orientations.
Explain the relationship between price and quantity sold.
Explain price elasticity.
Describe how to calculate a product’s break-even point.
Indicate the four types of price competitive levels.
Pricing Concepts for Establishing Value
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Procter & Gamble
©McGraw-Hill Education
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The 5 C’s of Pricing
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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).
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Profit Orientation
Profit Orientation
Targetprofit pricing
MaximizingProfits
Targetreturn pricing
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Sales Orientation
Focus on increasing sales
More concerned with overall
market share
Does not always imply setting low
prices
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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
automotive.com
Customer Orientation
C Borland/PhotoLink/Getty Images Don Farrall/Getty Images
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CHECK YOURSELF
1. What are the five Cs of pricing?
2. Identify the four types of company objectives.
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What are they trying to accomplish with this ad?
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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
Photo by Simon Frederick/Getty Images
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Demand Curves
Not all are downward sloping
Prestigious products or services have upward sloping curves
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Price Elasticity of Demand
Elastic (price
sensitive)
Inelastic (price
insensitive)Consumers
are less sensitive to
price increases for necessities
©PhotoLink/Getty Images
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Price Elasticity of Demand
©Dennis MacDonald/PhotoEdit, Inc. ©Bill Aron/PhotoEdit, Inc.
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Factors Influencing Price Elasticity of Demand
Income effect
Substitutioneffect
Cross-price
elasticity
WalmartCommercial
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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
BananaStock/JupiterImages
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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
Getty Images/Digital Vision
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CHECK YOURSELF
1. What is the difference between elastic versus inelastic demand?
2. What are the factors influencing price elasticity
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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
Michael Rosenfeld/Stone/Getty Images
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Break Even Analysis and Decision Making
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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 is the difference between fixed costs and variable costs?
2. How does one calculate the break-even point in units?
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Wal-Mart vs. Target
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CHECK YOURSELF
1. What are the four different types of competitive environments?
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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
