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14-1
CHAPTER
PRICING CONCEPTS FOR ESTABLISHING VALUE
14
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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
LO1
LO2
LO3
LO4
LO5
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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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CHECK YOURSELF
1. What are the five Cs of pricing?
2. Identify the four types of company objectives.
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2nd C: Customers
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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
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Factors Influencing Price Elasticity of Demand
Income
effect
Substitution
effect
Cross-
price
elasticity
WalmartCommercial
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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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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
