MARKETINGMARKETING © South-Western Thomson

CHAPTER 14

Determining the Best Price

14.114.1 The Economics of Price Decisions14.214.2 Developing Pricing Procedures14.314.3 Pricing Based on Market Conditions

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THE ECONOMICS THE ECONOMICS OF PRICE DECISIONSOF PRICE DECISIONSGOALSGOALS for Lesson 14.1Explain the reasons why price is an

important marketing tool.Demonstrate how the economic

concept of elasticity of demand relates to pricing decisions.

Describe the three primary ways in which government influences prices.

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Price as Price as a Marketing Toola Marketing ToolThe importance of price

What is price?Adjustability

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Price as Price as an Economic Conceptan Economic ConceptEconomic utilityElasticity of demand

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Supply and Demand Affect PriceSupply and Demand Affect Price

Price$8765432

10Quantity

20 30 40 50 60 70 80

1

90 100

DemandDemand

SupplySupply

EquilibriumPoint

EquilibriumPoint

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Inelastic DemandInelastic Demand

Price of a Dozen Eggs Quantity Sold Total Revenue

$0.65 305 $198.25

$0.68 300 $204.00

$0.71 292 $207.32

$0.74 285 $210.90

$0.77 277 $213.29

$0.80 264 $211.20

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Elastic DemandElastic Demand

Price of a Gallon of Ice Cream Quantity Sold Total Revenue

$3.65 180 $657.00

$3.70 165 $610.50

$3.75 158 $592.50

$3.80 147 $558.60

$3.85 136 $523.60

$3.90 122 $475.80

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Government’s Government’s Effect on PricesEffect on PricesRegulating competitionTaxationRegulating prices

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DEVELOPING DEVELOPING PRICING PROCEDURESPRICING PROCEDURESGOALSGOALS for Lesson 14.2Describe three objectives businesses

commonly choose from when setting a price.

Explain how businesses establish a price range for a product.

Identify the three components that must be covered by the selling price.

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Setting Price ObjectivesSetting Price Objectives

Maximize profitsIncrease salesMaintain an image

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Determining Determining a Price Rangea Price RangeMaximum priceMinimum priceBreakeven analysisPrice range

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Breakeven Analysis for Breakeven Analysis for Ascroe Garden WeederAscroe Garden Weeder

Variable TotalUnits Costs Variable Fixed Total TotalSold per Unit Costs + Costs = Costs Price Revenue

5,522 $2.80 $15,462 + $85,000 = $100,462 $14 $77,3086,054 $2.80 $16,951 + $85,000 = $101,951 $14 $84,7566,998 $2.80 $19,594 + $85,000 = $104,594 $14 $97,9727,589 $2.80 $21,249 + $85,000 = $106,249 $14 $106,2468,225 $2.80 $23,030 + $85,000 = $108,030 $14 $115,1509,110 $2.80 $25,508 + $85,000 = $110,508 $14 $127,540

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Breakeven point

Breakeven PointBreakeven Point

Total fixed cost

7,589 units

Breakeven point Price – Variable costs per unit

=

85,000 85,000

14.00 - 2.80 11.20== =

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Price Range for Price Range for a Pair of Tennis Shoesa Pair of Tennis Shoes

Total cost

$87.00

$53.00

$38.00

Price range

Highest price customer will pay

Lowest price company

can chargeVariable costs per pair

Fixed costs per pair (estimated)

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Calculating Calculating a Selling Pricea Selling PriceGross marginOperating expensesNet profitMarkupMarkdown

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Components Components of the Selling Priceof the Selling PriceProduct costOperating expensesNet profit

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PRICING BASED ON PRICING BASED ON MARKET CONDITIONSMARKET CONDITIONSGOALSGOALS for Lesson 14.3Identify two marketing tools that illuminate

competitive conditions and help marketers set prices.

Describe the various criteria businesses use in establishing the final price a customer pays.

Explain why extending and managing credit is important to marketing.

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Competitive EnvironmentCompetitive Environment

Product life cycleConsumer purchase classificationsNon-price competition

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Pricing PoliciesPricing Policies

Price flexibilityOne-price policyFlexible pricing policy

Price linesGeographic pricing

FOB pricingZone pricing

Discounts and allowancesAdded values

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Discounts and AllowancesDiscounts and Allowances

Quantity discountSeasonal discountCash discountTrade discountTrade-in allowanceAdvertising allowanceCouponRebate

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Offering CreditOffering Credit

Types of creditConsumer creditTrade credit

Developing credit proceduresCredit policiesCredit approvalCollections