Fundamentals of Pricing Marketing Chapter 12 Fundamentals of Pricing Gilbert A. Churchill, Jr. J. Paul Peter Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1998 1 1

Sample Demand Curve Price per Unit Quantity Demanded in Units 60 50 40 Slide 12-1 Figure 12.1 Price per Unit 60 50 40 30 20 10 10,000 20,000 30,000 40,000 50,000 Quantity Demanded in Units Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1998 2 2

Demographic Pricing Factors Slide 12-2 • How many potential buyers are in the market? • What is the location of potential buyers? • Are they organizational buyers or consumers? • What is the consumption rate of potential buyers? • What is the financial condition of potential buyers? Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1998 3

Psychological Pricing Factors Slide 12-3 • Will potential buyers use price as an indicator of the product’s quality? • Will potential buyers be favorably attracted by odd pricing such as 99 cents instead of $1, or $177 instead of $180? • Will potential buyers perceive the price to be too high relative to what the product offers? • Are potential buyers concerned enough with prestige to pay more for the product? • How much will potential buyers be willing to pay for the product? Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1998 4

Elastic Demand: European Vacations Inelastic Demand: Gasoline Demand Curves Showing Different Price Elasticities Slide 12-4 Figure 12.2 Elastic Demand: European Vacations Inelastic Demand: Gasoline Price per trip Price per gallon Quantity Demanded (Number of Trips) Quantity Demanded (Gallons) Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1998 5 5

Marginal Analysis Relationships Slide 12-5 Figure 12.4 Profit Dollars Total Cost Total Revenue Quantity Produced and Sold Marginal Cost Dollars Marginal Revenue Quantity Produced and Sold Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1998 6 6

Pricing Based on Cost Slide 12-6 Markup pricing a pricing approach that adds a percentage to the producer’s cost in order to arrive at a selling price. Rate of return pricing a pricing approach that involves total costs and then adding a desired rate of return to them to determine the selling price. Breakeven analysis a technique for determining the sales volume needed to cover all costs at a specific rate. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1998 7 7

Breakeven Analysis Dollars Total Revenue Total Cost Profit Slide 12-7 Figure 12.5 Dollars Total Revenue Total Cost Profit Breakeven Point Loss Quantity Produced and Sold Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1998 8 8

Pricing Based on Competition Slide 12-8 Pricing Below Competition pricing to gain market share and attract cost-conscious buyers. Especially useful to companies with low cost positions. Matching Competition pricing at competitor’s levels with the intent of distinguishing the product in other ways. Common in oligopolies. Pricing Above Competition pricing for products that offer greater value, quality, convenience or prestige. Sealed-Bid Pricing pricing in which the buyer asks potential sellers to submit sealed bids containing the seller’s pricing and availabilities. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1998 9 9

Pricing Based on Customer Value Slide 12-9 Dominant Backward Pricing a pricing approach that involves setting a price by starting with the estimated price customers will pay and working backwards with retail and wholesale margins. Value Pricing a pricing approach that involves setting prices so that the exchange value is higher than the value of competing exchanges. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1998 10 10

Laws Limiting Pricing Practices Slide 12-10 Table 12.3 Law Pricing Practices Sherman Antitrust Act Consumer Goods Pricing Act Federal Trade Commission Act Robinson-Patman Act Price Fixing Resale Price Maintenance Deceptive Pricing Practices Price discrimination that lessens or damages competition; discrimination in the use of promotional pricing Dumping Laws of most countries Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1998 11 11