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LEARNING OBJECTIVES (LO) AFTER READING CHAPTER 11, YOU SHOULD BE ABLE TO: Describe the nature and importance of pricing and the approaches used to select an approximate price level. LO1 Explain what a demand curve is and the role of revenues in pricing decisions. LO2 LO3 Explain the role of costs in pricing decisions and describe how various combinations of price, fixed cost, and unit variable cost affect a firm’s breakeven point. 11-2

Describe the steps taken in setting a final price. LEARNING OBJECTIVES (LO) AFTER READING CHAPTER 11, YOU SHOULD BE ABLE TO: LO4 Recognize the objectives a firm has in setting prices and the constraints that restrict the range of prices a firm can charge. LO5 Describe the steps taken in setting a final price. 11-3

VIZIO, INC.—WHERE VISION MEETS VALUE™ IN HDTV 11-4

Price Barter Price Equation NATURE AND IMPORTANCE OF PRICE WHAT IS A PRICE?: THE PRICE EQUATION LO1 Veyron vs. Euro- FighterDrag Race Price Barter Price Equation 11-5

FIGURE 11-1 The “price” a buyer pays can take different names depending on what is purchased 11-6

NATURE AND IMPORTANCE OF PRICE PRICE AS AN INDICATOR OF VALUE LO1 Value $ = $ Profit Equation 11-7

FIGURE 11-2 Four approaches for selecting an approximate price level 11-8

GENERAL PRICING APPROACHES DEMAND-ORIENTED PRICING APPROACHES LO1 Skimming Pricing Penetration Pricing $500.00 vs. $499.99 Prestige Pricing Odd-Even Pricing 11-9

MARKETING MATTERS Energizer’s Lesson in Price Perception— Value Lies in the Eye of the Beholder LO1 11-10

GENERAL PRICING APPROACHES DEMAND-ORIENTED PRICING APPROACHES LO1 Target Pricing Bundle Pricing Yield Management Pricing 11-11

GENERAL PRICING APPROACHES COST-ORIENTED PRICING APPROACHES LO1 Standard Markup Pricing Cost Selling Price 11-12

FIGURE 11-A Markups for a manufacturer, wholesaler, and retailer on a home appliance sold to consumers for $100 11-13

GENERAL PRICING APPROACHES COST-ORIENTED PRICING APPROACHES LO1 Cost-Plus Pricing Percentage of Cost Fixed Fee Experience Curve Pricing 11-14

GENERAL PRICING APPROACHES PROFIT-ORIENTED PRICING APPROACHES LO1 Target Profit Pricing Target Return-on-Sales Pricing Target Return-on-Investment (ROI) Pricing 11-15

GENERAL PRICING APPROACHES COMPETITION-ORIENTED PRICING APPROACHES LO1 Customary Pricing Above-, At- or Below-Market Pricing Loss-Leader Pricing 11-16

USING MARKETING DASHBOARDS Are Red Bull Prices Above, At, or Below the Market? Price Premium (%) 11-17

ESTIMATING DEMAND AND REVENUE FUNDAMENTALS OF ESTIMATING DEMAND LO2 Demand Curve Consumer Tastes Price and Availability of Similar Products Consumer Income Demand Factors 11-18

FIGURE 11-3 Demand curves for Newsweek showing the effect on annual sales (quantity demanded per year) by a change in price caused by (A) a movement along and (B) a shift of the demand curve 11-19

FIGURE 11-3A Demand curve for Newsweek showing the effect on annual sales by a change in price caused by a movement along the demand curve 11-20

FIGURE 11-3B Demand curve for Newsweek showing the effect on annual sales by a change in price caused by a shift of the demand curve 11-21

ESTIMATE DEMAND AND REVENUE FUNDAMENTALS OF ESTIMATING DEMAND LO2 Price Elasticity of Demand Elastic Demand Inelastic Demand Product Substitutes Necessities Large Cash Outlays 11-22

FIGURE 11-B Fundamental revenue concepts Total Revenue 11-23

FIGURE 11-4 Fundamental cost concepts Total Cost (TC) 11-24

Break-Even Point (BEP) DETERMINING COST, VOLUME, AND PROFIT RELATIONSHIPS BREAK-EVEN ANALYSIS AND BEP LO3 Break-Even Analysis Break-Even Point (BEP) 11-25

FIGURE 11-5 Calculating a break-even point for the picture frame store shows its profit starts at 400 framed pictures per year 11-26

Applications of Break-Even Analysis STEP 3: DETERMINE COST, VOLUME, AND PROFIT RELATIONSHIPS BREAK-EVEN ANALYSIS LO3 Break-Even Chart Applications of Break-Even Analysis 11-27

FIGURE 11-6 Break-even analysis chart for a picture frame store shows the break-even point at 400 pictures 11-28

PRICING OBJECTIVES AND CONSTRAINTS IDENTIFYING PRICING OBJECTIVES LO4 Pricing Objectives Profit Managing for Long-Run Profits Managing for Current Profit Target Return (ROI) 11-29

FIGURE 11-7 Where each dollar spent by consumers for designer denim jeans goes 11-30

PRICING OBJECTIVES AND CONSTRAINTS IDENTIFYING PRICING OBJECTIVES LO4 Pricing Objectives Sales ($) Survival Market Share ($ or #) Social Responsibility Unit Volume (#) 11-31

PRICING OBJECTIVES AND CONSTRAINTS IDENTIFYING PRICING CONSTRAINTS LO4 Pricing Constraints Demand for the Product Class (Cars), Product (Sports Cars), and Brand (Bugatti Veyron) Newness of the Product: Stage in the Product Life Cycle 11-32

PRICING OBJECTIVES AND CONSTRAINTS IDENTIFYING PRICING CONSTRAINTS LO4 Pricing Constraints Cost of Producing and Marketing a Product Competitors’ Prices 11-33 33

PRICING OBJECTIVES AND CONSTRAINTS IDENTIFYING PRICING CONSTRAINTS LO4 Pricing Constraints Legal and Ethical Considerations Price Fixing Deceptive Pricing Price Discrimination Predatory Pricing 11-34

FIGURE 11-C Several pricing practices are affected by legal and regulatory restrictions, which benefit both consumers and firms 11-35

FIGURE 11-D Five most common deceptive pricing practices 11-36

PRICING OBJECTIVES AND CONSTRAINTS IDENTIFYING PRICING CONSTRAINTS LO4 Pricing Constraints Cost of Changing Prices and Time Period They Apply Type of Competitive Market Pure Competition Oligopoly Monopolistic Competition Pure Monopoly 11-37

FIGURE 11-E Pricing, product, and advertising strategies available to firms in four types of competitive markets 11-38

SETTING A FINAL PRICE SET THE LIST PRICE: CHOOSING A PRICE POLICY LO5 CarMax Ad One-Price Policy Flexible Price Policy 11-39

MAKING RESPONSIBLE DECISIONS Flexible Pricing—Is There Discrimination in Bargaining for a New Car? LO5 Buying a New Car: Some Folks Pay More 11-40

SETTING A FINAL PRICE ADJUST THE LIST PRICE: DISCOUNTS LO5 Quantity Seasonal Trade (Functional) Cash 11-41

FIGURE 11-F The structure of trade discounts affects the manufacturer’s selling price and the margins made by resellers in the marketing channel 11-42

SETTING A FINAL PRICE ADJUST THE LIST PRICE: ALLOWANCES Trade-In Promotional Every Day Low Pricing (EDLP) 11-43

SETTING A FINAL PRICE ADJUST THE LIST PRICE: GEOGRAPHY LO5 FOB Origin Pricing 11-44

SETTING A FINAL PRICE ADJUST THE LIST PRICE: GEOGRAPHY LO5 Uniform Delivered Pricing: Single Zone U.S. Postal Service Priority Mail Flat Rate Prices from Denver to anywhere in the U.S. Envelope: $5.15 Small Box: $5.35 Medium Box: $11.35 Large Box: $15.45 11-45

SETTING A FINAL PRICE ADJUST THE LIST PRICE: GEOGRAPHY LO5 Uniform Delivered Pricing: Multiple-Zone 11-46

SETTING A FINAL PRICE ADJUST THE LIST PRICE: GEOGRAPHY LO5 Uniform Delivered Pricing: Basing-Point 11-47

WASHBURN GUITARS: USING BREAK-EVEN POINTS TO MAKE PRICING DECISIONS VIDEO CASE 11 11-48

VIDEO CASE 11 WASHBURN GUITARS 1. What factors are most likely to affect the demand for the lines of Washburn guitars (a) bought by a first-time guitar buyer and (b) bought by a sophisticated musician who wants a signature model? 11-49

VIDEO CASE 11 WASHBURN GUITARS 2. For Washburn, what are examples of (a) shifting the demand curve to the right to get a higher price for a guitar line (movement of the demand curve) and (b) pricing decisions involving moving along a demand curve? 11-50

VIDEO CASE 11 WASHBURN GUITARS 3. In Washburn’s factory, what is the break-even point for the new line of guitars if the retail price is (a) $349, (b) $389, and (c) $309? Also, (d) if Washburn achieves the sales target of 2,000 units at the $349 retail price, what will its profit be? 11-51

VIDEO CASE 11 WASHBURN GUITARS 4. Assume that the merger with Parker leads to the cost reductions projected in the case. What will be the (a) new break-even point at a $349 retail price for this line of guitars and (b) new profit if it sells 2,000 units? 11-52

VIDEO CASE 11 WASHBURN GUITARS 5. If for competitive reasons, Washburn eventually has to move all its production back to Asia, (a) which specific fixed and variable costs might be lowered and (b) what additional fixed and variable costs might it expect to incur? 11-53

Price (P) A price (P) is the money or other considerations (including other products and services) exchanged for the ownership or use of a product or service. 11-54

Value Value is the ratio of perceived benefits to price; or Value = (Perceived benefits divided by Price). 11-55

Profit Equation The profit equation is: Profit = Total revenue − Total cost; or Profit = (Unit price × Quantity sold) − (Fixed cost + Variable cost). 11-56

Demand Curve A demand curve is a graph relating the quantity sold and price, which shows the maximum number of units that will be sold at a given price. 11-57

Price Elasticity of Demand The price elasticity of demand is the percentage change in quantity demanded relative to a percentage change in price. 11-58

Total Revenue (TR) Total revenue (TR) is the total money received from the sale of a product. 11-59

Total Cost (TC) Total cost (TC) is the total expense incurred by a firm in producing and marketing a product. Total cost is the sum of fixed cost and variable cost. 11-60

Break-Even Analysis Break-even analysis is a technique that analyzes the relationship between total revenue and total cost to determine profitability at various levels of output. 11-61

Pricing Objectives Pricing objectives specify the role of price in an organization’s marketing and strategic plans. 11-62

Pricing Constraints Pricing constraints are factors that limit the range of prices a firm may set. 11-63