© McGraw-Hill Companies, Inc., McGraw-Hill/Irwin

13-2 © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin LEARNING OBJECTIVES Learning Objectives Why should firms pay more attention to setting prices? What is the relationship between price and quantity sold? Why is it important to know a product’s break-even point? Who wins in a price war? How has the Internet changed the way some people use price to make purchasing decisions?

13-3 © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Price and Value What’s the most you will pay for a pair of jeans?

13-4 © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Price BenefitsSacrifice

13-5 © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Price is a Signal Prices can be both too high and too low Price set too low may signal poor quality Price set too high might signal low value PriceGrabber.com Website

13-6 © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin The Role of Price in the Marketing Mix Price is the only marketing mix element that generates revenue Price is usually ranked as one of the most important factors in purchase decisions

13-7 © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin The 5 C’s of Pricing

13-8 © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin 1 st C: Company Objectives

13-9 © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Profit Orientation Profit Orientation Target return pricing Target profit pricing Maximizing profits

13-10 © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Sales Orientation Focus on increasing sales More concerned with overall market share Does not always imply low setting low prices

13-11 © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Competitor Orientation Competitive parity Status quo pricing Value is not part of this pricing strategy

13-12 © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin = Focus on customer expectations by matching prices to customer expectations automotive.com Website Customer Orientation

13-13 © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin What are they trying to accomplish with this ad?

13-14 © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin 2nd C: Customers

13-15 © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Demand Curves and Pricing Knowing demand curve enables to see relationship between price and demand

13-16 © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Demand Curves Not all are downward sloping Prestigious products or services have upward sloping curves

13-17 © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Price Elasticity of Demand Elastic (price sensitive) Inelastic (price insensitive) Consumers are less sensitive to price increases for necessities

13-18 © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Price Elasticity of Demand

13-19 © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Factors Influencing Price Elasticity of Demand Wal-Mart Commercial Income effect Substitution effect Cross- price elasticity

13-20 © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin 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

13-21 © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin 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

13-22 © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin 3rd C: Costs Variable Costs  Vary with production volume Fixed Costs  Unaffected by production volume Total Cost  Sum of variable and fixed costs

13-23 © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Break Even Analysis and Decision Making

13-24 © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Break Even Analysis

13-25 © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin 4th C: Competition Subway Commercial

13-26 © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin 5th C: Channel Members Manufacturers, wholesalers and retailers can have different perspectives on pricing strategies Manufactures must protect against gray market transactions

13-27 © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Check Yourself 1. What are the five Cs of pricing? 2. Identify the four types of company objectives. 3. What is the difference between elastic versus inelastic demand? 4. How does one calculate the break-even point in units?

13-28 © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Macro Influences on Pricing The Internet Increased price sensitivity Growth of online auctions

13-29 © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Economic Factors Local economic conditions Increasing disposable income Cross- shopping Increasing status consciousness Increasing globalization

13-30 © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin 1. How have the Internet and economic factors affected the way people react to prices? Check Yourself

13-31 © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Glossary Break-even analysis enables managers to examine the relationships among cost, price, revenue, and profit over different levels of production and sales. Return to slide

13-32 © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Glossary Cross-price elasticity is the percentage change in the quantity of Product A demanded compared with the percentage change in price in Product B. Return to slide

13-33 © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Glossary Fixed costs are those costs that remain essentially at the same level, regardless of any changes in the volume of production. Return to slide

13-34 © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Glossary Income effect is the change in the quantity of a product demanded by consumers due to a change in their income. Return to slide

13-35 © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Glossary The maximizing profits strategy assumes that if a firm can accurately specify a mathematical model that captures all the factors required to explain and predict sales and profits, it should be able to identify the price at which its profits are maximized. Return to slide

13-36 © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Glossary Price is the overall sacrifice a consumer is willing to make to acquire a specific product or service. Return to slide

13-37 © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Glossary The substitution effect refers to consumers’ ability to substitute other products for the focal brand. Return to slide

13-38 © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Glossary Target profit pricing is implemented by firms to meet a targeted profit objective. The firms use price to stimulate a certain level of sales at a certain profit per unit. Return to slide

13-39 © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Glossary Target return pricing occurs when firms employ pricing strategies designed to produce a specific return on their investment, usually expressed as a percentage of sales. Return to slide

13-40 © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Glossary The total cost is the sum of the variable and fixed costs. Return to slide

13-41 © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Glossary Variable costs are the costs that vary with production value. Return to slide