14-1 CHAPTER PRICING CONCEPTS FOR ESTABLISHING VALUE 14 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

14-2 LEARNING OBJECTIVES 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

14-3 Procter & Gamble ©McGraw-Hill Education

14-4 The 5 C’s of Pricing

st C: Company Objectives Company ObjectiveExamples of Pricing Strategy Implications Profit-orientedInstitute 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-orientedSet prices very low to generate new sales and take sales away from competitors, even if profits suffer. Competitor-orientedTo discourage more competitors from entering the market, set prices very low. Customer-orientedTarget a market segment of consumers who highly value a particular product benefit and set prices relatively high (referred to as premium pricing).

14-6 Profit Orientation Profit Orientation Target profit pricing Maximizing Profits Target return pricing

14-7 Sales Orientation Focus on increasing sales More concerned with overall market share Does not always imply setting low prices

14-8 Competitor Orientation  Competitive parity  Status quo pricing  Value is not part of this pricing strategy Roz Woodward/Getty Images

14-9 = Focus on customer expectations by matching prices to customer expectations automotive.com Customer Orientation C Borland/PhotoLink/Getty ImagesDon Farrall/Getty Images

14-10 CHECK YOURSELF 1.What are the five Cs of pricing? 2.Identify the four types of company objectives.

14-11 What are they trying to accomplish with this ad?

nd C: Customers

14-13 Demand Curves and Pricing Knowing demand curve enables to see relationship between price and demand Photo by Simon Frederick/Getty Images

14-14 Demand Curves Not all are downward sloping Prestigious products or services have upward sloping curves

14-15 Price Elasticity of Demand Elastic (price sensitive) Inelastic (price insensitive) Consumers are less sensitive to price increases for necessities ©PhotoLink/Getty Images

14-16 Price Elasticity of Demand ©Dennis MacDonald/PhotoEdit, Inc.©Bill Aron/PhotoEdit, Inc.

14-17 Factors Influencing Price Elasticity of Demand Income effect Substitution effect Cross- price elasticity Walmart Commercial

14-18 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 BananaStock/JupiterImages

14-19 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 Getty Images/Digital Vision

14-20 CHECK YOURSELF 1.What is the difference between elastic versus inelastic demand? 2.What are the factors influencing price elasticity

rd C: Costs  Variable Costs Variable Costs  Vary with production volume  Fixed Costs Fixed Costs  Unaffected by production volume  Total Cost Total Cost  Sum of variable and fixed costs Michael Rosenfeld/Stone/Getty Images

14-22 Break Even Analysis and Decision Making

14-23 Break Even Analysis

14-24 CHECK YOURSELF 1.What is the difference between fixed costs and variable costs? 2.How does one calculate the break-even point in units?

th C: Competition Subway Commercial

14-26 Wal-Mart vs. Target

14-27 CHECK YOURSELF 1.What are the four different types of competitive environments?

th C: Channel Members  Manufacturers, wholesalers and retailers can have different perspectives on pricing strategies  Manufactures must protect against gray market transactions

14-29 Return to slide Break-even analysis enables managers to examine the relationships among cost, price, revenue, and profit over different levels of production and sales. Glossary

14-30 Return to slide Cross-price elasticity is the percentage change in the quantity of Product A demanded compared with the percentage change in price in Product B. Glossary

14-31 Return to slide Fixed costs are those costs that remain essentially at the same level, regardless of any changes in the volume of production. Glossary

14-32 Return to slide Income effect is the change in the quantity of a product demanded by consumers due to a change in their income. Glossary

14-33 Return to slide 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. Glossary

14-34 Return to slide Price is the overall sacrifice a consumer is willing to make to acquire a specific product or service. Glossary

14-35 Return to slide The substitution effect refers to consumers’ ability to substitute other products for the focal brand. Glossary

14-36 Return to slide 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. Glossary

14-37 Return to slide 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. Glossary

14-38 Return to slide The total cost is the sum of the variable and fixed costs. Glossary

14-39 Return to slide Variable costs are the costs that vary with production value. Glossary

14-40 Return to slide A cumulative quantity discount uses the amount purchased over a specified time period and usually involves several transactions. Glossary

14-41 Return to slide Horizontal price fixing occurs when competitors that produce and sell competing products collude, or work together, to control prices, effectively taking price out of the decision process for consumers. Glossary

14-42 Return to slide Price skimming is a strategy that occurs in many markets, and particularly for new and innovative products or services, and involves consumers being willing to pay a higher price to obtain the new product or service. Glossary

14-43 Return to slide A reference price is the price against which buyers compare the actual selling price of the product and that facilitates their evaluation process. Glossary

14-44 Return to slide With a uniform delivered pricing tactic, the shipper charges one rate, no matter where the buyer is located. Glossary

14-45 Return to slide Vertical price fixing occurs when parties at different levels of the same marketing channel collude to control the prices passed on to consumers. Glossary