For use only with Perreault and McCarthy texts. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill Chapter 17: Price Setting in the Business World

For use only with Perreault and McCarthy texts. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill When you finish this chapter, you should 17-2 Chapter 17 Objectives 1. Understand how most wholesalers and retailers set their prices— using markups. 2. Understand why turnover is so important in pricing. 3. Understand the advantages and disadvantages of average-cost pricing. 4. Know how to use break-even analysis to evaluate possible prices. 5. Understand the advantages of marginal analysis and how to use it for price setting. 6. Understand the various factors that influence customer price sensitivity. 7. Know the many ways that price setters use demand estimates in their pricing. 8. Understand the important new terms.

For use only with Perreault and McCarthy texts. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill Exhibit 17-1 Markup chain in channels 17-3 Key Factors That Influence Price Setting Pricing objectives Discounts and allowances Legal environment Price flexibility Geographic pricing terms Demand Cost Price of other products in the line Competition Price settin g

For use only with Perreault and McCarthy texts. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill ProducerWholesalerRetailer Cost = = 80% Markup = 6.00 = 20% Cost = = 90% Markup = 2.40 = 10% Cost = = 60% Markup = = 40% Exhibit Markups

For use only with Perreault and McCarthy texts. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill Six Types of Costs Total Cost Average Fixed Cost Total Variable Cost Average Variable Cost Total Fixed Cost Average Cost 17-5

For use only with Perreault and McCarthy texts. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill Exhibit 17-6 Total revenue= Price x Quantity $30,000 = $3.00 x 10,000 $40,000 = $2.00 x 20,000 $57,000 = $1.90 x 30,000 $66,000 = $1.65 x 40,000 $75,000 = $1.50 x 50,000 $72,000 = $1.20 x 60, Quantity (000) Price per unit $ Prices Along the Demand Curve

For use only with Perreault and McCarthy texts. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill Exhibit 17-7 Estimated quantity to be sold Average fixed cost per unit Quantity demanded at selling price Cost-oriented selling price per unit Average total cost per unit Variable cost per unit Profit per unit ? 17-7 Summary of Relationships Affecting Price

For use only with Perreault and McCarthy texts. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill Exhibit Break-even Analysis Total Revenue and Cost Units of Production Break-Even Point Profit Area Total Fixed Costs Total Variable Costs Total Cost Curve Total Revenue Curve Loss Area More 0 Higher

For use only with Perreault and McCarthy texts. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill Marginal Analysis Exhibit Total profit Quantity Total revenue Total cost Best profit for quantity at best price = $106 = 6 = $ Dollars Note: curves here are approximate (you can’t sell part of a unit!)

For use only with Perreault and McCarthy texts. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill Evaluating a Customer’s Price Sensitivity Are there substitute ways of meeting a need? Is it easy to compare prices? Who pays the bill? How great is the total expenditure? How significant is the end benefit? Is there already a sunk investment related to the purchase? 17-10

For use only with Perreault and McCarthy texts. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill Demand-Oriented Pricing Odd-Even PrestigeValue-in-Use Reference Price LiningLeader Bait Psychological Types of Demand-Oriented Pricing Demand Backward

For use only with Perreault and McCarthy texts. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill Full-Line Pricing Product-Bundling Pricing? Product-Bundling Pricing? Complementary Pricing? Complementary Pricing? Market- or Firm Oriented? Market- or Firm Oriented? 17-12

For use only with Perreault and McCarthy texts. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill Bid pricing means offering a specific price for each possible job. Determining costs is a complicated process. Negotiated pricing involves setting a price as the result of a bargaining process between the buyer and seller Bid and Negotiated Pricing

For use only with Perreault and McCarthy texts. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw-Hill Fixed-Cost (FC) Contribution per Unit Marginal Analysis Value in Use Pricing Reference Price Leader Pricing Bait Pricing Psychological Pricing Odd-Even Pricing Price Lining Demand-Backward Pricing Markup Markup (percent) Markup Chain Stockturn Rate Average-Cost Pricing Total Fixed Cost Total Variable Cost Total Cost Average Cost Average Fixed Cost Average Variable Cost Break-Even Analysis Break-Even Point (BEP) Prestige Pricing Full-Line Pricing Complementary Product Pricing Product-Bundle Pricing Bid Pricing Negotiated Price Key Terms