For use only with Perreault and McCarthy texts. © The McGraw-Hill Companies, Inc., 1999 Irwin/McGraw-Hill Chapter 18: Price Setting in the Business World

For use only with Perreault and McCarthy texts. © The McGraw-Hill Companies, Inc., 1999 Irwin/McGraw-Hill Exhibit 18-1 Markup chain in channels 18-3 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., 1999 Irwin/McGraw-Hill Cost-Oriented Pricing Markups Average-cost pricing Target return pricing Break-even analysis and pricing Marginal analysis

For use only with Perreault and McCarthy texts. © The McGraw-Hill Companies, Inc., 1999 Irwin/McGraw-Hill Markups Markup - dollar amount added to the cost to get the selling price. Markup (percent) - percentage of selling price that is added to the cost to get the selling price. Standard markups Markup chain (next slide) Stockturn rate

For use only with Perreault and McCarthy texts. © The McGraw-Hill Companies, Inc., 1999 Irwin/McGraw-Hill ProducerWholesalerRetailer Cost = = 80% Markup = 6.00 = 20% Cost = = 90% Markup = 2.40 = 10% Cost = = 60% Markup = = 40% Exhibit Markup Chain

For use only with Perreault and McCarthy texts. © The McGraw-Hill Companies, Inc., 1999 Irwin/McGraw-Hill Average-Cost Pricing Adding a reasonable markup to the average cost of a product. Must consider different types of costs (next slide) when using average-cost pricing. Experience curve pricing is average-cost pricing using an estimate of future average costs.

For use only with Perreault and McCarthy texts. © The McGraw-Hill Companies, Inc., 1999 Irwin/McGraw-Hill Six Types of Costs Total Cost Average Fixed Cost Total Variable Cost Average Variable Cost Total Fixed Cost Average Cost 18-5

For use only with Perreault and McCarthy texts. © The McGraw-Hill Companies, Inc., 1999 Irwin/McGraw-Hill Exhibit 18-6 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., 1999 Irwin/McGraw-Hill Target Return Pricing Adding a target return (ROI or dollar return) to the cost of a product.

For use only with Perreault and McCarthy texts. © The McGraw-Hill Companies, Inc., 1999 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., 1999 Irwin/McGraw-Hill Marginal Analysis Focuses on the changes in total revenue and total cost from selling one more unit to find the most profitable price and quantity. Marginal cost (MC)- the change in total cost that results from producing one more unit. Marginal revenue (MR) - the change in total revenue that results from selling one more unit. Maximize profits when MR is just less than or equal to MC.

For use only with Perreault and McCarthy texts. © The McGraw-Hill Companies, Inc., 1999 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., 1999 Irwin/McGraw-Hill Demand-Oriented Pricing: 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? 18-10

For use only with Perreault and McCarthy texts. © The McGraw-Hill Companies, Inc., 1999 Irwin/McGraw-Hill Demand-Oriented Pricing Value-in-Use Odd-Even BaitPrestige LeaderPrice Lining Demand- Backward Types of Demand-Oriented Pricing Referenc e Psychological

For use only with Perreault and McCarthy texts. © The McGraw-Hill Companies, Inc., 1999 Irwin/McGraw-Hill Full-Line Pricing Product-Bundling Pricing? Product-Bundling Pricing? Complementary Pricing? Complementary Pricing? Market- or Firm Oriented? Market- or Firm Oriented? 18-12

For use only with Perreault and McCarthy texts. © The McGraw-Hill Companies, Inc., 1999 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