1. Fundamentals of Pricing
Marketing
Chapter 12
Fundamentals of Pricing
Gilbert A. Churchill, Jr J. Paul Peter
Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1998 1 1

2. Sample Demand Curve Price per Unit Quantity Demanded in Units 60 50 40
Slide
12-1
Figure
12.1
Price per Unit 60 50 40 30 20 10
10,000
20,000
30,000
40,000
50,000
Quantity Demanded in Units
Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1998 2 2

3. Demographic Pricing Factors
Slide
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• How many potential buyers are in the market?
• What is the location of potential buyers?
• Are they organizational buyers or consumers?
• What is the consumption rate of potential buyers?
• What is the financial condition of potential buyers?
Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1998 3

4. Psychological Pricing Factors
Slide
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• Will potential buyers use price as an indicator of the product’s quality?
• Will potential buyers be favorably attracted by odd pricing such as 99 cents instead of $1, or $177 instead of $180?
• Will potential buyers perceive the price to be too high relative to what the product offers?
• Are potential buyers concerned enough with prestige to pay more for the product?
• How much will potential buyers be willing to pay for the product?
Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1998 4

5. Elastic Demand: European Vacations Inelastic Demand: Gasoline
Demand Curves Showing Different Price Elasticities
Slide
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Figure
12.2
Elastic Demand: European Vacations
Inelastic Demand: Gasoline
Price per trip
Price per gallon
Quantity Demanded (Number of Trips)
Quantity Demanded (Gallons)
Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1998 5 5

6. Marginal Analysis Relationships
Slide
12-5
Figure
12.4
Profit
Dollars
Total Cost
Total Revenue
Quantity Produced and Sold
Marginal Cost
Dollars
Marginal Revenue
Quantity Produced and Sold
Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1998 6 6

7. Pricing Based on Cost
Slide
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Markup pricing a pricing approach that adds a percentage to the producer’s cost in order to arrive at a selling price.
Rate of return pricing a pricing approach that involves total costs and then adding a desired rate of return to them to determine the selling price.
Breakeven analysis a technique for determining the sales volume needed to cover all costs at a specific rate.
Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1998 7 7

8. Breakeven Analysis Dollars Total Revenue Total Cost Profit
Slide
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Figure
12.5
Dollars
Total Revenue
Total Cost
Profit
Breakeven Point
Loss
Quantity Produced and Sold
Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1998 8 8

9. Pricing Based on Competition
Slide
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Pricing Below Competition pricing to gain market share and attract cost-conscious buyers. Especially useful to companies with low cost positions.
Matching Competition pricing at competitor’s levels with the intent of distinguishing the product in other ways. Common in oligopolies.
Pricing Above Competition pricing for products that offer greater value, quality, convenience or prestige.
Sealed-Bid Pricing pricing in which the buyer asks potential sellers to submit sealed bids containing the seller’s pricing and availabilities.
Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1998 9 9

10. Pricing Based on Customer Value
Slide
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Dominant Backward Pricing a pricing approach that involves setting a price by starting with the estimated price customers will pay and working backwards with retail and wholesale margins.
Value Pricing a pricing approach that involves setting prices so that the exchange value is higher than the value of competing exchanges.
Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1998 10 10

11. Laws Limiting Pricing Practices
Slide
12-10
Table
12.3
Law
Pricing Practices
Sherman Antitrust Act
Consumer Goods Pricing Act
Federal Trade Commission Act
Robinson-Patman Act
Price Fixing
Resale Price Maintenance
Deceptive Pricing Practices
Price discrimination that lessens or damages competition; discrimination in the use of promotional pricing
Dumping
Laws of most countries
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