1. 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

2. For use only with Perreault and McCarthy texts. © The McGraw-Hill Companies, Inc., 1999 Irwin/McGraw-Hill When you finish this chapter, you should 18-2 Chapter 18 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.

3. 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

4. For use only with Perreault and McCarthy texts. © The McGraw-Hill Companies, Inc., 1999 Irwin/McGraw-Hill 24.00 30.00 50.00 ProducerWholesalerRetailer Cost = 24.00 = 80% Markup = 6.00 = 20% Cost = 21.60 = 90% Markup = 2.40 = 10% Cost = 30.00 = 60% Markup = 20.00 = 40% Exhibit 18-2 18-4 Markups

5. 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

6. 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 60,000 18-6 Quantity (000) Price per unit 10203040506070 $3.00 2.00 1.90 1.65 1.50 1.20 Prices Along the Demand Curve

7. For use only with Perreault and McCarthy texts. © The McGraw-Hill Companies, Inc., 1999 Irwin/McGraw-Hill Exhibit 18-7 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 ? 18-7 Summary of Relationships Affecting Price

8. For use only with Perreault and McCarthy texts. © The McGraw-Hill Companies, Inc., 1999 Irwin/McGraw-Hill Exhibit 18-8 18-8 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

9. For use only with Perreault and McCarthy texts. © The McGraw-Hill Companies, Inc., 1999 Irwin/McGraw-Hill Marginal Analysis Exhibit 18-10 18-9 Total profit Quantity Total revenue Total cost Best profit for quantity at best price = $106 = 6 = $79 2468 Dollars 800 700 600 500 400 300 200 100 0 -100 -200 -300 -400 Note: curves here are approximate (you can’t sell part of a unit!)

10. For use only with Perreault and McCarthy texts. © The McGraw-Hill Companies, Inc., 1999 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? 18-10

11. For use only with Perreault and McCarthy texts. © The McGraw-Hill Companies, Inc., 1999 Irwin/McGraw-Hill Demand-Oriented Pricing 18-11 Value-in-Use PsychologicalOdd-Even BaitPrestige LeaderPrice Lining Demand- Backward Reference Types of Demand-Oriented Pricing

12. 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

13. 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. 18-13 Bid and Negotiated Pricing

14. For use only with Perreault and McCarthy texts. © The McGraw-Hill Companies, Inc., 1999 Irwin/McGraw-Hill Break-Even Analysis Break-Even Point (BEP) Fixed-Cost (FC) Contribution per Unit Marginal Analysis Marginal Revenue Marginal Cost Rule for Maximizing Profit Marginal Profit Price Leader Value in Use Pricing Reference Price Leader Pricing Bait 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 Experience Curve Pricing Target Return Pricing Long-Run Target Return Pricing Psychological Pricing Odd-Even Pricing Price Lining Demand-Backward Pricing Prestige Pricing Full-Line Pricing Complementary Product Pricing Product-Bundle Pricing Bid Pricing Negotiated Price 18-14 Key Terms