1. Copyright © 2007 by The McGraw-Hill Companies, Inc. All Rights Reserved. Slide 12-1 PRICING PRODUCTS AND SERVICES C HAPTER

2. Copyright © 2007 by The McGraw-Hill Companies, Inc. All Rights Reserved. Slide 12-2 AFTER READING THIS CHAPTER YOU SHOULD BE ABLE TO: 1.Identify the elements that make up a price. 2.Describe how to establish the initial approximate price level using demand-oriented, cost-oriented, profit-oriented, and competition- oriented approaches.

3. Copyright © 2007 by The McGraw-Hill Companies, Inc. All Rights Reserved. Slide 12-3 AFTER READING THIS CHAPTER YOU SHOULD BE ABLE TO: 3.Explain what a demand curve is and the role of revenues in pricing decisions. 4.Explain the role of costs in pricing decisions. 5.Describe how various combinations of price, fixed cost, and unit variable cost affect a firm’s break-even point.

4. Copyright © 2007 by The McGraw-Hill Companies, Inc. All Rights Reserved. Slide 12-4 AFTER READING THIS CHAPTER YOU SHOULD BE ABLE TO: 6.Recognize the objectives a firm has in setting prices and the constraints that restrict the range of prices a firm can charge. 7.Describe the steps taken in setting a final price.

5. Copyright © 2007 by The McGraw-Hill Companies, Inc. All Rights Reserved. Slide 12-5 WHERE DOT-COMS STILL THRIVE: HELPING YOU GET A $100-A-NIGHT HOTEL ROOM OVERLOOKING NEW YORK’S CENTRAL PARK Why Travel Dot-Coms Haven ’ t Tanked Travel Dot-Com Prices: A Win-Win for Buyers and Sellers  Saving Time  Saving Money

6. Copyright © 2007 by The McGraw-Hill Companies, Inc. All Rights Reserved. Slide 12-6 NATURE AND IMPORTANCE OF PRICE The Many Names of Price  Price Price What Is a Price?  Barter  Price Equation

7. Copyright © 2007 by The McGraw-Hill Companies, Inc. All Rights Reserved. Slide 12-7 FIGURE 12-1 FIGURE 12-1 The price of three different purchases

8. Copyright © 2007 by The McGraw-Hill Companies, Inc. All Rights Reserved. Slide 12-8 Bugatti Veyron What is its price equation?

9. Copyright © 2007 by The McGraw-Hill Companies, Inc. All Rights Reserved. Slide 12-9 NATURE AND IMPORTANCE OF PRICE Price as an Indicator of Value  Value Pricing  Profit Equation Profit Equation Price in the Marketing Mix

10. Copyright © 2007 by The McGraw-Hill Companies, Inc. All Rights Reserved. Slide 12-10 FIGURE 12-2 FIGURE 12-2 Four approaches for selecting an approximate price level

11. Copyright © 2007 by The McGraw-Hill Companies, Inc. All Rights Reserved. Slide 12-11 GENERAL PRICING APPROACHES Demand-Oriented Approaches  Skimming Pricing  Penetration Pricing  Prestige Pricing  Odd-Even Pricing  Target Pricing  Bundle Pricing  Yield Management Pricing

12. Copyright © 2007 by The McGraw-Hill Companies, Inc. All Rights Reserved. Slide 12-12 Nintendo GameCube and Sears Craftsman Radial Saw What pricing approach is used by each and why?

13. Copyright © 2007 by The McGraw-Hill Companies, Inc. All Rights Reserved. Slide 12-13 Concept Check A: The profit equation is: Profit = Total revenue – Total cost = (Unit price × Quantity sold) – Total cost 1. What is the profit equation?

14. Copyright © 2007 by The McGraw-Hill Companies, Inc. All Rights Reserved. Slide 12-14 Concept Check A: A firm introducing a new product can use either skimming pricing to set the highest initial price that customers desiring the product are willing to pay or penetration pricing to set a low initial price to appeal immediately to the mass market. 2. What is the difference between skimming and penetration pricing?

15. Copyright © 2007 by The McGraw-Hill Companies, Inc. All Rights Reserved. Slide 12-15 Concept Check A: Odd-even pricing involves setting prices a few dollars or cents under an even number ($599.99 vs. $600.00). Psychologically, the $599.99 price feels lower than $600.00, even though the difference is 1¢. 3. What is odd-even pricing?

16. Copyright © 2007 by The McGraw-Hill Companies, Inc. All Rights Reserved. Slide 12-16 GENERAL PRICING APPROACHES Cost-Oriented Approaches  Standard Markup Pricing  Cost-Plus Pricing  Target Profit Pricing  Target Return-on-Sales Pricing  Target Return-on-Investment Pricing Profit-Oriented Approaches

17. Copyright © 2007 by The McGraw-Hill Companies, Inc. All Rights Reserved. Slide 12-17 GENERAL PRICING APPROACHES Competition-Oriented Approaches  Customary Pricing  Above-, At-, or Below-Market Pricing  Loss-Leader Pricing

18. Copyright © 2007 by The McGraw-Hill Companies, Inc. All Rights Reserved. Slide 12-18 ESTIMATING DEMAND AND REVENUE Fundamentals of Estimating Demand  The Demand Curve The Demand Curve Consumer Tastes Price and Availability of Similar Products Consumer Income Demand Factors

19. Copyright © 2007 by The McGraw-Hill Companies, Inc. All Rights Reserved. Slide 12-19 Newsweek How do you estimate demand and set a price?

20. Copyright © 2007 by The McGraw-Hill Companies, Inc. All Rights Reserved. Slide 12-20 FIGURE 12-3 FIGURE 12-3 Illustrative demand curves for Newsweek Demand curve under initial conditions Shift in the demand curve with more favorable conditions

21. Copyright © 2007 by The McGraw-Hill Companies, Inc. All Rights Reserved. Slide 12-21 FIGURE 12-3A FIGURE 12-3A Illustrative demand curve for Newsweek (initial conditions)

22. Copyright © 2007 by The McGraw-Hill Companies, Inc. All Rights Reserved. Slide 12-22 FIGURE 12-3B FIGURE 12-3B Illustrative demand curve for Newsweek (shift in demand)

23. Copyright © 2007 by The McGraw-Hill Companies, Inc. All Rights Reserved. Slide 12-23 ESTIMATING DEMAND AND REVENUE Fundamentals of Estimating Demand  Movement Along versus Shift of a Demand Curve Elastic Demand  Price Elasticity of Demand Inelastic Demand

24. Copyright © 2007 by The McGraw-Hill Companies, Inc. All Rights Reserved. Slide 12-24 Concept Check 1. What is loss-leader pricing? A: Loss-leader pricing involves deliberately selling a product below its customary price not to increase sales, but to attract customers’ attention in hopes that they will buy other products as well.

25. Copyright © 2007 by The McGraw-Hill Companies, Inc. All Rights Reserved. Slide 12-25 Concept Check 2. What are the three demand factors besides the product’s price that determine consumers’ willingness and ability to buy the product? A: They are consumer tastes, availability of similar products, and consumer income.

26. Copyright © 2007 by The McGraw-Hill Companies, Inc. All Rights Reserved. Slide 12-26 Concept Check 3. What is the difference between movement along a demand curve and a shift in a demand curve? A: A movement along a demand curve occurs when the price is lowered and the quantity demanded increases (and vice versa), assuming that other factors remain unchanged. However, if these factors change, then the demand curve will shift.

27. Copyright © 2007 by The McGraw-Hill Companies, Inc. All Rights Reserved. Slide 12-27 Fundamentals of Estimating Revenue  Total Revenue (TR) Total Revenue (TR) ESTIMATING DEMAND AND REVENUE

28. Copyright © 2007 by The McGraw-Hill Companies, Inc. All Rights Reserved. Slide 12-28 FIGURE 12-4 FIGURE 12-4 Fundamental revenue concept

29. Copyright © 2007 by The McGraw-Hill Companies, Inc. All Rights Reserved. Slide 12-29 DETERMINING COST, VOLUME, AND PROFIT RELATIONSHIPS The Importance of Controlling Costs  Total Cost (TC) Total Cost (TC)  Fixed Cost (FC) Fixed Cost (FC)  Variable Cost (VC) Variable Cost (VC)  Unit Variable Cost (UVC) Unit Variable Cost (UVC)

30. Copyright © 2007 by The McGraw-Hill Companies, Inc. All Rights Reserved. Slide 12-30 FIGURE 12-5 FIGURE 12-5 Fundamental cost concepts

31. Copyright © 2007 by The McGraw-Hill Companies, Inc. All Rights Reserved. Slide 12-31  Break-Even Point (BEP)  Calculating a Break-Even Point Break-Even Analysis  Break-Even Chart  Applications of Break-Even Analysis DETERMINING COST, VOLUME, AND PROFIT RELATIONSHIPS

32. Copyright © 2007 by The McGraw-Hill Companies, Inc. All Rights Reserved. Slide 12-32 FIGURE 12-6 FIGURE 12-6 Calculating a break-even point for a picture frame store

33. Copyright © 2007 by The McGraw-Hill Companies, Inc. All Rights Reserved. Slide 12-33 FIGURE 12-7 FIGURE 12-7 Break-even analysis chart for a picture frame store

34. Copyright © 2007 by The McGraw-Hill Companies, Inc. All Rights Reserved. Slide 12-34 Concept Check 1. What is the difference between fixed costs and variable costs? A: Fixed cost is the sum of the expenses of the firm that are stable and do not change with the quantity of the product that is produced and sold. Variable cost is the sum of the expenses of the firm that vary directly with the quantity of the product that is produced and sold.

35. Copyright © 2007 by The McGraw-Hill Companies, Inc. All Rights Reserved. Slide 12-35 Concept Check A: A break-even point (BEP) is the quantity at which total revenue and total cost are equal. 2. What is a break-even point?

36. Copyright © 2007 by The McGraw-Hill Companies, Inc. All Rights Reserved. Slide 12-36 PRICING OBJECTIVES AND CONSTRAINTS Identifying Pricing ObjectivesIdentifying Pricing Objectives  Profit Managing for Long-Run Profits Maximizing Current Profit Target Return

37. Copyright © 2007 by The McGraw-Hill Companies, Inc. All Rights Reserved. Slide 12-37 FIGURE 12-8 FIGURE 12-8 Where each dollar of your movie ticket goes

38. Copyright © 2007 by The McGraw-Hill Companies, Inc. All Rights Reserved. Slide 12-38 PRICING OBJECTIVES AND CONSTRAINTS Identifying Pricing ObjectivesIdentifying Pricing Objectives  Sales Revenue  Market Share  Unit Volume  Survival  Social Responsibility

39. Copyright © 2007 by The McGraw-Hill Companies, Inc. All Rights Reserved. Slide 12-39 PRICING OBJECTIVES AND CONSTRAINTS Identifying Pricing ConstraintsIdentifying Pricing Constraints  Demand for the Product Class, Product, and Brand  Newness of the Product: Stage in the Product Life Cycle  Cost of Producing and Marketing the Product  Competitors’ Prices

40. Copyright © 2007 by The McGraw-Hill Companies, Inc. All Rights Reserved. Slide 12-40 Ichiro Bobble Head What constraints affect this “collectible’s” price?

41. Copyright © 2007 by The McGraw-Hill Companies, Inc. All Rights Reserved. Slide 12-41 PRICING OBJECTIVES AND CONSTRAINTS Identifying Pricing ConstraintsIdentifying Pricing Constraints  Legal and Ethical Considerations Price Fixing  Horizontal Price Fixing  Vertical Price Fixing Price Discrimination Deceptive Pricing  Bait and Switch Predatory Pricing

42. Copyright © 2007 by The McGraw-Hill Companies, Inc. All Rights Reserved. Slide 12-42 Concept Check 1. What is the difference between pricing objectives and pricing constraints ? A: Pricing objectives specify the role of price in an organization’s marketing and strategic plans. Pricing constraints are factors that limit the range of price a firm may set.

43. Copyright © 2007 by The McGraw-Hill Companies, Inc. All Rights Reserved. Slide 12-43 Concept Check 2. Explain what bait and switch is and why it is an example of deceptive pricing. A: This occurs when a firm offers a very low price on a product (the bait) to attract customers to a store, who then are persuaded to purchase a higher-priced item (the switch). Misleading consumers is both illegal and unethical.

44. Copyright © 2007 by The McGraw-Hill Companies, Inc. All Rights Reserved. Slide 12-44 SETTING A FINAL PRICE Step 1: Set an Approximate Price Level  One-Price Policy Step 2: Set the List or Quoted Price  Flexible-Price Policy

45. Copyright © 2007 by The McGraw-Hill Companies, Inc. All Rights Reserved. Slide 12-45 Dollar Valley and Eddie Bauer What pricing policy is used by each and why?

46. Copyright © 2007 by The McGraw-Hill Companies, Inc. All Rights Reserved. Slide 12-46 SETTING A FINAL PRICE Step 3: Make Special Adjustments to the List or Quoted Price  Discounts Quantity Discounts Seasonal Discounts Trade (Functional) Discounts Cash Discounts

47. Copyright © 2007 by The McGraw-Hill Companies, Inc. All Rights Reserved. Slide 12-47 Payless ShoeSource What discount strategy is used and why?

48. Copyright © 2007 by The McGraw-Hill Companies, Inc. All Rights Reserved. Slide 12-48 SETTING A FINAL PRICE  Promotional Allowances  Trade-In Allowances Allowances Everyday Low Pricing  Uniform Delivered Pricing  FOB Origin Pricing Geographical Adjustments

49. Copyright © 2007 by The McGraw-Hill Companies, Inc. All Rights Reserved. Slide 12-49 Concept Check 1. What are the three steps in setting a final price ? A: They are: (1) select an appropriate price level; (2) set the list or quoted price; and (3) make special adjustments to the list or quoted price.

50. Copyright © 2007 by The McGraw-Hill Companies, Inc. All Rights Reserved. Slide 12-50 Concept Check 2. What is the purpose of (a) quantity discounts and (b) promotional allowances? A: (a) Quantity discounts encourage customers to buy larger quantities of a product. (b) Promotional allowances are used to encourage sellers to undertake certain advertising or selling activities to promote a product.

51. Copyright © 2007 by The McGraw-Hill Companies, Inc. All Rights Reserved. Slide 12-51 FINDING THE BEST AIRLINE TICKET PRICE GOING ONLINE

52. Copyright © 2007 by The McGraw-Hill Companies, Inc. All Rights Reserved. Slide 12-52 1. Book a round-trip leaving Friday at 4:00 PM from Chicago’s O’Hare Airport (ORD) and arriving at New York City’s La Guardia Airport (LGA). You’ll leave LGA Sunday around 5:00 PM to return to ORD. Which online travel service below provides the cheapest fare and fewest restrictions? Going Online TravelocityExpedia OrbitzPriceline

53. Copyright © 2007 by The McGraw-Hill Companies, Inc. All Rights Reserved. Slide 12-53 VIDEO CASE 12 STUART CELLARS: PRICE IS A MATTER OF TASTE

54. Copyright © 2007 by The McGraw-Hill Companies, Inc. All Rights Reserved. Slide 12-54 VIDEO CASE 12 Stuart Cellars

55. Copyright © 2007 by The McGraw-Hill Companies, Inc. All Rights Reserved. Slide 12-55 1. What factors related to (a) demand, (b) cost, (c) profit, and (d) competition are used by Stuart Cellars to arrive at an approximate price level? VIDEO CASE 12 Stuart Cellars

56. Copyright © 2007 by The McGraw-Hill Companies, Inc. All Rights Reserved. Slide 12-56 VIDEO CASE 12 Stuart Cellars 2. Assume that Stuart Cellars annual fixed costs are $1,000,000. With an average retail price of $28 per bottle and assuming estimated unit variable costs of $11.50, calculate break-even volume. If there are 12 bottles per case, how does the break-even unit volume compare to Stuart Cellars’ capacity?

57. Copyright © 2007 by The McGraw-Hill Companies, Inc. All Rights Reserved. Slide 12-57 VIDEO CASE 12 Stuart Cellars 3. You are a Stuart Cellars Wine Club member. You want to order Cabernet Sauvignon that normally retails for $45 per bottle. The following discount structure applies: 20 percent discount for purchases of 11 bottles or less; 30 percent discount for purchase of 12 bottles or more. Add 7.75 percent sales tax for California residents. What price, before shipping and handling, would you pay if (a) you order 10 bottles? (b) you order 12 bottles? (c) What are the implications of this discounting structure?

58. Copyright © 2007 by The McGraw-Hill Companies, Inc. All Rights Reserved. Slide 12-58 VIDEO CASE 12 Stuart Cellars 4. What pricing strategy(ies) does Stuart Cellars appear to be following? What will be the key factors in making these strategies a success?

59. Copyright © 2007 by The McGraw-Hill Companies, Inc. All Rights Reserved. Slide 12-59 SUPPLEMENTAL LECTURE NOTE 12-1 MP3 PRICING ECONOMICS: WHO GETS WHAT?

60. Copyright © 2007 by The McGraw-Hill Companies, Inc. All Rights Reserved. Slide 12-60 EXTRA VALUE MEAL BUNDLE PRICING AT MCDONALD ’ S IN-CLASS ACTIVITY 12-1

61. Copyright © 2007 by The McGraw-Hill Companies, Inc. All Rights Reserved. Slide 12-61

62. Copyright © 2007 by The McGraw-Hill Companies, Inc. All Rights Reserved. Slide 12-62

63. Copyright © 2007 by The McGraw-Hill Companies, Inc. All Rights Reserved. Slide 12-63 Price (P) Price (P) is the money or other considerations (including other goods and services) exchanged for the ownership or use of a good or service.

64. Copyright © 2007 by The McGraw-Hill Companies, Inc. All Rights Reserved. Slide 12-64 Profit Equation A firm’s profit equation is as follows: Profit = Total revenue − Total cost; or Profit = (Unit price × Quantity sold) − Total cost.

65. Copyright © 2007 by The McGraw-Hill Companies, Inc. All Rights Reserved. Slide 12-65 Demand Curve A demand curve is a graph relating the quantity sold and price, which shows the maximum number of units that will be sold at a given price.

66. Copyright © 2007 by The McGraw-Hill Companies, Inc. All Rights Reserved. Slide 12-66 Total Revenue (TR) Total revenue (TR) is the total money received from the sale of a product. Total revenue (TR) = unit price (P) × the quantity sold (Q) or TR = P × Q.

67. Copyright © 2007 by The McGraw-Hill Companies, Inc. All Rights Reserved. Slide 12-67 Total Cost (TC) Total cost (TC) is the total expense incurred by a firm in producing and marketing a product. Total cost (TC) equals the sum of fixed cost (FC) and variable cost (VC) or TC = FC + VC.

68. Copyright © 2007 by The McGraw-Hill Companies, Inc. All Rights Reserved. Slide 12-68 Fixed Cost (FC) Fixed cost (FC) is the sum of the expenses of the firm that are stable and do not change with the quantity of a product that is produced and sold.

69. Copyright © 2007 by The McGraw-Hill Companies, Inc. All Rights Reserved. Slide 12-69 Variable Cost (VC) Variable cost (VC) is the sum of the expenses of the firm that vary directly with the quantity of a product that is produced and sold.

70. Copyright © 2007 by The McGraw-Hill Companies, Inc. All Rights Reserved. Slide 12-70 Unit Variable Cost (UVC) Unit variable cost (UVC) is variable cost expressed on a per unit basis.

71. Copyright © 2007 by The McGraw-Hill Companies, Inc. All Rights Reserved. Slide 12-71 Break-Even Analysis Break-even analysis is a technique that analyzes the relationship between total revenue and total cost to determine profitability at various levels of output.

72. Copyright © 2007 by The McGraw-Hill Companies, Inc. All Rights Reserved. Slide 12-72 Pricing Objectives Pricing objectives involve specifying the role of price in an organization’s marketing and strategic plans.

73. Copyright © 2007 by The McGraw-Hill Companies, Inc. All Rights Reserved. Slide 12-73 Pricing Constraints Pricing constraints involve factors that limit the range of prices a firm may set.