1. Gilbert A. Churchill, Jr. J. Paul Peter Chapter 12 Fundamentals of Pricing Marketing The amount of money, good, or services that must be given up to acquire ownership or use of a product.

2. Sample Demand Curve Slide 12-1 Figure 12.1 10 20 30 40 50 60 10,00020,00030,00040,00050,000 Price per Unit Quantity Demanded in Units A graphical representation of the quantity of a product demanded at various prices.

3. 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? What is the general trend in the industry? Estimating Demand - Demographic Pricing Factors Slide 12-2

4. 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? Estimating Demand - Psychological Pricing Factors Slide 12-3

5. Demand Curves Showing Different Price Elasticities Slide 12-4 Figure 12.2 Price per trip Price per gallon Quantity Demanded (Number of Trips) Quantity Demanded (Gallons) Elastic Demand: European Vacations Inelastic Demand: Gasoline

6. Terms Total Revenues Total Costs Definition Key Terms Slide 12-5 The total amount of money received from the sale of all units of a product. The total amount of money spent in the sale of all units of a product. Profits The positive difference between total revenues and total costs. Marginal AnalysisThe technique for finding the greatest profits by measuring the economic effect of producing and selling each additional unit of a product. Marginal RevenuesThe change in total revenues that results from selling one additional units of a product Marginal CostsThe net addition to a firm’s total costs that result from the reduction of one additional unit of a product

7. Marginal Analysis Relationships Slide 12-6 Figure 12.4 Dollars Profit Quantity Produced and Sold Dollars Quantity Produced and Sold Total Cost Total Revenue Marginal Cost Marginal Revenue

8. Pricing Based on Cost Slide 12-7 Markup on cost pricing a pricing approach that adds a percentage of the cost price to the producer’s cost in order to arrive at a selling price. Markup on selling price a pricing approach that adds a percentage of the selling price to the producer’s cost in order to arrive at a selling price. Cost-plus pricing a markup pricing approach that adds on a dollar amount to the producer’s cost in order to arrive at a selling price. Rate of return pricinga pricing approach that involves total costs and then adding a desired rate of return to them to determine the selling price. Breakeven analysisa technique for determining the sales volume needed to cover all costs at a specific rate.

9. Breakeven Analysis Slide 12-8 Figure 12.5 Dollars Quantity Produced and Sold Total Cost Breakeven Point Total Revenue Loss Profit Breakeven point - the level of sales at which total revenues = total costs

10. Pricing Based on Competition Slide 12-9 Pricing Below Competitionpricing to gain market share and attract cost-conscious buyers. Especially useful to companies with low cost positions. Matching Competitionpricing 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 Pricingpricing in which the buyer asks potential sellers to submit sealed bids containing the seller’s pricing and availabilities.

11. Pricing Based on Customer Value Slide 12-10 Reference Pricethe price that buyers use to compare the offered price of a product or service. Demand-backward Pricinga 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 Pricinga pricing approach that involves setting prices so that the exchange value is higher than the value of competing exchanges.

12. Advantage Easy to use Intuitively appealing Used when you have many different products Limitations Comparison of the various pricing approaches Slide 12-11 Do not take into consideration the effects of price on consumer demand Does not take into account competitor’s prices Cost-based Pricing Competition-based pricing Value-based pricing Intuitively appealing Try to offer customers greater value Since costs are not considered, at what price can the firm generate profits Does not take into account what customers value most Ideal if a match can be found between what customers value most and it does well Offer customers greater value Does not take both costs and competitors into account

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

14. Illegal Pricing Practices Slide 12-13 Table 12.3 Definition Price Fixing Deceptive Pricing Price Discrimination Predatory Pricing Dumping Bait and switch Pricing Practices An illegal agreements among competitors to set the price of a product An illegal pricing tactic that involves misleading customers about the relative goodness of an asking price The illegal practice of charging different prices to buyers that do not reflect cost differences to the seller An illegal pricing approach that involves setting very low prices in order to hurt competitors. The illegal practice of pricing products below its costs or below the going rate in a market. An illegal pricing tactic by which customers are attracted to a store by an advertised low-priced product that is then reported to be out-of-stock in order to sell a more expensive product