1. CHAPTER PRICING CONCEPTS FOR ESTABLISHING VALUE 13 McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

2. 13-2 LEARNING OBJECTIVES Pricing Concepts for Establishing Value LO1 List the four pricing orientations. LO2 Explain the relationship between price and quantity sold. LO3Explain price elasticity. LO4 Describe how to calculate a product’s break-even point. LO5Indicate the four types of price competitive levels.

3. 13-3 Price and Value ©Uden Graham/Redlink/Corbis

4. 13-4 Price Benefits Sacrifice

5. 13-5 Bottled vs. Tap Water

6. 13-6 Price is a Signal Prices can be both too high and too low Price set too low may signal poor quality Price set too high might signal low value http://www.PriceGrabber.com http://www.PriceGrabber.com Website ©Brand X Pictures/PunchStock

7. 13-7 The Role of Price in the Marketing Mix Price is the only marketing mix element that generates revenue Price is usually ranked as one of the most important factors in purchase decisions Chad Baker/Ryan McVay/Getty Images

8. 13-8 The 5 C’s of Pricing

9. 13-9 1 st C: Company Objectives

10. 13-10 Profit Orientation Profit Orientation Target return pricing Target profit pricing Maximizing profits

11. 13-11 Sales Orientation Focus on increasing sales More concerned with overall market share Does not always imply setting low prices

12. 13-12 Competitor Orientation Competitive parity Status quo pricing Value is not part of this pricing strategy Roz Woodward/Getty Images

13. 13-13 = Focus on customer expectations by matching prices to customer expectations http://www.automotive.co mhttp://www.automotive.co m Website Customer Orientation C Borland/PhotoLink/Getty ImagesDon Farrall/Getty Images

14. 13-14 What are they trying to accomplish with this ad?

15. 13-15 2nd C: Customers

16. 13-16 Demand Curves and Pricing Knowing demand curve enables to see relationship between price and demand Photo by Simon Frederick/Getty Images

17. 13-17 Demand Curves Not all are downward sloping Prestigious products or services have upward sloping curves

18. 13-18 Price Elasticity of Demand Elastic (price sensitive) Inelastic (price insensitive) Consumers are less sensitive to price increases for necessities ©PhotoLink/Getty Images

19. 13-19 Price Elasticity of Demand ©Dennis MacDonald/PhotoEdit, Inc.©Bill Aron/PhotoEdit, Inc.

20. 13-20 Factors Influencing Price Elasticity of Demand Wal-Mart Commercial Income effect Substitution effect Cross- price elasticity

21. 13-21 Substitution Effect Meet Pete, college student on a budget: Old Spice Sport Deodorant user At the store he notices that Old Spice is more expensive Pete decides to give another brand a try and save money BananaStock/JupiterImages

22. 13-22 Cross-Price Elasticity Meet Kendra, self- supporting college student: Buys a new printer on sale for a great price Learns it requires special ink cartridges that cost more than the printer Getty Images/Digital Vision

23. 13-23 3rd C: Costs Variable Costs – Vary with production volume Fixed Costs – Unaffected by production volume Total Cost – Sum of variable and fixed costs Michael Rosenfeld/Stone/Getty Images

24. 13-24 Break Even Analysis and Decision Making

25. 13-25 Break Even Analysis

26. 13-26 4th C: Competition Subway Commercial

27. 13-27 Wal-Mart vs. Target

28. 13-28 5th C: Channel Members Manufacturers, wholesalers and retailers can have different perspectives on pricing strategies Manufactures must protect against gray market transactions

29. 13-29 Check Yourself 1. What are the five Cs of pricing? 2. Identify the four types of company objectives. 3. What is the difference between elastic versus inelastic demand? 4. How does one calculate the break- even point in units?

30. 13-30 Macro Influences on Pricing The Internet Increased price sensitivity Growth of online auctions Ryan McVay/Getty Images

31. 13-31 Economic Factors Local economic conditions Increasing disposable income Cross- shopping Increasing status consciousness Increasing globalization

32. 13-32 1. How have the Internet and economic factors affected the way people react to prices? Check Yourself

33. 13-33 Return to slide Break-even analysis enables managers to examine the relationships among cost, price, revenue, and profit over different levels of production and sales. Glossary

34. 13-34 Return to slide Cross-price elasticity is the percentage change in the quantity of Product A demanded compared with the percentage change in price in Product B. Glossary

35. 13-35 Return to slide Fixed costs are those costs that remain essentially at the same level, regardless of any changes in the volume of production. Glossary

36. 13-36 Return to slide Income effect is the change in the quantity of a product demanded by consumers due to a change in their income. Glossary

37. 13-37 Return to slide The maximizing profits strategy assumes that if a firm can accurately specify a mathematical model that captures all the factors required to explain and predict sales and profits, it should be able to identify the price at which its profits are maximized. Glossary

38. 13-38 Return to slide Price is the overall sacrifice a consumer is willing to make to acquire a specific product or service. Glossary

39. 13-39 Return to slide The substitution effect refers to consumers’ ability to substitute other products for the focal brand. Glossary

40. 13-40 Return to slide Target profit pricing is implemented by firms to meet a targeted profit objective. The firms use price to stimulate a certain level of sales at a certain profit per unit. Glossary

41. 13-41 Return to slide Target return pricing occurs when firms employ pricing strategies designed to produce a specific return on their investment, usually expressed as a percentage of sales. Glossary

42. 13-42 Return to slide The total cost is the sum of the variable and fixed costs. Glossary

43. 13-43 Return to slide Variable costs are the costs that vary with production value. Glossary