1. www.mhhe.com/fourps For use only with Perreault and McCarthy texts. © 2006 McGraw-Hill Companies, Inc. McGraw-Hill/Irwin CHAPTER SEVENTEEN CHAPTER SEVENTEEN Price Setting in the Business World

2. 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. © 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin When we finish this lecture you should

3. 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. © 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin When we finish this lecture you should

4. © 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Price Setting Is a Key Strategy Decision Exhibit 17-1 PricesettingPricesetting Markup chain in channels in channels (Chapter 17) Markup chain in channels in channels (Chapter 17) Demand Demand Cost Cost Competition (Chapter 17) (Chapter 17)Competition Pricing objectives (Chapter 16) Pricing objectives (Chapter 16) Price of other Products in line (Chapter 17) Price of other Products in line (Chapter 17) Geographic pricing terms (Chapter 16) Geographic pricing terms (Chapter 16) Legal environment environment (Chapter 16) Legal environment environment (Chapter 16) Priceflexibility Priceflexibility Discounts and allowances allowances (Chapter 16) Discounts and allowances allowances (Chapter 16)

5. © 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Focusing on Cost and Demand

6. © 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Some Firms Just Use Markups Exhibit 17-2 +

7. © 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin High Markups Don’t Always Mean Big Profits +

8. © 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Average Cost Pricing Is Common and Can Be Dangerous Exhibit 17-3 +

9. Average Fixed Cost Average Cost Total Cost Total Variable Cost Total Fixed Cost Total Fixed Cost Total Fixed Cost Total Fixed Cost Average Variable Cost The Marketing Manager Must Consider Various Kinds of Costs © 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin

10. Average Fixed Cost in Action +

11. © 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin An Example Shows Cost Relations Exhibit 17-4 +

12. © 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Break-Even Analysis Can Evaluate Possible Prices Exhibit 17-8

13. © 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Interactive Exercise: Break-Even Analysis

14. © 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Marginal Analysis Considers Both Costs and Demand Exhibit 17-9

15. © 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Profit Maximization with Total Revenue and Total Cost Curves Exhibit 17-10

16. © 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Demand-Oriented Approaches for Setting Prices +

17. © 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Price Sensitivity and Pricing

18. Types of Demand-Oriented Pricing Value-in-Use Auctions Sequential Reductions Sequential Reductions Reference Value-in-Use Auctions Reference © 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin More Demand-Oriented Methods Sequential Reductions Sequential Reductions Leader & Bait Leader & Bait

19. Types of Demand-Oriented Pricing © 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin More Demand-Oriented Methods Value-in-Use Auctions Sequential Reductions Sequential Reductions Reference Leader & Bait Leader & Bait Psychological Demand- Backward Demand- Backward Price Lining Odd-Even Prestige Demand- Backward Demand- Backward Price Lining Odd-Even Psychological

20. Full-Line Pricing Firm- Oriented Firm- Oriented Firm- Oriented Firm- Oriented Costs Are Complicated Costs Are Complicated Costs Are Complicated Costs Are Complicated Market- Oriented Market- Oriented Market- Oriented Market- Oriented © 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Pricing a Full Line Complementary Product Pricing Complementary Product Pricing

21. © 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Other Price-Level Policies

22. Consider Demand Ethical Issues New Prices for Every Job © 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Bid Pricing and Negotiated Pricing Depend Heavily on Costs Negotiated Prices

23. Markup Markup (percent) Markup chain Stockturn rate Average-cost pricing Total fixed cost Total variable cost Total cost Average cost (per unit) Average fixed cost (per unit) © 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Key Terms Average variable cost (per unit) Break-even analysis Break-even point (BEP) Fixed-cost (FC) contribution per unit Marginal analysis Value-in-use pricing Reference price Leader pricing Bait pricing

24. Psychological pricing Odd-even pricing Demand-backward pricing Prestige pricing Full-line pricing Complementary product pricing Product-bundle pricing Bid pricing Negotiated price © 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Key Terms