CHAPTER

Day 16

BUS 222

Agenda

• Questions?• Quiz 4 Today (45 min.)

– Chaps 10, 11 & 12 – 15 M/C and 1 extra credit – Open Book, Open Notes 45 mins

• Assignment 5 Due • Assignment posted

– Due April 10 – Marketing Assignment 6.pdf

• Begin Discussion on Pricing Concepts for Establishing Value (30 min.)

CHAPTER

PRICING CONCEPTS FOR ESTABLISHING VALUE

13

McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

LEARNING OBJECTIVES

Pricing Concepts for Establishing Value

LO1 List the four pricing orientations.LO2 Explain the relationship between

price and quantity sold.LO3 Explain price elasticity.LO4 Describe how to calculate a

product’s break-even point.LO5 Indicate the four types of price

competitive levels.

Which is the best Wine?

$40 $70 $22

Price and Value

What’s the most you will pay for a nice hotel?

©Uden Graham/Redlink/Corbis

Price

Bottled vs. Tap Water

Price is a Signal

http://www.PriceGrabber.com

Website

©Brand X Pictures/PunchStock

The Role of Price in the Marketing Mix

Price is the only marketing mix element that generates revenue

Price is the only marketing mix element that generates revenue

Price is usually ranked as one of the most important factors in purchase decisions

Price is usually ranked as one of the most important factors in purchase decisions

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The 5 C’s of Pricing

1st C: Company Objectives

Profit Orientation

Sales Orientation

Competitor Orientation

• Competitive parity• Status quo pricing• Value is not part of this pricing strategy

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Focus on customer expectations by matching prices to customer expectations

Focus on customer expectations by matching prices to customer expectations

Customer Orientation

C Borland/PhotoLink/Getty Images Don Farrall/Getty Images

What are they trying to accomplish with this ad?

http://www.zipcar.com/

2nd C: Customers

Demand Curves and Pricing

Knowing demand curve enables to see

relationship between price and demand

Photo by Simon Frederick/Getty Images

Can you name the price?

$89.95

$199.95

$399.95

$799.95

$1795.95

$3795.95

http://woodlandcreekfurniture.com/product/bungalow-dresser-with-five-drawers-or-six-drawers/

Demand Curves

Price Elasticity of Demand

©PhotoLink/Getty Images

Price Elasticity of Demand

©Dennis MacDonald/PhotoEdit, Inc. ©Bill Aron/PhotoEdit, Inc.

• When price of Porterhouse Steak is $10/lb I may buy one 32 oz steak every month

• When the price drops to $8/lb I will buy four 32 oz steaks every month

• % change of demand is (8-2)/8 = 75%• % change in price is ($8 – $10)/$8 = -25%• Price elasticity of demand is 75%/-25% =

-3

Price Elasticity of Demand Example

Factors Influencing Price Elasticity of Demand

Wal-Mart Commercial

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

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

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

Break Even Analysis and Decision Making

BE Chart.xlsx

Break Even AnalysisTotal Variable Cost = Variable Cost per unit X Quantity

Total Cost = Fixed Cost + Total Variable CostTotal Revenue = Price X Quantity

Fixed CostsContribution per unit

Break-Even Point (units) =

Example: Fixed Cost = 100, Variable Cost = 2, Unit Price = 7

Contribution per unit = Unit Price – Variable Cost = 7 – 2 = 5

Break even Point = 100 / 5 = 20

Total revenue = 20 * 7 = 140 BE Chart.xlsx

4th C: Competition

Subway Commercial

Wal-Mart vs. Target

5th C: Channel Members

• Manufacturers, wholesalers and retailers can have different perspectives on pricing strategies

• Manufactures must protect against gray market transactions

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?

Macro Influences on Pricing

• The Internet• Increased price

sensitivity• Growth of online

auctions

Ryan McVay/Getty Images

Economic Factors

1. How have the Internet and economic factors affected the way people react to prices?

Check Yourself