Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

LEARNING OBJECTIVES (LO) AFTER READING CHAPTER 12, YOU SHOULD BE ABLE TO: LO1 Describe the nature and importance of pricing and the approaches used to select an approximate price level. Explain what a demand curve is and the role of revenues in pricing decisions. LO3 LO2 Explain the role of costs in pricing decisions and describe how various combinations of price, fixed cost, and unit variable cost affect a firm’s breakeven point. 12-2

Recognize the objectives a firm has in setting prices and the constraints that restrict the range of prices a firm can charge. Describe the steps taken in setting a final price. LO4 LO5 LEARNING OBJECTIVES (LO) AFTER READING CHAPTER 12, YOU SHOULD BE ABLE TO: 12-3

VIZIO, INC.—WHERE VISION MEETS VALUE ™ IN HDTV 12-4

NATURE AND IMPORTANCE OF PRICE WHAT IS A PRICE?: THE PRICE EQUATION LO1  Price Price  Barter  Price Equation 12-5

FIGURE 12-1 FIGURE 12-1 The “price” a buyer pays can take different names depending on what is purchased 12-6

NATURE AND IMPORTANCE OF PRICE PRICE: AS AN INDICATOR OF VALUE; IN THE MKT MIX LO1  Value Value =$$  Profit Equation Profit Equation 12-7

FIGURE 12-2 FIGURE 12-2 Four approaches for selecting an approximate price level 12-8

GENERAL PRICING APPROACHES DEMAND-ORIENTED PRICING APPROACHES LO1  Skimming Pricing  Penetration Pricing  Prestige Pricing  Odd-Even Pricing $ vs. $

MARKETING MATTERS Energizer’s Lesson in Price Perception— Value Lies in the Eye of the Beholder LO

GENERAL PRICING APPROACHES DEMAND-ORIENTED PRICING APPROACHES LO1  Bundle Pricing  Yield Management Pricing  Target Pricing 12-11

GENERAL PRICING APPROACHES COST-ORIENTED PRICING APPROACHES LO1  Standard Markup Pricing  Cost-Plus Pricing Cost-Plus Pricing 12-12

FIGURE 12-A FIGURE 12-A Markups for a manufacturer, wholesaler, and retailer on a home appliance sold to consumers for $

 Target Profit Pricing  Target Return-on-Sales Pricing  Target Return-on-Investment (ROI) Pricing GENERAL PRICING APPROACHES PROFIT-ORIENTED PRICING APPROACHES LO

GENERAL PRICING APPROACHES COMPETITION-ORIENTED PRICING APPROACHES LO1  Above-, At- or Below-Market Pricing  Loss-Leader Pricing  Customary Pricing 12-15

USING MARKETING DASHBOARDS Are Cracker Jack Prices Above, At, or Below the Market? Price Premium (%) LO

ESTIMATING DEMAND AND REVENUE FUNDAMENTALS OF ESTIMATING DEMAND LO2  Demand Curve Demand Curve Consumer Tastes Price and Availability of Similar Products Consumer Income Demand Factors 12-17

FIGURE 12-3 FIGURE 12-3 Demand curves for Newsweek showing the effect on annual sales (quantity demanded per year) by a change in price caused by (A) a movement along and (B) a shift of the demand curve 12-18

FIGURE 12-3A FIGURE 12-3A Demand curve for Newsweek showing the effect on annual sales by a change in price caused by a movement along the demand curve 12-19

FIGURE 12-3B FIGURE 12-3B Demand curve for Newsweek showing the effect on annual sales by a change in price caused by a shift of the demand curve 12-20

 Price Elasticity of Demand Price Elasticity of Demand Elastic Demand Inelastic Demand ESTIMATE DEMAND AND REVENUE FUNDAMENTALS OF ESTIMATING DEMAND LO

Necessities Large Cash Outlays Product Substitutes ESTIMATE DEMAND AND REVENUE FUNDAMENTALS OF ESTIMATING DEMAND LO2  Price Elasticity of Demand Price Elasticity of Demand 12-22

FIGURE 12-4 FIGURE 12-4 Fundamental revenue concepts  Total Revenue Total Revenue 12-23

FIGURE 12-5 FIGURE 12-5 Fundamental cost concepts  Total Cost (TC) Total Cost (TC) 12-24

DETERMINING COST, VOLUME, AND PROFIT RELATIONSHIPS BREAK-EVEN ANALYSIS AND BEP LO3  Break-Even Analysis Break-Even Analysis  Break-Even Point (BEP) 12-25

FIGURE 12-6 FIGURE 12-6 Calculating a break-even point for the picture frame store shows its profit starts at 400 framed pictures per year 12-26

STEP 3: DETERMINE COST, VOLUME, AND PROFIT RELATIONSHIPS BREAK-EVEN ANALYSIS LO6  Break-Even Chart  Applications of Break-Even Analysis 12-27

FIGURE 12-7 FIGURE 12-7 Break-even analysis chart for a picture frame store shows the break-even point at 400 pictures 12-28

PRICING OBJECTIVES AND CONSTRAINTS IDENTIFYING PRICING OBJECTIVES LO4  Pricing Objectives Pricing Objectives Profit  Managing for Current Profit  Managing for Long-Run Profits  Target Return (ROI) 12-29

FIGURE 12-8 FIGURE 12-8 Where each dollar of your movie ticket goes 12-30

Sales ($) Social Responsibility Market Share ($ or #) Unit Volume (#) Survival PRICING OBJECTIVES AND CONSTRAINTS IDENTIFYING PRICING OBJECTIVES LO4  Pricing Objectives Pricing Objectives 12-31

 Pricing Constraints Pricing Constraints Demand for the Product Class (Cars), Product (Sports Cars), and Brand (Tesla Roadster) Newness of the Product: Stage in the Product Life Cycle PRICING OBJECTIVES AND CONSTRAINTS IDENTIFYING PRICING CONSTRAINTS LO

Cost of Producing and Marketing a Product  Pricing Constraints Pricing Constraints PRICING OBJECTIVES AND CONSTRAINTS IDENTIFYING PRICING CONSTRAINTS LO4 Competitors’ Prices Legal and Ethical Considerations 12-33

FIGURE 12-B FIGURE 12-B Several pricing practices are affected by legal and regulatory restrictions, which benefit both consumers and business 12-34

FIGURE 12-C FIGURE 12-C Five most common deceptive pricing practices 12-35

SETTING A FINAL PRICE LO5  Step 1: Select an Approximate Price Level  Step 2: Set the List or Quoted Price One-Price Policy/ Fixed Pricing Flexible Price Policy 12-36

MAKING RESPONSIBLE DECISIONS Flexible Pricing—Is There Discrimination in Bargaining for a New Car? Buying a New Car: Some Folks Pay More LO

SETTING A FINAL PRICE LO5  Step 3: Make Special Adjustments to the List or Quoted Price Discounts  Quantity  Trade (Functional)  Seasonal  Cash 12-38

SETTING A FINAL PRICE LO5 Allowances  Trade-In  Everyday Low Pricing (EDLP)  Promotional  Step 3: Make Special Adjustments to the List or Quoted Price 12-39

SETTING A FINAL PRICE  Step 3: Make Special Adjustments to the List or Quoted Price LO5 Geographical Adjustments  FOB Origin Pricing  Uniform Delivered Pricing (Multiple Zone) 12-40

WASHBURN GUITARS: USING BREAK-EVEN POINTS TO MAKE PRICING DECISIONS VIDEO CASE

VIDEO CASE 12 WASHBURN GUITARS 1. What factors are most likely to affect the demand for the lines of Washburn guitars (a) bought by a first-time guitar buyer and (b) bought by a sophisticated musician who wants a signature model? 12-42

VIDEO CASE 12 WASHBURN GUITARS 2. For Washburn, what are examples of (a) shifting the demand curve to the right to get a higher price for a guitar line (movement of the demand curve) and (b) pricing decisions involving moving along a demand curve? 12-43

VIDEO CASE 12 WASHBURN GUITARS 3. In Washburn’s factory, what is the break-even point for the new line of guitars if the retail price is (a) $349, (b) $389, and (c) $309? Also, (d) if Washburn achieves the sales target of 2,000 units at the $349 retail price, what will its profit be? 12-44

VIDEO CASE 12 WASHBURN GUITARS 4. Assume that the merger with Parker leads to the cost reductions projected in the case. What will be the (a) new break- even point at a $349 retail price for this line of guitars and (b) new profit if it sells 2,000 units? 12-45

VIDEO CASE 12 WASHBURN GUITARS 5. If for competitive reasons, Washburn eventually has to move all its production back to Asia, (a) which specific fixed and variable costs might be lowered and (b) what additional fixed and variable costs might it expect to incur? 12-46

Price (P) A price (P) is the money or other considerations (including other products and services) exchanged for the ownership or use of a product or service

Value Value is the ratio of perceived benefits to price; or Value = (Perceived benefits ÷ Price)

Profit Equation The profit equation is: Profit = Total revenue − Total cost; or Profit = (Unit price × Quantity sold) − (Fixed cost + Variable cost)

Demand Curve A demand curve is a graph relating the quantity sold and the price, which shows the maximum number of units that will be sold at a given price

Price Elasticity of Demand The price elasticity of demand is the percentage change in quantity demanded relative to a percentage change in price

Total Revenue (TR) Total revenue (TR) is the total money received from the sale of a product; the unit price of a product multiplied by the quantity sold

Total Cost (TC) Total cost (TC) is the total expenses incurred by a firm in producing and marketing a product; total cost is the sum of fixed costs and variable costs

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

Pricing Objectives Pricing objectives are expectations that specify the role of price in an organization’s marketing and strategic plans

Pricing Constraints Pricing constraints are factors that limit the range of prices a firm may set