1. PRICING CONCEPTS FOR ESTABLISHING VALUE14
PRICING CONCEPTS FOR ESTABLISHING VALUE

2. Pricing Concepts for Establishing Value
List the four pricing orientations.
Explain the relationship between price and quantity sold.
Explain price elasticity.
Describe how to calculate a product’s break-even point.
Indicate the four types of price competitive levels.
LO1
LO2
LO3
LO4
LO5

3. The 5 C’s of Pricing

4. 1st C: Company Objectives
Examples of Pricing Strategy Implications
Profit-oriented
Institute a companywide policy that all products must provide for at least an 18 percent profit margin to reach a particular profit goal for the firm.
Sales-oriented
Set prices very low to generate new sales and take sales away from competitors, even if profits suffer.
Competitor-oriented
To discourage more competitors from entering the market, set prices very low.
Customer-oriented
Target a market segment of consumers who highly value a particular product benefit and set prices relatively high (referred to as premium pricing).

5. CHECK YOURSELF What are the five Cs of pricing?
Identify the four types of company objectives.

6. 2nd C: Customers

7. Demand Curves Not all are downward sloping
Prestigious products or services have upward sloping curves

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

9. Factors Influencing Price Elasticity of Demand
Income
effect
Substitution
Cross-
price
elasticity
Walmart Commercial

10. CHECK YOURSELF
What is the difference between elastic versus inelastic demand?
What are the factors influencing price elasticity

11. 3rd C: Costs Variable Costs Fixed Costs Total Cost
Vary with production volume
Fixed Costs
Unaffected by production volume
Total Cost
Sum of variable and fixed costs
Michael Rosenfeld/Stone/Getty Images

12. Break Even Analysis and Decision Making

13. Break Even Analysis

14. CHECK YOURSELF
What is the difference between fixed costs and variable costs?
How does one calculate the break-even point in units?

15. 4th C: Competition
Subway Commercial

16. CHECK YOURSELF
What are the four different types of competitive environments?

17. 5th C: Channel Members
Manufacturers, wholesalers and retailers can have different perspectives on pricing strategies
Manufactures must protect against gray market transactions

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

19. Glossary
Cross-price elasticity is the percentage change in the quantity of Product A demanded compared with the percentage change in price in Product B.

20. Glossary
Fixed costs are those costs that remain essentially at the same level, regardless of any changes in the volume of production.

21. Glossary
Income effect is the change in the quantity of a product demanded by consumers due to a change in their income.

22. Glossary
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.

23. Glossary
Price is the overall sacrifice a consumer is willing to make to acquire a specific product or service.

24. Glossary
The substitution effect refers to consumers’ ability to substitute other products for the focal brand.

25. Glossary
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.

26. Glossary
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.

27. Glossary
The total cost is the sum of the variable and fixed costs.

28. Glossary
Variable costs are the costs that vary with production value.

29. Glossary
A cumulative quantity discount uses the amount purchased over a specified time period and usually involves several transactions.

30. Glossary
Horizontal price fixing occurs when competitors that produce and sell competing products collude, or work together, to control prices, effectively taking price out of the decision process for consumers.

31. Glossary
Price skimming is a strategy that occurs in many markets, and particularly for new and innovative products or services, and involves consumers being willing to pay a higher price to obtain the new product or service.

32. Glossary
A reference price is the price against which buyers compare the actual selling price of the product and that facilitates their evaluation process.

33. Glossary
With a uniform delivered pricing tactic, the shipper charges one rate, no matter where the buyer is located.

34. Glossary
Vertical price fixing occurs when parties at different levels of the same marketing channel collude to control the prices passed on to consumers.