Chapter 17: Price Setting in the Business World

1. Chapter 17: 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. 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. 8. Understand the important new terms. Chapter 17 Objectives When you finish this chapter, you should 17-2

3. Pricing objectives Price of other products in the line Price flexibility Discounts and allowances Demand Price setting Cost Legal environment Geographic pricing terms Competition Key Factors That Influence Price Setting Markup chain in channels Exhibit 17-1 17-3

4. 50.00 30.00 Markup = 20.00 = 40% 24.00 Markup = 6.00 = 20% Cost = 30.00 = 60% Markup = 2.40 = 10% Cost = 24.00 = 80% Cost = 21.60 = 90% Producer Wholesaler Retailer Markups Exhibit 17-2 17-4

5. Total Cost Total Fixed Cost Total Variable Cost Average Fixed Cost Average Variable Cost Average Cost Six Types of Costs 17-5

6. $3.00 2.00 Price per unit 1.90 1.65 1.50 1.20 10 20 30 40 50 60 70 Quantity (000) Prices Along the Demand Curve Total revenue = Price x Quantity $30,000 = $3.00 x 10,000 $40,000 = $2.00 x 20,000 $57,000 = $1.90 x 30,000 $66,000 = $1.65 x 40,000 $75,000 = $1.50 x 50,000 $72,000 = $1.20 x 60,000 Exhibit 17-6 17-6

7. Estimated quantity to be sold ? Quantity demanded at selling price Average fixed cost per unit Variable cost per unit Cost-oriented selling price per unit Average total cost per unit Profit per unit Summary of Relationships Affecting Price Exhibit 17-7 17-7

8. Higher Profit Area Total Revenue Curve Total Cost Curve Break-Even Point Total Revenue and Cost Loss Area Total Variable Costs Total Fixed Costs 0 More Units of Production Break-even Analysis Exhibit 17-8 17-8

9. Marginal Analysis 800 Total cost 700 600 500 400 300 Total revenue Best profit for quantity at best price Dollars = $106 = 6 = $79 200 100 0 Quantity 2 4 6 8 -100 -200 -300 -400 Total profit Exhibit 17-10 Note: curves here are approximate (you can’t sell part of a unit!) 17-9

10. Evaluating a Customer’s Price Sensitivity • Are there substitute ways of meeting a need? • Is it easy to compare prices? • Who pays the bill? • How great is the total expenditure? • How significant is the end benefit? • Is there already a sunk investment related to the purchase? 17-10

11. Demand-Oriented Pricing Prestige Value-in-Use Types of Demand-Oriented Pricing Demand Backward Reference Price Lining Leader Odd-Even Bait Psychological 17-11

12. ????? ????? ????? ????? ????? Full-Line Pricing Market- or Firm Oriented? Complementary Pricing? Product-Bundling Pricing? 17-12

13. Bid and Negotiated Pricing Bid pricing means offering a specific price for each possible job. Determining costs is a complicated process. Negotiated pricing involves setting a price as the result of a bargaining process between the buyer and seller. 17-13

14. Key Terms Markup Markup (percent) Markup Chain Stockturn Rate Average-Cost Pricing Total Fixed Cost Total Variable Cost Total Cost Average Cost Average Fixed Cost Average Variable Cost 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 Psychological Pricing Odd-Even Pricing Price Lining Demand-Backward Pricing Prestige Pricing Full-Line Pricing Complementary Product Pricing Product-Bundle Pricing Bid Pricing Negotiated Price 17-14