1. © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin

2. Learning Objectives
LEARNING OBJECTIVES
 Why should firms pay more attention to setting prices?
 What is the relationship between price and quantity sold?
 Why is it important to know a product’s break-even
point?
 Who wins in a price war?
 How has the Internet changed the way some people use
price to make purchasing decisions?
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3. Price and Value
What’s the most you
will pay for a pair of
jeans?
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4. Price
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5. Price is a Signal
PriceGrabber.com Website
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6. The Role of Price in the Marketing Mix
Price is usually ranked as one of the most
Price is usually ranked as one of the most
important factors in purchase decisions
important factors in purchase decisions
Price is the only marketing mix element that
Price is the only marketing mix element that
generates revenue
generates revenue
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7. The 5 C’s of Pricing
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8. 1st C: Company Objectives
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9. Profit Orientation
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10. Sales Orientation
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11. Competitor Orientation
 Competitive parity
 Status quo pricing
 Value is not part of this pricing strategy
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12. Customer Orientation
=
Focus on customer expectations by matching
Focus on customer expectations by matching
prices to customer expectations
prices to customer expectations
automotive.com Website
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13. 2nd C: Customers
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14. Demand Curves and Pricing
Knowing demand
curve enables to see
relationship between
price and demand
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15. Demand Curves
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16. Price Elasticity of Demand
 Elastic (price sensitive)
 Inelastic (price
insensitive)
 Consumers are less
sensitive to price
increases for
necessities
© McGraw-Hill Companies, Inc., McGraw-Hill/Irwin 13-16

17. 3rd C: Costs
 Variable Costs
− Vary with production volume
 Fixed Costs
− Unaffected by production
volume
 Total Cost
− Sum of variable and fixed costs
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18. Break Even Analysis and
Decision Making
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19. 4th C: Competition
Subway Commercial
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20. 5th C: Channel Members
 Manufacturers,
wholesalers and
retailers can have
different perspectives
on pricing strategies
 Manufactures must
protect against gray
market transactions
© McGraw-Hill Companies, Inc., McGraw-Hill/Irwin 13-20

21. Macro Influences on Pricing
 The Internet
 Increased price
sensitivity
 Growth of online
auctions
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22. Review Only
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23. Economic Factors
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24. What are they trying to accomplish
with this ad?
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25. Price Elasticity of Demand
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26. Factors Influencing
Price Elasticity of Demand
Wal-Mart Commercial
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27. 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
© McGraw-Hill Companies, Inc., McGraw-Hill/Irwin 13-27

28. 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
© McGraw-Hill Companies, Inc., McGraw-Hill/Irwin 13-28

29. Break Even Analysis
Total Variable Cost = Variable Cost per unit X Quantity
Total Cost = Fixed Cost + Total Variable Cost
Total Revenue = Price X Quantity
Fixed Costs
Break-Even Point (units) =
Contribution per unit
© McGraw-Hill Companies, Inc., McGraw-Hill/Irwin 13-29

30. 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?
© McGraw-Hill Companies, Inc., McGraw-Hill/Irwin 13-30

31. Check Yourself
1. How have the Internet and economic
factors affected the way people react to
prices?
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32. Glossary
Break-even analysis enables managers to examine
the relationships among cost, price, revenue, and
profit over different levels of production and
sales.
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33. 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.
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34. Glossary
Fixed costs are those costs that remain essentially
at the same level, regardless of any changes in the
volume of production.
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35. Glossary
Income effect is the change in the quantity of a
product demanded by consumers due to a change
in their income.
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36. 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.
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37. Glossary
Price is the overall sacrifice a consumer is willing to
make to acquire a specific product or service.
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38. Glossary
The substitution effect refers to consumers’ ability
to substitute other products for the focal brand.
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39. 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.
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40. 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.
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41. Glossary
The total cost is the sum of the variable and fixed
costs.
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42. Glossary
Variable costs are the costs that vary with
production value.
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