1. 14-1
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CHAPTER
Pricing Concepts for
Establishing Value
14
Copyright © 2014 by the McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

2. 14-2
L E A R N I N G O B J E C T I V E S
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This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
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.
Pricing Concepts for Establishing Value
LO1
LO2
LO3
LO4
LO5

3. 14-3
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This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Price
Benefits
Sacrifice

4. 14-4
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This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
The Role of Price in the Marketing Mix
Price is the only marketing mix element that
generates revenue
Price is usually ranked as one of the most
important factors in purchase decisions
ChadBaker/RyanMcVay/GettyImages

5. 14-5
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This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
The 5 C’s of Pricing

6. 14-6
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1st C: Company Objectives

7. 14-7
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2nd C: Customers

8. 14-8
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Demand Curves
Not all are downward
sloping
Prestigious products
or services have
upward sloping
curves

9. 14-9
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This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Price Elasticity of Demand
Elastic
(price sensitive)
Inelastic
(price insensitive)
Consumers are less
sensitive to price
increases for necessities
©PhotoLink/Getty Images

10. 14-10
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This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Factors Influencing
Price Elasticity of Demand
Income
effect
Substitution
effect
Cross-
price
elasticity

11. 14-11
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This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
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

12. 14-12
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This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Break Even Analysis and Decision Making

13. 14-13
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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
Contribution per unit
Break-Even Point (units) =

14. 14-14
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This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
4th C: Competition
Less Price Competition More Price Competition
Fewer
Firms
Many
Firms
Oligopoly
A handful of firms control the market
Ingram Publishing/SuperStock.
Monopoly
One firm controls the market
©Brand X Pictures/PunchStock.
Monopolistic Comp.
Many firms selling differentiated
products at different prices
Steve Cole/Getty Images.
Pure Competition
Many firms selling commodities for the
same prices
©Corbis – All Rights Reserved.

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

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This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
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?

17. 14-17
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Economic Factors
Local
economic
conditions
Increasing
disposable
income
Cross-
shopping
Increasing
status
consciousness
Increasing
globalization

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This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
1. How have the Internet and economic factors
affected the way people react to prices?
CHECK YOURSELF

19. 14-19
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This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Break-even analysis enables managers to
examine the relationships among cost, price,
revenue, and profit over different levels of
production and sales.
Glossary

20. 14-20
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Cross-price elasticity is the percentage change
in the quantity of Product A demanded
compared with the percentage change in price
in Product B.
Glossary

21. 14-21
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This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Fixed costs are those costs that remain
essentially at the same level, regardless of any
changes in the volume of production.
Glossary

22. 14-22
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Income effect is the change in the quantity of a
product demanded by consumers due to a
change in their income.
Glossary

23. 14-23
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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.
Glossary

24. 14-24
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Price is the overall sacrifice a consumer is willing
to make to acquire a specific product or service.
Glossary

25. 14-25
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The substitution effect refers to consumers’
ability to substitute other products for the focal
brand.
Glossary

26. 14-26
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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.
Glossary

27. 14-27
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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.
Glossary

28. 14-28
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The total cost is the sum of the variable and
fixed costs.
Glossary

29. 14-29
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Variable costs are the costs that vary with
production value.
Glossary