This document discusses the key concepts involved in setting prices for products and services. It covers the nature and importance of pricing, approaches to estimating demand and revenue, determining costs and profitability, and identifying pricing objectives and constraints. The learning objectives are to describe pricing approaches, explain demand curves and revenue, understand how costs affect breakeven points, and recognize objectives and constraints in price setting. Various pricing strategies, costs, profits, and external factors that influence pricing are analyzed.

1. © 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner.
This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

2. © 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner.
This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
LEARNING OBJECTIVES (LO)
AFTER READING CHAPTER 11, 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.
11-2

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LEARNING OBJECTIVES (LO)
AFTER READING CHAPTER 11, YOU SHOULD BE ABLE TO:
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
11-3

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VIZIO, INC.—DELIVERING BEAUTIFULLY
SIMPLE PRODUCTS AT A GREAT VALUE
11-4

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NATURE AND IMPORTANCE OF PRICE
WHAT IS A PRICE?: THE PRICE EQUATION
LO1
 Price
 Barter
 Price Equation
Final Price = List Price – (Incentives + Allowances) + Extra Fees
Bugatti
Veyron
Video
11-5

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FIGURE 11-1 The “price” a buyer pays can
take different names depending on what is
purchased
11-6

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NATURE AND IMPORTANCE OF PRICE
PRICE AS AN INDICATOR OF VALUE
LO1
 Value
Value =
Perceived Benefits
Price
 Profit Equation
11-7

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FIGURE 11-2 Four approaches for selecting
an approximate price level
11-8

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GENERAL PRICING APPROACHES
DEMAND-ORIENTED PRICING APPROACHES
LO1
 Skimming
Pricing
 Penetration
Pricing
 Prestige
Pricing
 Odd-Even
Pricing
$500.00
vs.
$499.99
11-9
Rolex Ad

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MARKETING MATTERS
Energizer’s Lesson in Price Perception—
Value Lies in the Eye of the Beholder
LO1
11-10
Energizer Ad

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

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GENERAL PRICING APPROACHES
COST-ORIENTED PRICING APPROACHES
LO1
 Standard Markup
Pricing
• Cost
• Selling Price
11-12

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FIGURE 11-A Markups for a manufacturer,
wholesaler, and retailer on a home appliance
sold to consumers for $100
11-13

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GENERAL PRICING APPROACHES
COST-ORIENTED PRICING APPROACHES
LO1
 Cost-Plus Pricing
• Percentage of Cost
• Fixed Fee
11-14

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 Target Profit Pricing
 Target Return-on-Sales Pricing
 Target Return-on-Investment
(ROI) Pricing
GENERAL PRICING APPROACHES
PROFIT-ORIENTED PRICING APPROACHES
LO1
11-15

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GENERAL PRICING APPROACHES
COMPETITION-ORIENTED PRICING APPROACHES
LO1
 Above-, At- or Below-Market Pricing
 Loss-Leader Pricing
 Customary Pricing
11-16

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USING MARKETING DASHBOARDS
Are Red Bull Prices
Above, At, or Below the Market?
Price Premium (%)
LO1
Price Premium (%) =
Dollar Sales ($) Market Share for a Brand
Unit Volume (#) Market Share for a Brand
– 1
11-17

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ESTIMATING DEMAND AND REVENUE
FUNDAMENTALS OF ESTIMATING DEMAND
LO2
 Demand Curve
• Consumer Tastes
• Price and Availability
of Similar Products
• Consumer Income
11-18

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FIGURE 11-3 Demand curves for Red Baron
frozen cheese pizza showing the effect on
annual sales by a change in price caused by
(A) a movement along the demand curve and
(B) a shift of the demand curve

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FIGURE 11-3A Demand curves for Red Baron
frozen cheese pizza showing the effect on
annual sales by a change in price caused by a
movement along the demand curve

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FIGURE 11-3B Demand curves for Red Baron
frozen cheese pizza showing the effect on
annual sales by a change in price caused by a
shift of the demand curve

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 Price Elasticity of Demand
Price Elasticity of Demand (E) =
Percentage Change in Quantity Demanded
Percentage Change in Price
• Elastic Demand • Inelastic Demand
ESTIMATE DEMAND AND REVENUE
FUNDAMENTALS OF ESTIMATING DEMAND
LO2
• Necessities• Product Substitutes
• Large Cash Outlays
11-22

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FIGURE 11-B Fundamental revenue concepts
 Total Revenue
11-23

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FIGURE 11-4 Fundamental cost concepts
 Total Cost (TC)
11-24

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DETERMINING COST, VOLUME,
AND PROFIT RELATIONSHIPS
BREAK-EVEN ANALYSIS AND BEP
LO3
 Break-Even Analysis
 Break-Even Point (BEP)
11-25

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FIGURE 11-5 Calculating a break-even point
for the picture frame store shows its profit
starts at 400 framed pictures per year
11-26

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DETERMINING COST, VOLUME,
AND PROFIT RELATIONSHIPS
BREAK-EVEN ANALYSIS
LO3
 Break-Even Chart
 Applications of
Break-Even Analysis
11-27

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FIGURE 11-6 Break-even analysis chart for
a picture frame store shows the break-even
point at 400 pictures
11-28

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PRICING OBJECTIVES AND CONSTRAINTS
IDENTIFYING PRICING OBJECTIVES
LO4
 Pricing Objectives
• Profit
 Managing for Current Profit
 Managing for Long-Run Profits
 Target Return (ROI)
11-29

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• Sales ($)
• Social
Responsibility
• Market Share ($ or #)
• Unit Volume (#)
• Survival
PRICING OBJECTIVES AND CONSTRAINTS
IDENTIFYING PRICING OBJECTIVES
LO4
 Pricing Objectives
11-30

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• Demand for the
Product Class (Cars),
Product (Sports Cars),
and Brand (Bugatti Veyron)
 Pricing Constraints
PRICING OBJECTIVES AND CONSTRAINTS
IDENTIFYING PRICING CONSTRAINTS
LO4
• Newness of the
Product: Stage in the
Product Life Cycle
11-31

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• Cost of Producing and
Marketing a Product
PRICING OBJECTIVES AND CONSTRAINTS
IDENTIFYING PRICING CONSTRAINTS
LO4
• Competitors’ Prices
 Pricing Constraints
11-32

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PRICING OBJECTIVES AND CONSTRAINTS
IDENTIFYING PRICING CONSTRAINTS
LO4
• Legal and Ethical Considerations
 Price Discrimination
 Price Fixing
 Predatory Pricing
 Deceptive Pricing
 Pricing Constraints
11-33

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FIGURE 11-C Several pricing practices are
affected by legal and regulatory restrictions,
which benefit both consumers and firms
11-34

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FIGURE 11-D Five most common deceptive
pricing practices
11-35

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PRICING OBJECTIVES AND CONSTRAINTS
IDENTIFYING PRICING CONSTRAINTS
LO4
• Cost of Changing Prices
and Time Period They Apply
• Type of Competitive Market
 Pure Competition
 Monopolistic Competition
 Oligopoly
 Pure Monopoly
 Pricing Constraints
11-36

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FIGURE 11-E Pricing, product, and
advertising strategies available to firms in
four types of competitive markets
11-37

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SETTING A FINAL PRICE
SET THE LIST PRICE: CHOOSING A PRICE POLICY
LO5
 One-Price Policy
 Flexible Price Policy
CarMax
Ad
11-38

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MAKING RESPONSIBLE DECISIONS
Flexible Pricing—Is There Discrimination
in Bargaining for a New Car?
Buying a New Car: Some Folks Pay More
LO5
11-39

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SETTING A FINAL PRICE
ADJUST THE LIST PRICE: DISCOUNTS
LO5
 Quantity
 Trade (Functional)
 Seasonal
 Cash
11-40

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FIGURE 11-F The structure of trade
discounts affects the manufacturer’s selling
price and the margins made by resellers in
the marketing channel
11-41

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SETTING A FINAL PRICE
ADJUST THE LIST PRICE: ALLOWANCES
LO5
 Trade-In
 Every Day Low Pricing (EDLP)
 Promotional
11-42

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CARMEX [B]: SETTING THE PRICE OF
THE NUMBER ONE LIP BALM
VIDEO CASE 11
Carmex (B)
Video Case

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1. Which of the four approaches to
setting a price does Carmex use
for its products? Should one
approach be used exclusively?
VIDEO CASE 11
Carmex [B]

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VIDEO CASE 11
Carmex [B]
2. Why do many Carmex product
prices end in 9? What type of
pricing is this called? What
should happen to demand when
this approach is used?

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VIDEO CASE 11
Carmex [B]
3. Should cost be a factor in
Carmex’s prices? What do you
think is a reasonable markup for
Carmex and for its retailers?

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VIDEO CASE 11
Carmex [B]
4. What is the difference between an
EDLP retailer and a High-Low
retailer? Why does Carmex
charge them different prices?

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VIDEO CASE 11
Carmex [B]
5. Conduct an online search of lip
balm products and compare the
price of a Carmex product with
three similar products from
competitors. How do you think
the competitors are setting their
prices?

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EXTRA VALUE MEAL
BUNDLE PRICING
AT MCDONALD’S
IN-CLASS ACTIVITY 11-2

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52. © 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner.
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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.
11-52

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Value
Value is the ratio of perceived
benefits to price; or
Value = (Perceived benefits
divided by Price).
11-53

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Profit Equation
The profit equation is:
Profit = Total revenue − Total cost; or
Profit = (Unit price × Quantity sold) −
(Fixed cost + Variable cost).
11-54

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Demand Curve
A demand curve is a graph
relating the quantity sold and
price, which shows the maximum
number of units that will be sold
at a given price.
11-55

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Price Elasticity of Demand
The price elasticity of demand
is the percentage change in
quantity demanded relative to a
percentage change in price.
11-56

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Total Revenue (TR)
Total revenue (TR) is the total
money received from the sale
of a product.
11-57

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Total Cost (TC)
Total cost (TC) is the total
expense incurred by a firm in
producing and marketing a
product. Total cost is the sum
of fixed cost and variable cost.
11-58

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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.
11-59

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Pricing Objectives
Pricing objectives specify the
role of price in an organization’s
marketing and strategic plans.
11-60

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Pricing Constraints
Pricing constraints are factors
that limit the range of prices a
firm may set.
11-61