C

o
p
y
r
i
g
h
t

2
0
0
5

P
e
a
r
s
o
n

E
d
u
c
a
t
i
o
n

I
n
c
.

Pricing
Chapter 12
PowerPoint slides
Express version


I nstructor name
Course name
School name
Date
Principles of Marketing, Sixth Canadian Edition
C
o
p
y
r
i
g
h
t

2
0
0
5

P
e
a
r
s
o
n

E
d
u
c
a
t
i
o
n

I
n
c
.

Principles of Marketing, Sixth Canadian Edition
12.2
Learning Objectives
After studying this chapter, you should be able to:
Identify and define the internal factors affecting a firms pricing
decisions
Identify and define the external factors affecting pricing
decisions, including the impact of consumer perceptions of
price and value
Contrast the two general approaches to
setting prices
Discuss how companies adjust their
prices to take into account different
types of customers and situations
Discuss the key issues related to
initiating and responding to price
changes
C
o
p
y
r
i
g
h
t

2
0
0
5

P
e
a
r
s
o
n

E
d
u
c
a
t
i
o
n

I
n
c
.

Principles of Marketing, Sixth Canadian Edition
12.3
What is a Price?
Price: the amount of money charged for a product or service, or the
sum of values exchanged for the benefits of having or using the
product or service
Fixed pricing
Dynamic pricing
Only marketing mix
element that
produces revenue
Pricing best practices:
Develop a 1% pricing
mindset
Consistently deliver more
value
Price strategically, not
opportunistically
Know your competition
Make pricing a process
C
o
p
y
r
i
g
h
t

2
0
0
5

P
e
a
r
s
o
n

E
d
u
c
a
t
i
o
n

I
n
c
.

Principles of Marketing, Sixth Canadian Edition
12.4
Factors Affecting Pricing Decisions
Marketing objectives:
Survival
Current profit maximization
Market share leadership
Product quality leadership
Figure 12.1
Marketing mix strategy:
Price should be consistent
with other mix elements
Target costing
Non-price positions
C
o
p
y
r
i
g
h
t

2
0
0
5

P
e
a
r
s
o
n

E
d
u
c
a
t
i
o
n

I
n
c
.

Principles of Marketing, Sixth Canadian Edition
12.5
Costs
Fixed costs: costs that do not vary with production
Variable costs: costs that vary directly with the level of production
Total costs: sum of fixed and variable costs

Figure 12.2
C
o
p
y
r
i
g
h
t

2
0
0
5

P
e
a
r
s
o
n

E
d
u
c
a
t
i
o
n

I
n
c
.

Principles of Marketing, Sixth Canadian Edition
12.6
Cost Per Unit/Accumulated Production
Experience (learning) curve: the drop in the average per-unit
production cost that comes with accumulated production experience
Figure 12.3
C
o
p
y
r
i
g
h
t

2
0
0
5

P
e
a
r
s
o
n

E
d
u
c
a
t
i
o
n

I
n
c
.

Principles of Marketing, Sixth Canadian Edition
12.7
New-Product Pricing
Market skimming pricing: setting a high price to skim
maximum revenues layer by layer from the segments willing to
pay the high price
Market
penetration
pricing: setting a
low price for a new
product to attract a
large number of
buyers and achieve a
large market share
Figure 7.7
Skimming price drops in steps
C
o
p
y
r
i
g
h
t

2
0
0
5

P
e
a
r
s
o
n

E
d
u
c
a
t
i
o
n

I
n
c
.

Principles of Marketing, Sixth Canadian Edition
12.8
External Factors Affecting Pricing Decisions
Types of markets:
Pure competition
Monopolistic competition
Oligopolistic competition
Pure monopoly
Figure 12.1
Competition:
Consumers will compare
High margins attract
competition
Benchmarking costs
C
o
p
y
r
i
g
h
t

2
0
0
5

P
e
a
r
s
o
n

E
d
u
c
a
t
i
o
n

I
n
c
.

Principles of Marketing, Sixth Canadian Edition
12.9
The Price-Demand Relationship
Demand curve: a curve that shows the number of units the market
will buy at different possible prices in a given time period
Calculated as the % change in quantity demanded divided by the %
change in price; values >1 and <-1 are elastic
Elastic products:
lower price to
maximize revenue
Inelastic
products: raise
price to maximize
revenue
Prestige goods
behave in a
contrary fashion
Figure 12.4
C
o
p
y
r
i
g
h
t

2
0
0
5

P
e
a
r
s
o
n

E
d
u
c
a
t
i
o
n

I
n
c
.

Principles of Marketing, Sixth Canadian Edition
12.10
General Pricing Approaches
Cost-based pricing: adding a standard markup to the cost of the
product; using formula:
Average unit cost equals variable cost plus (fixed cost/unit sales)
Markup price equals Unit cost/(1 minus desired return on sales)
Example: $10 + ($300,000/50,000) = $16
Selling price based on 20%: $16/(1 - .20) = $20
Double-check: $4 profit/selling price = 20% profit margin
Figure 12.5
Note: multiplying
$16 by 1.2 equals a
selling price of
$19.20, and a
profit margin of
only 17%
C
o
p
y
r
i
g
h
t

2
0
0
5

P
e
a
r
s
o
n

E
d
u
c
a
t
i
o
n

I
n
c
.

Principles of Marketing, Sixth Canadian Edition
12.11
Break-even Chart
Break-even (target profit) pricing: setting price to break
even (or make a target profit) on the costs of making and
marketing a product
Break-even equals fixed cost divided by (price minus variable
cost)
Example (a):
B/E = $300,000/($20 - $10)
B/E = 30,000 units
Example (b):
B/E = ($300,000 + $75,000
profit)/($20 - $10)
B/E = 37,500 units

Figure 12.6
C
o
p
y
r
i
g
h
t

2
0
0
5

P
e
a
r
s
o
n

E
d
u
c
a
t
i
o
n

I
n
c
.

Principles of Marketing, Sixth Canadian Edition
12.12
Cost Versus Value Pricing
Value-based pricing: setting price based on buyers perceptions
of value rather than on the sellers cost
Everyday low pricing (EDLP): charging a constant low price
with few discounts or promotional sales; used successfully by Wal-
Mart, suits busy consumers, encourages impulse buying due to trust
Figure 12.7
C
o
p
y
r
i
g
h
t

2
0
0
5

P
e
a
r
s
o
n

E
d
u
c
a
t
i
o
n

I
n
c
.

Principles of Marketing, Sixth Canadian Edition
12.13
Price Adjustment Strategies
Table 12.2
Discount and
Allowance pricing
Segmented
pricing
Psychological
pricing
Promotional
pricing
Geographical
pricing
International
pricing
Reducing prices to reward customer
responses such as paying early
Adjusting prices to allow for differences
in customers, products, or locations
Adjusting prices for
psychological effect
Temporarily reducing prices
to increase short-run sales
Adjusting prices to account for
geographic location of customers
Adjusting prices for
international markets
C
o
p
y
r
i
g
h
t

2
0
0
5

P
e
a
r
s
o
n

E
d
u
c
a
t
i
o
n

I
n
c
.

Principles of Marketing, Sixth Canadian Edition
12.14
Geographical Pricing
FOB-origin pricing: goods are placed free on board a
carrier; the customer pays the freight from the factory to the
destination
Uniform-delivered price:
the company charges the same
price including freight to all
customers, regardless of their
location
Zone pricing: the company
sets up two or more zones, all
customers within a zone pay the
same price, the more distant the
zone, the higher the price
C
o
p
y
r
i
g
h
t

2
0
0
5

P
e
a
r
s
o
n

E
d
u
c
a
t
i
o
n

I
n
c
.

Principles of Marketing, Sixth Canadian Edition
12.15
Responding to Price Changes
Note to user: this figure is from
the U.S. edition of this text
C
o
p
y
r
i
g
h
t

2
0
0
5

P
e
a
r
s
o
n

E
d
u
c
a
t
i
o
n

I
n
c
.

Principles of Marketing, Sixth Canadian Edition
12.16
Public Policy and Pricing
The Competition Act: Sections 34, 36, and 38
Price fixing: cannot collude to restrict pricing competition
Price discrimination: customers must be given proportionally
equal discounts when used
Deceptive pricing: cannot mislead customers as to value received
Figure 12.9
C
o
p
y
r
i
g
h
t

2
0
0
5

P
e
a
r
s
o
n

E
d
u
c
a
t
i
o
n

I
n
c
.

Principles of Marketing, Sixth Canadian Edition
12.17
In Conclusion
The learning objectives for this chapter were:
Identify and define the internal factors affecting a firms pricing
decisions
Identify and define the external factors affecting pricing
decisions, including the impact of consumer perceptions of price
and value
Contrast the two general approaches
to setting prices
Discuss how companies adjust their
prices to take into account different
types of customers and situations
Discuss the key issues related to
initiating and responding to price
changes