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Marketing chapter 14a arrival at the final price

McGraw-Hill/Irwin

Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights


LEARNING OBJECTIVES (LO)
AFTER READING CHAPTER 14, YOU SHOULD BE ABLE TO:

LO1

LO2

Describe how to establish the
“approximate price level” using
demand-oriented, cost-oriented,
profit-oriented, and competitionoriented approaches.
Recognize the major factors
considered in deriving a final list or
quoted price from the approximate
price level.
14-2



LEARNING OBJECTIVES (LO)
AFTER READING CHAPTER 14, YOU SHOULD BE ABLE TO:

LO3

LO4

Identify the adjustments made to the
approximate price level on the basis of
discounts, allowances, and geography.
Name the principal laws and
regulations affecting specific pricing
practices.

14-3


FIGURE 14-1 The six steps in setting price.
The first three steps were covered in
Chapter 13 and the last three steps in
Chapter 14.

14-4


FIGURE 14-2 Four approaches for selecting
an approximate price level

14-5


LO1

STEP 4: SELECT AN
APPROXIMATE PRICE LEVEL
DEMAND-ORIENTED PRICING APPROACHES




Skimming
Pricing



Penetration
Pricing



Prestige
Pricing



Price
Lining
14-6


FIGURE 14-3 Demand curves for two
demand-oriented pricing approaches

14-7


LO1

STEP 4: SELECT AN
APPROXIMATE PRICE LEVEL
DEMAND-ORIENTED PRICING APPROACHES



Odd-Even Pricing



Target Pricing



Bundle Pricing

14-8


Concept Check

1. What are the circumstances in pricing a
new product that might support
skimming or penetration pricing?
A: A firm introducing a new product can
use either skimming pricing to set the
highest initial price that customers
desiring the product are willing to pay
or penetration pricing to set a low
initial price to appeal immediately to
the mass market.
Slide 14-12


Concept Check

2. What is odd-even pricing?
A: Odd-even pricing involves setting
prices a few dollars or cents under
an even number. Psychologically,
a $499.99 price feels lower than
$500.00, even though the difference
is 1¢.
Slide 14-13


STEP 4: SELECT AN
APPROPRIATE PRICE LEVEL

• Cost-Oriented Approaches
– Price is set by looking at the production
and marketing costs and then adding
enough to cover direct expenses,
overhead, and profit

Slide 14-14


STEP 4: SELECT AN
APPROPRIATE PRICE LEVEL
• Cost-Oriented Approaches
 Standard Markup Pricing
• Markup on Cost
• Markup on Selling Price

 Cost-Plus Pricing
• Cost-Plus Percentage-of-Cost Pricing

• Cost-Plus Fixed-Fee Pricing
– most common in B2B in service sector
Slide 14-14


STEP 4: SELECT AN
APPROPRIATE PRICE LEVEL
• Cost-Oriented Approaches
 Standard Markup Pricing
• Markup on Cost
• Markup on Selling Price

Slide 14-14


What Is Markup?
WHAT IS MARKUP?
● Markup

is the dollar amount added to the product
cost to determine its selling price
● Markup is often expressed as a percentage

5-14


WHAT IS PERCENT MARKUP?

$1.00 = cost to retailer
$1.00 = dollar markup
$2.00 = selling price

5-15


WHAT IS PERCENT MARKUP?

● It

depends on whether you use

● Selling

Price, or

● Cost

● Dollar

markup is divided by either selling price or
cost to retailer

5-16


WHAT IS PERCENT MARKUP?
$1.00 = cost to retailer
$1.00 = dollar markup
$2.00 = selling price
• Selling price = 50%
• Cost = 100%
• We use selling price in
calculating the percent of markup
5-17


Example of Markup on Selling Price in
Channel of Distribution

5-18


LO1

STEP 4: SELECT AN
APPROXIMATE PRICE LEVEL
PROFIT-ORIENTED PRICING APPROACHES



Target Profit Pricing



Target Returnon-Sales Pricing



Target Return-onInvestment Pricing
14-20


STEP 4: SELECT AN
APPROPRIATE PRICE LEVEL
 Target Profit Pricing – setting an annual target
of a specific dollar volume of profit
Profit = Total revenue – Total Cost
= (P x Q) – [FC + (UVC x Q)]


STEP 4: SELECT AN
APPROPRIATE PRICE LEVEL

 Target Return-On-Sales Pricing – setting a
price to achieve a profit that is a
specified percentage of sales volume


STEP 4: SELECT AN
APPROPRIATE PRICE LEVEL
 Target Return-On-Investment Pricing – setting
a price to achieve an annual target return on
investment
ROI = Net Profit after taxes / Investment


LO1

STEP 4: SELECT AN
APPROXIMATE PRICE LEVEL
COMPETITION-ORIENTED PRICING APPROACHES



Customary Pricing



Above-, At-, or Below-Market Pricing



Loss-Leader Pricing
14-25


STEP 4: SELECT AN
APPROXIMATE PRICE LEVEL
COMPETITION-ORIENTED PRICING APPROACHES

 Customary Pricing – setting a price that is
dictated by tradition, standard channel of
distribution


STEP 4: SELECT AN
APPROXIMATE PRICE LEVEL
COMPETITION-ORIENTED PRICING APPROACHES

 Above-, At-, or Below-Market Pricing – setting
market price based on subjective feel for
competitors’ price or market price as the
benchmark


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