Basic Marketing, 13th edition

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Chapter 18 Price Setting in the Business
World
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Chapter 18 Objectives
When you finish this chapter, you should

• 1. Understand how most wholesalers and retailers
  set their prices using markups.
• 2. Understand why turnover is so important in
  pricing.
• 3. Understand the advantages and disadvantages of
  average-cost pricing.
• 4. Know how to use break-even analysis to
  evaluate possible prices.

• 5. Understand the advantages of marginal analysis
  and how to use it for price setting.
• 6. Understand the various factors that influence
  customer price sensitivity.
• 7. Know the many ways that price setters use
  demand estimates in their pricing.
• 8. Understand the important new terms.

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Key Factors That Influence Price Setting
Markup chain in channels
Exhibit 18-1
18-3
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Markups
Exhibit 18-2
18-4
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Six Types of Costs
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Prices Along the Demand Curve
Total revenue Price x Quantity 30,000
3.00 x 10,000 40,000 2.00 x 20,000
57,000 1.90 x 30,000 66,000 1.65 x
40,000 75,000 1.50 x 50,000 72,000
1.20 x 60,000
Exhibit 18-6
18-6
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Summary of Relationships Affecting Price
Exhibit 18-7
18-7
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Break-even Analysis
Exhibit 18-8
18-8
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Marginal Analysis
800
Total cost
700
600
500
400
300
Total revenue
Best profit for quantity at best price
Dollars
106 6 79
200
100
0
Quantity
2
4
6
8
-100
-200
-300
-400
Total profit
Exhibit 18-10
Note curves here are approximate (you cant sell
part of a unit!)
18-9
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Evaluating a Customers Price Sensitivity

• Are there substitute ways of meeting a need?
• Is it easy to compare prices?
• Who pays the bill?
• How great is the total expenditure?
• How significant is the end benefit?
• Is there already a sunk investment related to the
  purchase?

18-10
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Demand-Oriented Pricing
18-11
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Full-Line Pricing
Market- or Firm Oriented?
Complementary Pricing?
Product-Bundling Pricing?
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Bid and Negotiated Pricing
Bid pricing means offering a specific price for
each possible job. Determining costs is a
complicated process.
Negotiated pricing involves setting a price as
the result of a bargaining process between the
buyer and seller.
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Key Terms
Break-Even Analysis Break-Even Point
(BEP) Fixed-Cost (FC) Contribution per
Unit Marginal Analysis Marginal Revenue Marginal
Cost Rule for Maximizing Profit Marginal
Profit Price Leader Value in Use
Pricing Reference Price Leader Pricing Bait
Pricing
Markup Markup (percent) Markup Chain Stockturn
Rate Average-Cost Pricing Total Fixed Cost Total
Variable Cost Total Cost Average Cost Average
Fixed Cost Average Variable Cost Experience
Curve Pricing Target Return Pricing Long-Run
Target Return Pricing
Psychological Pricing Odd-Even Pricing Price
Lining Demand-Backward Pricing Prestige
Pricing Full-Line Pricing Complementary Product
Pricing Product-Bundle Pricing Bid
Pricing Negotiated Price
18-14