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Chapter 11 – Pricing Products and Services
11-21
a. Speak in terms of “revenues generated,” which…
b. Are the monies received by the firm for selling its products.
• Total revenue (TR).
LEARNING REVIEW
11-3. What three key factors are necessary when estimating consumer demand?
11-4. Price elasticity of demand is _________.
IV. DETERMINING COST, VOLUME,
AND PROFIT RELATIONSHIPS [LO 11-3]
• Revenues are the monies received by the firm from selling its products to customers.
A. The Importance of Controlling Costs
• Understanding the role and behavior of costs is critical for marketing decisions.
• [Figure 11-5] Four cost concepts are important in pricing decisions:
a. Total cost (TC).
• Is the total expense incurred by a firm in producing and marketing a
product.
b. Fixed cost (FC).
Chapter 11 – Pricing Products and Services
11-22
c. Variable cost (VC).
• Is the sum of the expenses of the firm that vary directly with the quantity
of a product that is produced and sold.
d. Unit variable cost (UVC).
• Is variable cost expressed on a per unit basis, or…
B. Break-Even Analysis
• Marketing managers often employ an approach that considers cost, volume, and
profit relationships based on the profit equation.
• Break-even analysis is a technique that analyzes the relationship between total
revenue and total cost to determine profitability at various levels of output.
• The break-even point (BEP).
a. Is the quantity at which total revenue and total cost are equal.
1. Calculating a Break-Even Point.
Using the small picture frame store example in the text, a BEP quantity for the
Chapter 11 – Pricing Products and Services
11-23
2. Developing a Break-Even Chart.
a. [Figure 11-6]
• The orange-shaded row shows that the break-even quantity at a price of
$120 per picture is 400 pictures.
b. A break-even chart: [Figure 11-7]
• Is a graphic presentation of the break-even analysis that shows when…
– Total revenue (green line DE) and total cost (blue line AC) intersect…
• If the quantity sold annually increases to 2,000 pictures:
– As shown by the row shaded in green in Figure 11-9.
LEARNING REVIEW
11-5. What is the difference between fixed costs and variable costs?
11-6. What is a break-even point?
Chapter 11 – Pricing Products and Services
11-24
V. PRICING OBJECTIVES AND CONSTRAINTS [LO 11-4]
• A marketing manager must consider the pricing objectives and constraints that will
narrow the range of choices.
A. Identifying Pricing Objectives
• Pricing objectives:
b. Are carried to lower levels in the organization, such as in setting objectives for
marketing managers responsible for an individual brand.
c. May change depending on:
• The financial position of the firm.
• An organization may pursue six broad objectives (see Chapter 2) that tie directly
to the organization’s pricing objectives.
1. Profit.
a. Three different objectives relate to a firm’s profit, which is often measured in
terms of return on investment (ROI) or return on assets (ROA).
b. Managing for long-run profits objective.
c. Maximizing current profit objective, such as for a quarter or year.
d. Target return objective. Occurs when a firm sets a profit goal, such as
20 percent for pretax ROI.
2. Sales.
Chapter 11 – Pricing Products and Services
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a. Another objective may be to increase sales revenue, which in turn will lead to
increases in market share and profit.
3. Market Share.
a. Market share is the ratio of the firm’s sales revenues or unit sales to those of
4. Unit volume.
a. Is the quantity produced or sold.
5. Survival.
a. In some instances, profits, sales, and market share are less important
6. Social Responsibility. A firm may forgo higher profit on sales for a pricing
objective that recognizes its obligations to customers and society in general.
B. Identifying Pricing Constraints
• Pricing constraints are factors that limit the range of prices a firm may set.
1. Demand for the Product Class, Product, and Brand.
Chapter 11 – Pricing Products and Services
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a. The number of potential buyers for the product class (cars), product group
2. Newness of the Product: Stage in the Product Life Cycle.
a. The newer a product and the earlier it is in its life cycle, the higher is the price
that can usually be charged.
3. Cost of Producing and Marketing the Product.
a. Marketers are to ensure that firms in their channels of distribution make an
adequate profit.
7. Competitors’ Prices
8. Legal and Ethical Considerations.
Setting a final price is further complicated by legal and ethical issues.
Chapter 11 – Pricing Products and Services
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a. Price fixing is a conspiracy among firms to set prices for a product and is
illegal per se (per se means “in and of itself”) under the Sherman Act.
• Horizontal price fixing is when two or more competitors explicitly or
implicitly set prices.
• Vertical price fixing.
b Price discrimination is the practice of charging different prices to different
buyers for products of like grade and quality.
• Is prohibited by the Clayton Act as amended by the Robinson-Patman Act.
c. Deceptive Pricing.
• Involves price deals that mislead consumers.
• Is outlawed by the Federal Trade Commission Act.
• Bait and switch.
– Exists when a firm offers a very low price on a product (the bait) to
attract customers to a store.
– Setting a high price for the purpose of establishing a reference for a
price reduction is considered deceptive.
.
d. Predatory pricing is the practice of charging a very low price for a product
with the intent of driving competitors out of business.
• Once competitors have been driven out, the firm raises its prices.
Chapter 11 – Pricing Products and Services
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LEARNING REVIEW
11-7. What is the difference between pricing objectives and pricing constraints?
11-8. Explain what bait and switch is and why it is an example of deceptive pricing.
Answer: Bait and switch is the practice of offering a very low price on a product (the
bait) to attract customers to a store. Once in the store, the customer is persuaded to
VI. SETTING A FINAL PRICE [LO 11-5]
The final price serves many functions – high enough to cover production costs, and meet
company needs, but low enough that customers are willing to pay for it.
A. Step 1: Select an Approximate Price Level
• Before setting final price, must understand the market environment, features
and customer benefits, and goals.
B. Step 2: Set the List or Quoted Price
1. One-Price Policy.
Chapter 11 – Pricing Products and Services
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2. Dynamic Pricing Policy.
• A dynamic pricing policy involves different prices for products and services
in real time in response to supply and demand conditions. Also called a
flexible-pricing policy.
MAKING RESPONSIBLE DECISIONS
The Ethics and Economics of Surge Pricing
Uber and Lyft have changed the way local taxi service operates. Using independent
drivers and driver-owned vehicles, both companies are middlemen using digital technology
to provide on-demand transportation to consumers.
Customers complain about the practice of “surge” or “prime-time” pricing using by
these companies during peak demand times. From classical economic perspective, these
forms of dynamic pricing make sense based on supply and demand. Critics argue that this is
flagrant price gouging. Where do you stand?
C. Step 3: Make Special Adjustments to the List or Quoted Price
Marketers make three special adjustments to the list or quoted price.
1. Discounts
Chapter 11 – Pricing Products and Services
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1. Quantity Discounts.
b. Are offered at all levels in the marketing channel (wholesaler/retailer).
c. Larger purchases:
2. Seasonal Discounts.
a. Are used to encourage buyers to stock inventory earlier than their normal
3. Trade (Functional) Discounts.
a. A manufacturer gives trade or functional, discounts to reward wholesalers and
4. Cash Discounts.
B. Allowances
Allowances, like discounts, are reductions from list or quoted prices to buyers for
performing some activity.
1. Trade-in Allowances.
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2. Promotional Allowances.
a. Promotional allowances:
• Are cash payments or an extra amount of “free goods” awarded sellers in
the marketing channel for…
• Undertaking certain advertising or selling activities to promote a product.
b. Retailers frequently pass on a portion of these savings to the consumer.
c. Everyday low pricing (EDLP).
• Is the practice of replacing promotional allowances with lower
manufacturer list prices.
LEARNING REVIEW
11-9. What are the three steps in setting a final price?
11-10. What is the purpose of (a) quantity discounts and (b) promotional allowances?
Chapter 11 – Pricing Products and Services
11-32
APPLYING MARKETING KNOWLEDGE
1. How would the price equation apply to the purchase price of (a) gasoline,
(b) an airline ticket, and (c) a checking account?
Answers:
ITEM
PURCHASED
FINAL LIST PRICE
DISCOUNTS AND
ALLOWANCES (–)
EXTRA FEES (+)
a.
Gasoline
Final price
=
Pump price
–
Cash discount
b.
Airline
ticket
Final fare
=
Standard
coach fare
–
Seasonal,
frequent flyer,
and off-peak
discounts
+
Premium for
first class,
peak hours
flight
c.
Checking
account
Service
charge
=
Standard
service
charge
–
Discount for
checking
balance over set
amount
+
Per check
charge based
on activity
2. Under what conditions would a digital camera manufacturer adopt a skimming price
approach for a new product? A penetration approach?
Answers:
a. Skimming pricing approach. A digital camera manufacturer might adopt a skimming
b. Penetration pricing approach. A penetration price approach might be adopted if the
3. What are some similarities and differences between skimming pricing, prestige
pricing, and above-market pricing?
Answers:
a. Similarities. Skimming, prestige, and above-market pricing all involve setting a
premium price for a product, hoping consumers will associate high quality with high
11-33
4. Touché Toiletries, Inc., has developed an addition to its Lizardman Cologne line
tentatively branded Ode d’Toade Cologne. Unit variable costs are 45 cents for a
three-ounce bottle, and heavy advertising expenditures in the first year would result
in total fixed costs of $900,000. Ode d’Toade Cologne is priced at $7.50 for a three-
ounce bottle. How many bottles of Ode d’Toade must be sold to break even?
Answer:
5. What would be your response be to the statement, “Profit maximization is the only
legitimate pricing objective for the firm?”
Chapter 11 – Pricing Products and Services
BUILDING YOUR MARKETING PLAN
In starting to set a final price:
1. List two pricing objectives and three pricing constraints.
2. Think about your customers and competitors and set three possible prices.
3. Assume a fixed cost and unit variable cost and (a) calculate the break-even points and
(b) plot a break-even chart for the three prices specified in step 2.
Answer: Questions #2 and #3 force students to dig into key fixed and unit variable costs
Helping with Common Student Problems
“But I don’t know what the fixed costs for a flower shop are going to be” is a common
student complaint. The simple instructor answer: “Well then you’d better do some data digging
