CHAPTER 20
Pricing Concepts
TEACHING RESOURCES QUICK REFERENCE GUIDE
Resource
Location
Purpose and Perspective
IRM, p. 457
Lecture Outline
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Discussion Starters
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Class Exercises
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Chapter Quiz
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Semester Project
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Answers to Discussion and Review Questions
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Answers to Application Questions
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Answers to Internet Exercises
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Answers to Developing Your Marketing Plan
IRM, p. 476
Comments on the Cases
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Case 20.1
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Case 20.2
IRM, p. 478
Examination Questions: Essay
Testing CD
Examination Questions: Multiple-Choice
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Examination Questions: True-False
Testing CD
PowerPoint Slides
PURPOSE AND PERSPECTIVE
This chapter introduces basic pricing concepts and issues. First, we explore the nature and importance of
price. Next, we discuss price and nonprice competition. We follow this with an explanation of demand
curves, demand fluctuations, and assessment of price elasticity of demand. Next, we explore marginal
analysis and breakeven analysis. We also identify and examine various factors that affect marketers’
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LECTURE OUTLINE
I. The Nature of Price
A. Price is the value paid for a product in a marketing exchange.
1. Many factors influence the assessment of value. In most situations the price is apparent to
buyer and seller; however, price does not always take the form of money paid.
B. The Importance of Price to Marketers
1. Price plays an important role in marketing because it is often the only marketing mix variable
that can be changed quickly to respond to shifts in demand or to competitors’ actions.
II. Price and Nonprice Competition
A. Pricing decisions are often made according to price or nonprice competitive situations.
B. Price Competition
1. With price competition, a marketer emphasizes price as an issue and matches or beats the
prices of competitors.
C. Nonprice Competition
1. Nonprice competition occurs when a seller decides not to focus on price and instead
emphasizes distinctive product features, service, product quality, promotion, packaging, or
other factors to distinguish its product from competing brands.
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III. Analysis of Demand
A. Marketing research and forecasting techniques yield estimates of sales potential, or the quantity
of a product that could be sold during a specific period.
B. The Demand Curve
1. For most products, there is an inverse relationship between price and demand. The quantity
demanded goes up as the price goes down and goes down as the price goes up.
2. A demand curve is a graph of the quantity of products expected to be sold at various prices,
C. Demand Fluctuations
1. Changes in buyers’ needs, variations in the effectiveness of other marketing mix variables,
the presence of substitutes, and dynamic environmental factors can influence demand.
D. Assessing Price Elasticity of Demand
1. After identifying the target market’s evaluation of price and examining demand to learn
whether price is inversely or directly related to quantity, the next step in pricing is to assess
price elasticity of demand.
IV. Demand, Cost, and Profit Relationships
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A. The analysis of demand, cost, and profit is important because customers are becoming less
tolerant of price increases, which forces manufacturers to find new ways to control costs.
B. Marginal Analysis
1. Marginal analysis examines what happens to a firm’s costs and revenues when production (or
sales volume) is changed by one unit.
2. To determine the costs of production, it is necessary to distinguish among several types of
costs.
a. Fixed costs do not vary with changes in the number of units produced or sold. Average
fixed cost is the fixed cost per unit produced, and is calculated by dividing fixed costs by
the number of units produced.
3. Marginal revenue (MR) is the change in total revenue that occurs when a firm sells an
additional unit of a product.
a. Most firms in the United States face downward-sloping demand curves for their products;
in other words, they must lower their prices to sell additional units.
4. This discussion of marginal analysis may give the false impression that pricing can be highly
precise. If revenue (demand) and cost (supply) remained constant, prices could be set for
maximum profits. In practice, however, cost and revenue frequently change.
5. Marginal analysis is to be used only as a model; the marketer can benefit by understanding
the relationship between MC and MR.
C. Breakeven Analysis
1. The breakeven point is the point at which costs of producing the product equal revenue from
selling the product. It is calculated by dividing the fixed costs by price minus variable costs.
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V. Factors That Affect Pricing Decisions
A. Pricing decisions can be complex because of the number of factors to be considered.
B. Organizational and Marketing Objectives
1. Marketers should set prices that are consistent with the organization’s goals and mission.
D. Costs
1. Costs must be an issue when establishing price.
2. In the short term, a firm may sell products below cost to match competition, to generate cash
E. Other Marketing Mix Variables
1. Because of the interrelation of the marketing mix variables, pricing decisions can influence
evaluations and activities associated with product, distribution, and promotion variables.
2. Price can affect demand. For many products, buyers associate better product quality with a
F. Channel Member Expectations
1. When making pricing decisions, a producer must consider what distribution channel members
expect.
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G. Customers’ Interpretation and Response
1. Marketers should address the following question when making pricing decisions: How will
our customers interpret our prices and respond to them?
a. Interpretation means what the price means or what it communicates to customers.
b. Customer response refers to whether the price will move customers closer to purchase
and the degree to which the price enhances their satisfaction with the purchase experience
2. Customers compare prices with internal or external reference prices.
a. An internal reference price is a price developed in the buyer’s mind through experience
with the product.
3. Buyers’ perceptions of a product relative to competing products may allow the firm to set a
price that differs significantly from rivals’ prices; if the product is deemed superior to most of
the competition, a premium price may be feasible.
4. Buyers can be characterized according to their degree of value consciousness, price
consciousness, and prestige sensitivity.
a. Value-conscious customers are concerned about both price and quality aspects of a
product; these consumers consider quality per unit of price and the additional gains
H. Competition
1. A marketer needs to know competitors’ prices so it can adjust its price accordingly.
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2. When adjusting prices, a marketer must assess how competitors will respond.
I. Legal and Regulatory Issues
1. Legal and regulatory issues can strongly influence marketers’ pricing decisions.
2. To control inflation, the federal government may invoke price controls, freeze prices, or
determine the rates at which firms may increase prices.
3. Many regulations and laws affect pricing decisions and activities.
VI. Pricing for Business Markets
A. Business markets consist of individuals and organizations that purchase products for the purpose
of resale, using them in their own operations, or for producing other products. Establishing prices
for this category of buyers is sometimes different from setting prices for consumers.
B. Price Discounting
1. Producers commonly provide intermediaries with discounts, or reductions, from list prices.
2. Trade Discounts
a. Trade, or functional, discounts are reductions off the list price given by a producer to an
3. Quantity Discounts
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4. Cash Discounts
a. A cash discount, or price reduction, is given to a buyer for paying promptly or in cash.
b. For example, a “2/10 net 30” means that the buyer will receive 2 percent discount if the
account is paid within 10 days; otherwise, the entire balance is due in 30 days without a
discount.
C. Geographic Pricing
1. Geographic pricing involves reduction for transportation costs or other costs associated with
the physical distance between the buyer and the seller.
2. Prices may be quoted F.O.B. factory or F.O.B. destination, depending on who pays for the
shipping costs.
D. Transfer Pricing
1. Transfer pricing occurs when one unit in a company sells a product to another unit.
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2. The price is determined by one of four methods: actual full cost, standard full cost, cost plus
investment, or market-based cost.
a. Actual full cost is calculated by dividing all fixed and variable expenses for a period into
the number of units produced
3. The choice of transfer pricing depends on the company’s management strategy and the nature
of the units’ interaction.
4. An organization must ensure that transfer pricing is fair to all units involved in the
transaction.
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DISCUSSION STARTER
Discussion Starter 1: Bartering: Everything Old is New Again
ASK: If you have very little money, how do you get the things you need?
For many people, bartering is one way of dealing with difficult economic times. It is a means of obtaining
Discussion Starter 2: Irrational Demand
ASK: For an established product category, how are consumers’ minds changed about what the price
should be for the product?
Often newcomers to a category seek to shift our pricing expectations upward. This was what Starbucks
Discussion Starter 3: Using Reference Pricing
ASK: How do you know you are getting a good price?
When shopping for an infrequently purchased product, consumers often rely on reference pricing. Many
ASK: How effective is Overstock’s use of reference pricing to consumers?
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Class Exercise 1: Price versus Nonprice Competition
This exercise examines price and nonprice competition, pricing objectives, and factors affecting price
decisions.
Prompt for students:
Consider the following scenario and answer the questions.
Prices of personal computers continue to drop because of the following conditions:
Questions
1. Do you think Dell should compete through price or nonprice competition? What are the
advantages and disadvantages of each approach?
2. If Dell were to continue competing on price, how might this affect other marketing mix variables?
3. If Dell drops its prices in the near future, what can you expect other PC makers to do? What kind
of competitive situation is the PC industry (oligopoly, monopolistic, pure competition)? What
does this imply for price setting?
Answers:
1. In the past, Dell has not competed on a price basis, focusing instead on distinctive product features,
service, product quality, and heavy promotion. This strategy generally leads to increased customer
Class Exercise 2: Demand-Related Pricing Calculations
Prompt for students:
Complete the following calculations:
Price Elasticity of Demand
Calculate the price elasticity of demand for a restaurant’s pizza under the following conditions:
Old price: $8 New price: $10