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Irwin/McGraw-Hill© The McGraw-Hill Companies, Inc., 2000MARKETING, 6/eMARKETING, 6/e BERKOWITZ KERIN HARTLEY RUDELIUS
Irwin/McGraw-Hill
C H A P T E R F I F T E E N
PRICE: ARRIVING AT THE FINAL PRICE
Irwin/McGraw-Hill© The McGraw-Hill Companies, Inc., 2000MARKETING, 6/eMARKETING, 6/e BERKOWITZ KERIN HARTLEY RUDELIUS
AFTER READING THIS CHAPTER YOU AFTER READING THIS CHAPTER YOU SHOULD BE ABLE TO:SHOULD BE ABLE TO:
• Understand how to establish the initial
“approximate price level” using demand-
oriented, cost-oriented, profit-oriented,
and competition-oriented approaches.
• Identify the major factors considered in
deriving a final list or quoted price from
the approximate price level.
Irwin/McGraw-Hill© The McGraw-Hill Companies, Inc., 2000MARKETING, 6/eMARKETING, 6/e BERKOWITZ KERIN HARTLEY RUDELIUS
AFTER READING THIS CHAPTER YOU AFTER READING THIS CHAPTER YOU SHOULD BE ABLE TO: SHOULD BE ABLE TO:
• Describe adjustments made to the approximate price level based on geography, discounts and allowances.
• Prepare basic financial analyses useful in evaluating alternative prices and arriving at the final sales price.
• Describe the principal laws and regulations affecting pricing practices.
Irwin/McGraw-Hill© The McGraw-Hill Companies, Inc., 2000MARKETING, 6/eMARKETING, 6/e BERKOWITZ KERIN HARTLEY RUDELIUS
PP15PP15--1 Steps in Setting Price1 Steps in Setting Price
Identifypricingconstraintsand objectives
Estimatedemand andrevenue
Estimatecost, volume,and profitrelationships
Set list orquoted price-One price or
flexible prices-Company,
customer, andcompetitiveeffects
-Incrementalcosts andrevenues
Make specialadjustments tolist or quotedprice-Discounts-Allowances-Geographical
adjustments
Select anapproximateprice level-Demand-
orientedapproaches
-Cost-Orientedapproaches
-Profit-orientedapproaches
-Competition-orientedapproaches
Irwin/McGraw-Hill© The McGraw-Hill Companies, Inc., 2000MARKETING, 6/eMARKETING, 6/e BERKOWITZ KERIN HARTLEY RUDELIUS
PP15PP15--AA The Gillette Mach 3 Shaving SystemAA The Gillette Mach 3 Shaving System
Gillette’s world leading market share:
71% in North American and Europe
91% in Latin American
69% in India
New Mach 3 shaving system is priced 35% above their
highly successful Sensor Excel model, as marketing
research indicated that men would be willing to pay
45% more than they were paying for Sensor given the
additional benefits of the Mach 3.
Irwin/McGraw-Hill© The McGraw-Hill Companies, Inc., 2000MARKETING, 6/eMARKETING, 6/e BERKOWITZ KERIN HARTLEY RUDELIUS
PP15PP15––2 Four approaches for selecting an approximate price level2 Four approaches for selecting an approximate price level
© 1994, Richard D. Irwin, Inc. To accompany MARKETING, 4/E by Berkowitz, Kerin, Hartley, and Rudelius.
Selecting anSelecting anapproximateapproximateprice levelprice level
Demand-basedapproachesskimmingpenetrationprestigeprice liningodd-eventargetbundleyield management
Cost-based approachesstandard markupcost-plusexperience curve
Profit-based approachestarget profittarget return on salestarget return on
investment
Competition-basedapproachescustomaryabove, at, or below
marketloss leader
Irwin/McGraw-Hill© The McGraw-Hill Companies, Inc., 2000MARKETING, 6/eMARKETING, 6/e BERKOWITZ KERIN HARTLEY RUDELIUS
PP15PP15--BB DemandBB Demand--Oriented Pricing ApproachesOriented Pricing Approaches
Demand-Oriented Approaches include:
• skimming pricing
• penetration pricing
• prestige pricing
• price lining
• odd-even pricing
• target pricing
• bundle pricing
• yield management pricing
Irwin/McGraw-Hill© The McGraw-Hill Companies, Inc., 2000MARKETING, 6/eMARKETING, 6/e BERKOWITZ KERIN HARTLEY RUDELIUS
PP15PP15––3 Demand curves for two types of demand3 Demand curves for two types of demand--based methodsbased methods
A
B
C
PQ
Quantity
Pri
ce P1
Quantity
Pri
ce
A B
P2
P3
Prestige pricing Price lining
Irwin/McGraw-Hill© The McGraw-Hill Companies, Inc., 2000MARKETING, 6/eMARKETING, 6/e BERKOWITZ KERIN HARTLEY RUDELIUS
PP15PP15--CC Concept Check CC Concept Check
1. What are the circumstances in pricing
a new product that might support
skimming or penetration pricing?
2. What is odd-even pricing?
Irwin/McGraw-Hill© The McGraw-Hill Companies, Inc., 2000MARKETING, 6/eMARKETING, 6/e BERKOWITZ KERIN HARTLEY RUDELIUS
PP15PP15--DD CostDD Cost--Oriented Pricing ApproachesOriented Pricing Approaches
Cost-Oriented Approaches include:
• standard markup pricing
• cost-plus pricing
• experience curve pricing
Irwin/McGraw-Hill© The McGraw-Hill Companies, Inc., 2000MARKETING, 6/eMARKETING, 6/e BERKOWITZ KERIN HARTLEY RUDELIUS
PP15PP15––A MarkA Mark--ups for a manufacturer, wholesaler and retailer on ups for a manufacturer, wholesaler and retailer on a home appliance sold to the consumer for $100a home appliance sold to the consumer for $100
$100
80
60
40
20
10
0
Pri
ce
Manufacturer Wholesaler Retailer
Manufacturerselling price = $ 59.93
Manufacturer mark-up= $ 7.76 = 15%
Manufacturercost = $ 51.77
Wholesaler mark-up= $ 11.90 = 20%
Wholesalerselling price = $ 71.43
Retailercost = $ 71.43
Retailer mark-up=$ 28.57 = 40%
Retailerselling price = $ 100
Wholesalercost = $ 59.53
Irwin/McGraw-Hill© The McGraw-Hill Companies, Inc., 2000MARKETING, 6/eMARKETING, 6/e BERKOWITZ KERIN HARTLEY RUDELIUS
PP15PP15––B Cellular phone unit sales, average cost and average price: B Cellular phone unit sales, average cost and average price: evidence of the experience effectevidence of the experience effect
3,500
’83’84’85’86’87 ’88’89’90’91’92’93’94’95
3,000
2,500
2,000
1,500
1,000
500
0
Average Price ofLeast-Expensive
Models
Dollars
’83’84’85’86’87’88’89’90’91’92’93’94’95
2,500
2,000
1,500
1,000
500
0
Average costof Least-Expensive
Models
Dollars’83’84’85’86’87’88’89’90’91’92’93’94’95
3,000
2,500
2,000
1,500
1,000
500
0
Cellular Phonein Service
Dollars
As Cellular PhoneVolume Increases . . .
The Average Cost toProduce Decreases . . .
Followed by PriceDecreases
Irwin/McGraw-Hill© The McGraw-Hill Companies, Inc., 2000MARKETING, 6/eMARKETING, 6/e BERKOWITZ KERIN HARTLEY RUDELIUS
PP15PP15--EE ProfitEE Profit--Oriented Pricing ApproachesOriented Pricing Approaches
Profit-Oriented Approaches include:
• target profit pricing
• target return-on-sales pricing
• target return-on-investment pricing
Irwin/McGraw-Hill© The McGraw-Hill Companies, Inc., 2000MARKETING, 6/eMARKETING, 6/e BERKOWITZ KERIN HARTLEY RUDELIUS
PP15PP15--4 Results of computer spreadsheet simulation to select price 4 Results of computer spreadsheet simulation to select price to achieve a target return on investmentto achieve a target return on investment
Assumptions SIMULATION
or Results Financial Element Year A B C D
Assumptions Price per unit (P) $50 $54 $54 $58 $58
Units Sold (Q) 1.000 1,200 1,100 1,100 1,000Change in Unit Variable Cost (UVC) 0% +10% +10% +20% +20% Unit variable cost $22.00 $24.20 $24.20 $26.40 $26.40Total expenses $8,000 Same Same Same SameOwner’s salary $18,000 Same Same Same SameInvestment $20,000 Same Same Same SameState and federal taxes 50% Same Same Same Same
Spreadsheet Net Sales (P x Q) $50,000 $ 64,800 $59,400 $63,800 $58,000simulation Less: COGS 22,000 29,040 26,620 29,040 26,400results (Q x UVC)
Gross Margin $28,000 $ 35,760 32,780 $ 34,760 $31,600Less: total expenses 8,000 8,000 8,000 8,000 8,000Less: owner’s salary 18,000 18,000 18,000 18,000 18,000
Net profit before taxes $ 2,000 $ 9,760 $6,780 $8,760 $5,600Less: taxes 1,000 4,880 3,390 4,380 2,800
Net profit after taxes $ 1,000 $ 4,880 3,390 4,380 2,800Investment $20,000 $20,000 $ 20,000 $20,000 $20,000
Return on Investment 5% 24.4% 17.0% 21.9% 14.0%
Irwin/McGraw-Hill© The McGraw-Hill Companies, Inc., 2000MARKETING, 6/eMARKETING, 6/e BERKOWITZ KERIN HARTLEY RUDELIUS
PP15PP15--FF CompetitionFF Competition--Oriented Pricing ApproachesOriented Pricing Approaches
Competition-Oriented Approaches
include:
• customary pricing
• above-, at-, or below-market pricing
• loss leader pricing
Irwin/McGraw-Hill© The McGraw-Hill Companies, Inc., 2000MARKETING, 6/eMARKETING, 6/e BERKOWITZ KERIN HARTLEY RUDELIUS
PP15PP15--GG Concept CheckGG Concept Check
1. What is standard markup pricing?
2. What profit-based pricing approach
should a manager use if he or she wants to
reflect the percentage of the firm’s
resources used in obtaining the profit?
3. What is the purpose of loss-leader pricing
when used by a retail firm?
Irwin/McGraw-Hill© The McGraw-Hill Companies, Inc., 2000MARKETING, 6/eMARKETING, 6/e BERKOWITZ KERIN HARTLEY RUDELIUS
PP15PP15--HH OneHH One--Price versus FlexiblePrice versus Flexible--price Policiesprice Policies
• One-Price Policy: setting the same price for similar customers who buy the same product and quantities under the same circumstances. An example would be Saturn’s “no hassle-one price” policy for new and used cars.
• Flexible-Price Policy: offering the same product and quantities to similar customers but at different prices. Car dealers have traditionally (and still do) used flexible pricing in getting to the final sale price.
Irwin/McGraw-Hill© The McGraw-Hill Companies, Inc., 2000MARKETING, 6/eMARKETING, 6/e BERKOWITZ KERIN HARTLEY RUDELIUS
PP15PP15--5 The Power of Marginal Analysis in real5 The Power of Marginal Analysis in real--world decisionsworld decisions
Suppose the owner of a picture framing store is considering buying a series of
magazine ads to reach her up-scale market. The cost of the ads is $1,000, the average
price of a framed picture is $50, and the unit variable cost(materials plus labor) is $30. This is a direct application of marginal analysis that an astute manager uses to
estimate the incremental revenue or incremental number of units that must be
obtained to at least cover the incremental cost. In this example, the number of extra
picture frames that must be sold is obtained as follows:
Incremental number of frames =
=
Extra fixed cost
Price - Unit variable cost
$1,000 of advertising
$50 - $30
50 frames=
Irwin/McGraw-Hill© The McGraw-Hill Companies, Inc., 2000MARKETING, 6/eMARKETING, 6/e BERKOWITZ KERIN HARTLEY RUDELIUS
PP15PP15--6 Three special adjustments to list or quoted price6 Three special adjustments to list or quoted price
DiscountsQuantity
cumulativenon-cumulative
Trade (functional)Cash
AllowancesTrade-inPromotional
GeographicaladjustmentsFOB origin pricingDelivered pricingSingle zone pricingMultiple zone pricingFOB with freight-allowed pricing
Basing-point pricing
Special adjustmentsto list or quoted price
Irwin/McGraw-Hill© The McGraw-Hill Companies, Inc., 2000MARKETING, 6/eMARKETING, 6/e BERKOWITZ KERIN HARTLEY RUDELIUS
Jobber discount:5% of jobber sales price
Jobber discount:5% of jobber sales price
Jobber cost ormanufacturer’s
sale price
$ 59.15
Jobber cost ormanufacturer’s
sale price
$ 59.15
Wholesaler costor jobbersales price
$ 63.00
Wholesaler costor jobbersales price
$ 63.00
Retailer’s costor wholesaler
sales price
$ 70.00
Retailer’s costor wholesaler
sales price
$ 70.00
PP15PP15––7 The Structure of Trade Discounts7 The Structure of Trade Discounts
Manufacturer’ssuggestedlist Price
$100.00
Manufacturer’ssuggestedlist Price
$100.00
(minus)($ 30.00)
(minus)($ 7.00)
(minus)($ 3.15)
Retail discount:30% of manufacturer’s
suggested price
Retail discount:30% of manufacturer’s
suggested price
Wholesaler’s discount:10% of wholesaler’s
sales price
Wholesaler’s discount:10% of wholesaler’s
sales price
Irwin/McGraw-Hill© The McGraw-Hill Companies, Inc., 2000MARKETING, 6/eMARKETING, 6/e BERKOWITZ KERIN HARTLEY RUDELIUS
PP15PP15––C Example of basingC Example of basing--point pricingpoint pricing
$10 f
reig
ht
$30 freight
$20 freight
Seattlecustomerpays $130
Los Angelescustomerpays $120 St. Louis plant is
“basing-point”$100 base price
Chicago customerpays $110
Irwin/McGraw-Hill© The McGraw-Hill Companies, Inc., 2000MARKETING, 6/eMARKETING, 6/e BERKOWITZ KERIN HARTLEY RUDELIUS
PP15PP15––8 Pricing practices affected by legal restrictions8 Pricing practices affected by legal restrictions
Consumer GoodsPricing Act
Consumer GoodsPricing Act
ShermanAct
ShermanAct
Federal TradeCommission Act
Federal TradeCommission Act
Robinson-PatmanAct
Robinson-PatmanAct
Horizontalprice fixing
Horizontalprice fixing
Predatorypricing
Predatorypricing
Geographicalpricing
Geographicalpricing
Pricediscrimination
Pricediscrimination
Verticalprice fixing
Verticalprice fixing
Deceptivepricing
Deceptivepricing
Irwin/McGraw-Hill© The McGraw-Hill Companies, Inc., 2000MARKETING, 6/eMARKETING, 6/e BERKOWITZ KERIN HARTLEY RUDELIUS
PP15PP15--II Concept CheckII Concept Check
1. Why would a seller choose a flexible-price
policy over a one-price policy?
2. If a firm wished to encourage repeat
purchases by a buyer throughout the
year, would a cumulative or
non-cumulative quantity discount be a
better strategy.
3. What pricing practices are covered by
Sherman Act?