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?