File 1

© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use.
Not authorized for sale or distribution in any manner.

This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
LEARNING OBJECTIVES (LO)
AFTER READING CHAPTER 11, YOU SHOULD BE ABLE TO:
L Describe the nature and importance of

O pricing and the approaches used to
1 select an approximate price level.
L
Explain what a demand curve is and
O
the role of revenues in pricing
2
decisions.
L Explain the role of costs in pricing
O decisions and describe how various
3 combinations of price, fixed cost, and
unit variable cost affect a firm’s
breakeven point.
© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner.
11-2
LEARNING OBJECTIVES (LO)
AFTER READING CHAPTER 11, YOU SHOULD BE ABLE TO:
L Recognize the objectives a firm has in

O setting prices and the constraints that
4 restrict the range of prices a firm can
charge.
L
Describe the steps taken in setting a
O
final price.
5
11-3
VIZIO, INC.—DELIVERING BEAUTIFULLY
SIMPLE PRODUCTS AT A GREAT VALUE
11-4
L
O
NATURE AND IMPORTANCE OF PRICE
1 WHAT IS A PRICE?: THE PRICE EQUATION
Price
Barter Bugatti
Veyron
Video
Price Equation
11-5
FIGURE 11-1 The “price” a buyer pays can
take different names depending on what is
purchased
11-6
L
O
NATURE AND IMPORTANCE OF PRICE
1 PRICE AS AN INDICATOR OF VALUE
Value
Profit Equation
11-7
FIGURE 11-2 Four approaches for selecting
an approximate price level
11-8
L
O
GENERAL PRICING APPROACHES
1 DEMAND-ORIENTED PRICING APPROACHES
Skimming Penetration
Pricing Pricing
Prestige Odd-Even
Pricing Pricing
Rolex Ad
$500.00
vs.
$499.99
11-9
L
MARKETING MATTERS
O
1
Energizer’s Lesson in Price Perception—
Value Lies in the Eye of the Beholder
Energizer Ad
11-10
L
O
1 DEMAND-ORIENTED PRICING APPROACHES
Target Pricing
Bundle Pricing
Yield Management Pricing
11-11
L
O
1 COST-ORIENTED PRICING APPROACHES
Standard Markup
Pricing
• Cost
• Selling Price
11-12
FIGURE 11-A Markups for a manufacturer,
wholesaler, and retailer on a home appliance
sold to consumers for $100
11-13
L
O
1 COST-ORIENTED PRICING APPROACHES
Cost-Plus Pricing
• Percentage of Cost
• Fixed Fee
11-14
L
O
1 PROFIT-ORIENTED PRICING APPROACHES
Target Profit Pricing
Target Return-on-Sales Pricing
Target Return-on-Investment
(ROI) Pricing
11-15
L
O
1 COMPETITION-ORIENTED PRICING APPROACHES
Customary Pricing
Above-, At- or Below-Market Pricing
Loss-Leader Pricing
11-16
L
USING MARKETING DASHBOARDS
O
1
Are Red Bull Prices
Above, At, or Below the Market?
Price Premium (%)
11-17
L
O
ESTIMATING DEMAND AND REVENUE
2 FUNDAMENTALS OF ESTIMATING DEMAND
Demand Curve
• Consumer Tastes
• Price and Availability

of Similar Products
• Consumer Income
11-18
FIGURE 11-3 Demand curves for Red Baron
frozen cheese pizza showing the effect on
annual sales by a change in price caused by
(A) a movement along the demand curve and
(B) a shift of the demand curve
FIGURE 11-3A Demand curves for Red Baron
annual sales by a change in price caused by a
movement along the demand curve
FIGURE 11-3B Demand curves for Red Baron
annual sales by a change in price caused by a
shift of the demand curve
L
O
ESTIMATE DEMAND AND REVENUE
2 FUNDAMENTALS OF ESTIMATING DEMAND
Price Elasticity of Demand
• Elastic Demand • Inelastic Demand

• Product
• Necessities
Substitutes
• Large Cash
Outlays
11-22
FIGURE 11-B Fundamental revenue concepts
Total Revenue
11-23
FIGURE 11-4 Fundamental cost concepts
Total Cost (TC)
11-24
L
DETERMINING COST, VOLUME,
O
3
AND PROFIT RELATIONSHIPS
BREAK-EVEN ANALYSIS AND BEP
Break-Even Analysis
Break-Even Point (BEP)
11-25
FIGURE 11-5 Calculating a break-even point
for the picture frame store shows its profit
starts at 400 framed pictures per year
11-26
L
DETERMINING COST, VOLUME,
O
3
AND PROFIT RELATIONSHIPS
BREAK-EVEN ANALYSIS
Break-Even Chart
Applications of
Break-Even Analysis
11-27
FIGURE 11-6 Break-even analysis chart for
a picture frame store shows the break-even
point at 400 pictures
11-28
L
O
PRICING OBJECTIVES AND CONSTRAINTS
4 IDENTIFYING PRICING OBJECTIVES
Pricing Objectives
• Profi
t
▪ Managing for Long-Run Profits
▪ Managing for Current Profit
▪ Target Return
(ROI)
11-29
L
O
4 IDENTIFYING PRICING OBJECTIVES
Pricing Objectives
• Sales • Surviva
($) l
• Social
• Market Share ($ or #)
Responsibili
ty
• Unit Volume (#)
11-30
L
O
4 IDENTIFYING PRICING CONSTRAINTS
Pricing Constraints
• Demand for the

Product Class (Cars),
Product (Sports Cars),
and Brand (Bugatti Veyron)
• Newness of the
Product: Stage in the
Product Life Cycle
11-31
L
O
Pricing Constraints
• Cost of Producing and

Marketing a Product
• Competitors’ Prices
11-32
L
O
Pricing Constraints
• Legal and Ethical Considerations
▪ Deceptive
▪ Price Fixing
Pricing
▪ Price Discrimination ▪ Predatory Pricing
11-33
FIGURE 11-C Several pricing practices are
affected by legal and regulatory restrictions,
which benefit both consumers and firms
11-34
FIGURE 11-D Five most common deceptive
pricing practices
11-35
L
O
Pricing Constraints
• Cost of Changing Prices
and Time Period They Apply
• Type of Competitive Market
▪ Pure Competition ▪ Oligopoly
▪ Monopolistic Competition ▪ Pure Monopoly
11-36
FIGURE 11-E Pricing, product, and
advertising strategies available to firms in
four types of competitive markets
11-37
L
O
SETTING A FINAL PRICE
5 SET THE LIST PRICE: CHOOSING A PRICE POLICY
One-Price Policy
CarMax
Ad
Flexible Price Policy
11-38
L
MAKING RESPONSIBLE DECISIONS
O
5
Flexible Pricing—Is There Discrimination
in Bargaining for a New Car?
Buying a New Car: Some Folks Pay
More
11-39
L
O
5 ADJUST THE LIST PRICE: DISCOUNTS
Quantity
Seasonal
Trade (Functional)
Cash
11-40
FIGURE 11-F The structure of trade
discounts affects the manufacturer’s selling
price and the margins made by resellers in
the marketing channel
11-41
L
O
5 ADJUST THE LIST PRICE: ALLOWANCES
Trade-In
Promotional
Every Day Low Pricing (EDLP)
11-42
VIDEO CASE 11
CARMEX [B]: SETTING THE PRICE OF
THE NUMBER ONE LIP BALM
Carmex (B)
Video Case
VIDEO CASE 11
Carmex [B]
1. Which of the four approaches to

setting a price does Carmex use
for its products? Should one
approach be used exclusively?
VIDEO CASE 11
Carmex [B]
2. Why do many Carmex product

prices end in 9? What type of
pricing is this called? What
should happen to demand when
this approach is used?
VIDEO CASE 11
Carmex [B]
3. Should cost be a factor in

Carmex’s prices? What do you
think is a reasonable markup for
Carmex and for its retailers?
VIDEO CASE 11
Carmex [B]
4. What is the difference between an

EDLP retailer and a High-Low
retailer? Why does Carmex
charge them different prices?
VIDEO CASE 11
Carmex [B]
5. Conduct an online search of lip

balm products and compare the
price of a Carmex product with
three similar products from
competitors. How do you think
the competitors are setting their
prices?
IN-CLASS ACTIVITY 11-2
EXTRA VALUE MEAL

BUNDLE PRICING
AT MCDONALD’S
Price (P)
A price (P) is the money or other

considerations (including other
products and services) exchanged
for the ownership or use of a
product or service.
11-52
Value
Value is the ratio of perceived

benefits to price; or
Value = (Perceived benefits
divided by Price).
11-53
Profit Equation
The profit equation is:

Profit = Total revenue − Total cost; or
Profit = (Unit price × Quantity sold) −

(Fixed cost + Variable cost).
11-54
Demand Curve
A demand curve is a graph

relating the quantity sold and
price, which shows the maximum
number of units that will be sold
at a given price.
11-55
Price Elasticity of Demand
The price elasticity of demand

is the percentage change in
quantity demanded relative to a
percentage change in price.
11-56
Total Revenue (TR)
Total revenue (TR) is the total

money received from the sale
of a product.
11-57
Total Cost (TC)
Total cost (TC) is the total

expense incurred by a firm in
producing and marketing a
product. Total cost is the sum
of fixed cost and variable cost.
11-58
Break-Even Analysis
Break-even analysis is a
technique that analyzes the
relationship between total
revenue and total cost to
determine profitability at
various levels of output.
11-59
Pricing Objectives
Pricing objectives specify the

role of price in an organization’s
marketing and strategic plans.
11-60
Pricing Constraints
Pricing constraints are factors

that limit the range of prices a
firm may set.
11-61

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© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use.

Not authorized for sale or distribution in any manner.

L Describe the nature and importance of

L Recognize the objectives a firm has in

Yield Management Pricing

Target Profit Pricing

Target Return-on-Sales Pricing

Above-, At- or Below-Market Pricing

Price Premium (%)

• Price and Availability

Price Elasticity of Demand

• Elastic Demand • Inelastic Demand

Total Cost (TC)

Break-Even Point (BEP)

▪ Managing for Current Profit

• Demand for the

• Cost of Producing and

• Legal and Ethical Considerations

▪ Price Discrimination ▪ Predatory Pricing

• Type of Competitive Market

▪ Pure Competition ▪ Oligopoly

▪ Monopolistic Competition ▪ Pure Monopoly

Every Day Low Pricing (EDLP)

1. Which of the four approaches to

2. Why do many Carmex product

3. Should cost be a factor in

4. What is the difference between an

5. Conduct an online search of lip

EXTRA VALUE MEAL

A price (P) is the money or other

Value is the ratio of perceived

The profit equation is:

Profit = (Unit price × Quantity sold) −

A demand curve is a graph

The price elasticity of demand

Total revenue (TR) is the total

Total cost (TC) is the total

Pricing objectives specify the

Pricing constraints are factors

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