When you finish this chapter, you will: Understand how most wholesalers and retailers set their prices using markups, understand why turnover is so important in pricing, understand the advantages and disadvantages of average-cost pricing, know how to use break-even analysis to evaluate possible prices, know the many ways that price setters use demand estimates in their pricing.
Chapter 18: Price Setting in the Business World For use with Shapiro, Wong, Perreault, and McCarthy texts Copyright © 2002 McGraw-Hill Ryerson Limited Key Factors That Influence Price Setting Pricing objectives Price of other products in the line Demand Price flexibility Price settin g Cost Competition Exhibit 181 182 Markup chain in channels Discounts and allowances Legal environment Geographic pricing terms For use with Shapiro, Wong, Perreault, and McCarthy texts Copyright © 2002 McGraw-Hill Ryerson Limited Markup Chain and Channel Pricing 50.00 30.00 Markup = 20.00 = 40% 24.00 Markup = 6.00 = 20% Markup = 2.40 = 10% Cost = 21.60 = 90% Producer Cost = 24.00 = 80% Wholesaler Cost = 30.00 = 60% Retailer Exhibit 182 183 For use with Shapiro, Wong, Perreault, and McCarthy texts Copyright © 2002 McGraw-Hill Ryerson Limited Six Types of Costs Total Cost Total Fixed Cost Total Variable Cost Average Fixed Cost Average Variable Cost Average Cost 184 For use with Shapiro, Wong, Perreault, and McCarthy texts Copyright © 2002 McGraw-Hill Ryerson Limited Prices Along the Demand Curve Total revenue = Price x Quantity Price per unit $3.00 $30,000 $40,000 $57,000 $66,000 $75,000 $72,000 2.00 1.90 = $3.00 x 10,000 = $2.00 x 20,000 = $1.90 x 30,000 = $1.65 x 40,000 = $1.50 x 50,000 = $1.20 x 60,000 1.65 1.50 1.20 10 20 30 40 50 60 70 Quantity (000) Exhibit 186 185 For use with Shapiro, Wong, Perreault, and McCarthy texts Copyright © 2002 McGraw-Hill Ryerson Limited Summary of Relationships Affecting Price ? Estimated quantity to be sold Quantity demanded at selling price Cost-oriented selling price per unit Average fixed cost per unit Variable cost per unit Average total cost per unit Profit per unit Exhibit 187 186 For use with Shapiro, Wong, Perreault, and McCarthy texts Copyright © 2002 McGraw-Hill Ryerson Limited Break-Even Analysis Total Revenue and Cost Higher Profit Area Total Revenue Curve Total Cost Curve Break-Even Point Loss Area Total Variable Costs Total Fixed Costs Units of Production More Exhibit 188 187 For use with Shapiro, Wong, Perreault, and McCarthy texts Copyright © 2002 McGraw-Hill Ryerson Limited Demand-Oriented Pricing Psychological Bait Leader Odd-Even Types of Demand-Oriented Pricing Prestige Price Lining DemandBackward Value-in-Use Reference 188 For use with Shapiro, Wong, Perreault, and McCarthy texts Copyright © 2002 McGraw-Hill Ryerson Limited Full-Line Pricing ????? ????? ????? ????? ????? 189 MarketMarket- or or Firm Firm Oriented? Oriented? Complementary Complementary Pricing? Pricing? Product-Bundling Product-Bundling Pricing? Pricing? For use with Shapiro, Wong, Perreault, and McCarthy texts Copyright © 2002 McGraw-Hill Ryerson Limited Bid and Negotiated Pricing Bid pricing means offering a specific price for each possible job. Determining costs is a complicated process Negotiated pricing involves setting a price as the result of a bargaining process between the buyer and seller 1810 For use with Shapiro, Wong, Perreault, and McCarthy texts Copyright © 2002 McGraw-Hill Ryerson Limited ... Demand-Oriented Pricing Psychological Bait Leader Odd-Even Types of Demand-Oriented Pricing Prestige Price Lining DemandBackward Value -in- Use Reference 188 For use with Shapiro, Wong, Perreault,...Key Factors That Influence Price Setting Pricing objectives Price of other products in the line Demand Price flexibility Price settin g Cost Competition Exhibit 181 182 Markup chain in channels... and Negotiated Pricing Bid pricing means offering a specific price for each possible job. Determining costs is a complicated process Negotiated pricing involves setting a price as the result