Perreault−McCarthy: Basic

Marketing: A

Global−Managerial

Approach, 14/e

18. Price Setting in the
    Business World

Text © The McGraw−Hill

Companies, 2002

When You
Finish This Chapter,
You Should

1.Understand how
most wholesalers and
retailers set their
prices—using
markups.

2.Understand why
turnover is so impor-
tant in pricing.

3.Understand the
advantages and dis-
advantages of
average-cost pricing.

4.Know how to use
break-even analysis
to evaluate possible
prices.

5.Understand the
advantages of mar-
ginal analysis and
how to use it for price
setting.

6.Understand the
various factors that
influence customer
price sensitivity.

7.Know the many
ways that price set-
ters use demand
estimates in their
pricing.

8.Understand the
important new terms
(shown in red).

Chapter Eighteen

Price Setting in the

Business World

In the spring of 2001, Kmart’s

prices on products like toothpaste,

light bulbs, laundry soap, and

beauty products were 10 to 15

percent higher than at Wal-Mart.

Shoppers buy these items fre-

quently and know what they pay.

To provide equal value, marketing

managers for Kmart decided that

they needed to cut prices on 4,000

products. And to highlight their

price cutting they revived Kmart’s

hourly Blue Light Specials, a sur-

prise sale on an item that usually

lasts about 15 minutes. It didn’t

take long for Wal-Mart to announce

that it would be putting even more

emphasis on price rollbacks. By

taking a longer-term look at how

Wal-Mart has grown so fast in the

past, you’ll get a pretty good idea

how this wrestling match is going

to turn out.

To put the big picture in perspec-

tive, Wal-Mart’s current sales are

about five times Kmart’s. By the

year 2005, Wal-Mart sales

should exceed $330 billion—

double what they were in 1999

and 13 times what they were

in 1990. Back then, Wal-Mart

earned about twice as much

profit as Kmart even though they

had about the same sales revenue.

place

price

promotion

produc