Basic Marketing: A Global Managerial Approach

Perreault−McCarthy: Basic
Marketing: A
Global−Managerial
Approach, 14/e

18. Price Setting in the
    Business World

Text © The McGraw−Hill

Companies, 2002

Price Setting in the Business World 541

Conclusion

In this chapter, we discussed various approaches to

price setting. Generally, retailers and wholesalers use

markups. Some just use the same markups for all their

items. Others find that varying the markups increases

turnover and profit. In other words, they consider de-

mand and competition!

Many firms use average-cost pricing to help set their

prices. But this approach sometimes ignores demand

completely. A more realistic approach to average-cost

pricing requires a sales forecast—maybe just assuming

that sales in the next period will be roughly the same as

in the last period. This approach doesenable the mar-

keting manager to set a price—but the price may or may

not cover all costs and earn the desired profit.

Break-even analysis is useful for evaluating possible

prices. It provides a rough-and-ready tool for eliminating

unworkable prices. But management must estimate de-

mand to evaluate the chance of reaching these possible

break-even points.

The major difficulty with demand-oriented pricing is

estimating the demand curve. But experienced man-

agers, aided perhaps by marketing research, can

estimate the nature of demand for their products. Such

estimates are useful even if they aren’t exact. They get

you thinking in the right ballpark. Sometimes, when all

you need is a decision about raising or lowering price,

even rough demand estimates can be very revealing.

Further, a firm’s demand curve does not cease to exist

simply because it’s ignored. Some information is better

than none at all. And marketers should consider de-

mand in their pricing. We see this with value in use

pricing, online auctions, leader pricing, bait pricing,

odd-even pricing, psychological pricing, full-line

pricing, and even bid pricing. Understanding the fac-

tors that influence price sensitivity can make these

approaches more effective.

Throughout the book, we stress that firms must con-

sider the customer before they do anything. This

certainly applies to pricing. It means that when man-

agers are setting a price, they have to consider what

customers will be willing to pay. This isn’t always easy.

But it’s nice to know that there is a profit range around

the best price. Therefore, even rough estimates about

what potential customers will buy at various prices will

probably lead to a better price than mechanical use of

traditional markups or cost-oriented formulas.

While our focus in this chapter is on price setting, it’s

clear that pricing decisions must consider the cost of of-

fering the whole marketing mix. Smart marketers don’t

just accept costs as a given. Target marketers always look

for ways to be more efficient—to reduce costs while im-

proving the value that they offer customers. Improved

coordination of physical distribution, for example, may

improve customer service and reduce costs. Carefully de-

fined target markets may make promotion spending

more efficient. Products that really meet customers’

needs reduce costly new-product failures. Channel

members can shift and share functions—so that the cost

of performing needed marketing activities is as low as

possible. Marketers should set prices based on demand as

well as on costs. But creative marketers also look for

ways to reduce costs—because costs affect profit.

Questions and Problems

1. Why do many department stores seek a markup of
   about 40 percent when some discount houses oper-
   ate on a 20 percent markup?
   2. A producer distributed its riding lawn mowers
   through wholesalers and retailers. The retail selling
   price was $800, and the manufacturing cost to the

to reduce costs of other elements of the marketing mix—consistent with the

customer’s needs—in order to earn a profit. Another customer might want more of

some other element of the marketing mix—like more technical help after the sale—

and be less sensitive to price.

Sellers must know their costs to negotiate prices effectively. However, negotiated

pricing is a demand-oriented approach. Here the seller analyzes very carefully a par-

ticular customer’s position on a demand curve, or on different possible demand

curves based on different offerings, rather than the overall demand curve for a group

of customers.