Mar 3023 Chapter 10: Chapter Ten
The Importance of Pricing
1. Price is the amount of something – money, time, or effort—that a buyer exchanges with
a seller to obtain a product
a. It reflects the value the product delivers to consumers as well as the value the
product captures for the firm
b. When used correctly, pricing strategies can maximize profits and help the firm
take a commanding market position; when used incorrectly, pricing strategies
can limit revenue, profits, and brand perceptions
2. Revenue is the result of the price charged to customers multiplied by the number of
units sold
3. Profits are the firm’s “bottom line”: revenue minus total costs
4. The objective of strategic pricing is profitability
a. Two ways to increase revenue: sell more products or sell them at a higher price
The Price-Setting Process
1. Marketing executives in search of substantial profits typically want high prices across
the products they sell, whereas salespeople often want lower prices, to increase the
perceived customer value and ultimately the number of units sold
2. Step 1: Define the Pricing Objectives – describe what a firm hopes to achieve through
specific and measurable goals
a. Profit Maximization involves setting a relatively high price for a period of time
after the product launches
b. Volume Maximization is the process of setting prices low to encourage a greater
volume of purchases
i. The goal is to gain a large market share due to the low price [penetration
pricing]
ii. For this strategy to work long-term, the firm must have a significant cost
or resource advantage over competitors
c. Survival Pricing involves lowering prices to the point at which revenue just
covers costs, allowing the firm to endure during a difficult time
3. Step 2: Evaluate Demand
a. For producers, the optimal price is the point at which marginal revenue equals
marginal cost
b. Marginal Revenue is the change in total revenue that results from selling one
additional unit of product
c. Marginal Cost is the change in total cost that results from producing one
additional unit of product
d. Price Sensitivity is the degree to which the price of a product affects consumers’
purchasing behavior
e. Price Elasticity of Demand is a measure of price sensitivity that gives the
percentage change in quantity demanded in response to a percentage change in
price (holding constant all the other determinants of demand, such as income)
f. Inelastic Demand is demand for which a given percentage change in price results
in a smaller percentage change in quantity demanded
