Page 356 - Introduction to Business

330 PART 3 Marketing

EXHIBIT 9.7 Pricing Concepts
A Demand Schedule

LEARNING OBJECTIVE 8
Price Quantity Demanded
Summarize the basic concepts and tools needed to set prices.
$20 1
Demand is the number of units of a product that will be purchased at various
$18 2
prices. In general, more units of a product will be purchased at lower prices because
$16 3
a buyer can purchase more units of a product when the price is lower. For example,
$14 4
if a man has $80 to spend for shoes, he can buy four pairs if the price is $20 a pair.
$12 5
He could buy five pairs if a price of $16 a pair were charged. Thus, we can see that
$10 6
at the lower price of $16, more pairs of shoes can be bought (five) than at the higher
$8 7
price of $20 (four).
$6 8
In order to be able to make intelligent pricing decisions for their products,
$4 9
marketers must have some idea of the number of units that would probably be
$2 10
purchased for a number of likely prices (see Exhibit 9.7). The demand sche-
dule indicates the quantity of units that will be purchased for a
EXHIBIT 9.8 number of prices. This same information can also be graphed. The
graph is called a demand curve and was illustrated in Chapter 1.
Calculation of Total Revenues
A demand curve provides the same information as a demand
schedule: It indicates the number of units that will be purchased for
Quantity Total
Price Demanded Revenue each price. It is just a different way of expressing the same relation-
ships.
$20 1 $20 The price that will maximize total revenue is important. In
$18 2 $36 order to determine it, it is necessary to calculate the total revenue
$16 3 $48 existing for each price and quantity. This is found by multiplying
$14 4 $56 each price by its corresponding quantity (see Exhibit 9.8). There, we
$12 5 $60 can see that total maximum revenue of $60 is found at two prices,
$10 6 $60 $10 and $12.
$8 7 $56 The price that maximizes total revenue may not be the price that
$6 8 $48 maximizes net profit, however. To discover this, marketers must esti-
$4 9 $36 mate the costs required to produce and market the various quanti-
$2 10 $20 ties involved, then subtract them from total revenues.

Setting Prices for New Products
There are several steps that need to be taken in order to set prices on new products.
1. Decide on a basic pricing objective. This usually suggests either a high or a low
price. For example, an objective to keep out competition necessitates a low
price. An objective of securing a fast return on a product’s investment usually
means a relatively high price.
2. Estimate the total cost per unit for the product at various levels of demand.
The product should probably not be priced below this floor.
3. Find out what the competition’s prices are for similar products. These prices
indicate, to some extent, an upper limit on the price that can be established.
4. Determine the extent to which the product is distinctive from competitive
products. The more distinctive the product, the higher the price that can be
charged; the less distinctive, the lower the price possible.
5. Find out how much marketing support will be provided the product in the
form of advertising budget, speed of delivery, effort to be exerted by the sales

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