Marketing CH13a building the price foundation

McGraw-Hill/Irwin

Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Rese


LEARNING OBJECTIVES (LO)
AFTER READING CHAPTER 13, YOU SHOULD BE ABLE TO:

LO1

LO2

LO3

Identify the elements that make up a
price.
Recognize the objectives a firm has in
setting prices and the constraints that
restrict the range of prices a firm can
charge.
Explain what a demand curve is and
the role of revenues in pricing
decisions.
13-2


LEARNING OBJECTIVES (LO)
AFTER READING CHAPTER 13, YOU SHOULD BE ABLE TO:

LO4

Describe what price elasticity of
demand means to a manager facing a
pricing decision.

LO5

Explain the role of costs in pricing
decisions.

LO6

Describe how various combinations of
price, fixed cost, and unit variable cost
affect a firm’s breakeven point.
13-3


LO1

NATURE AND IMPORTANCE OF PRICE
WHAT IS A PRICE?



Price



Barter



Price Equation

Final Price = list Price – (Incentives + Allowances) + Extra Fees

13-6


FIGURE 13-2 The “price” a buyer pays can
take different names depending on what is
purchased

13-7


LO1



NATURE AND IMPORTANCE OF PRICE
PRICE AS AN INDICATOR OF VALUE

Value

Value =

Perceived Benefits
Price

$



=

$

Value-Pricing
13-8


LO1



NATURE AND IMPORTANCE OF PRICE
PRICE IN THE MARKETING MIX

Profit Equation

Profit = Total Revenue – Total Costs
= (Unit Price x Quantity Sold) – (Fixed Cost + Variable Cost)



Six Steps in Setting Price

13-9

FIGURE 13-3 The six steps in setting price.
The first three steps are covered in Chapter
13 and the last three steps in Chapter 14.

13-10


STEP 1: IDENTIFY PRICING OBJECTIVES
LO2
AND CONSTRAINTS
IDENTIFYING PRICING OBJECTIVES


Pricing Objectives
• Profit
 Managing for Long-Run Profits
 Managing for Current Profit
 Target Return (ROI)

• “The World is Flattening”
13-11


STEP 1: IDENTIFY PRICING OBJECTIVES
LO2
AND CONSTRAINTS
IDENTIFYING PRICING OBJECTIVES


Pricing Objectives
• Sales ($)

• Survival

• Market Share ($ or #)

• Social
Responsibility

• Unit Volume (#)
13-13


STEP 1: IDENTIFY PRICING OBJECTIVES
LO2
AND CONSTRAINTS
IDENTIFYING PRICING CONSTRAINTS


Pricing Constraints
• Demand for the
Product Class (Cars),
Product (Sports Cars),
and Brand (Bugatti Veyron)
• Newness of the
Product: Stage in the
Product Life Cycle

eBay

13-14


STEP 1: IDENTIFY PRICING OBJECTIVES
LO2
AND CONSTRAINTS
IDENTIFYING PRICING CONSTRAINTS

• Single Product vs.
a Product Line
• Cost of Producing and
Marketing a Product
• Cost of Changing
Prices and Time Period
They Apply
13-15


STEP 1: IDENTIFY PRICING OBJECTIVES
LO2
AND CONSTRAINTS
IDENTIFYING PRICING CONSTRAINTS

• Type of Competitive Market
 Pure Competition
 Monopolistic Competition
 Oligopoly
 Pure Monopoly

• Competitors’ Prices

13-16


FIGURE 13-4 Pricing, product, and
advertising strategies available to firms in
four types of competitive markets

13-17


LO3

STEP 2: ESTIMATE DEMAND
AND REVENUE
FUNDAMENTALS OF ESTIMATING DEMAND

• The Demand Curve
 Consumer Tastes
 Price and Availability
of Similar Products
 Consumer Income

• Demand Factors

13-18


LO3

STEP 2: ESTIMATE DEMAND
AND REVENUE
FUNDAMENTALS OF ESTIMATING DEMAND

• Movement Along vs. a
Shift of Demand Curve
 Movement Along
a Demand Curve
 Shift in the
Demand Curve

13-20


FIGURE 13-5A Demand curve for Newsweek
showing the effect on annual sales by a
change in price caused by a movement
along the demand curve

13-21


FIGURE 13-5B Demand curve for Newsweek
showing the effect on annual sales by a
change in price caused by a shift of the
demand curve

13-22

LO3

STEP 2: ESTIMATE DEMAND
AND REVENUE
FUNDAMENTALS OF ESTIMATING REVENUE



Total Revenue (TR)



Average Revenue (AR)



Demand Curves
and Revenue

13-23


MARKETING MATTERS
The Airbus vs. Boeing Face-off—How Many Can We Sell
and at What Price…in a $2.7 Trillion Market?



The Products



Marketing
and Pricing



Demand

13-25


LO4

STEP 2: ESTIMATE DEMAND
AND REVENUE
FUNDAMENTALS OF ESTIMATING REVENUE



Price Elasticity of Demand

Price Elasticity of Demand (E) =

Percentage Change in Quantity Demanded
Percentage Change in Price

• Elastic Demand
• Inelastic Demand
• Unitary Demand

13-26


LO4

STEP 2: ESTIMATE DEMAND
AND REVENUE
FUNDAMENTALS OF ESTIMATING REVENUE



Price Elasticity of Demand
• Product Substitutes
• Necessities
• Large Cash Outlays

13-27


Clothing and Gasoline
Which product is more sensitive to price changes?

13-28


LO5

STEP 3: DETERMINE COST, VOLUME,
AND PROFIT RELATIONSHIPS
THE IMPORTANCE OF CONTROLLING COSTS



Total Cost (TC)



Fixed Cost (FC)



Variable Cost (VC)



Unit Variable Cost (UVC)



Marginal Cost (MC)



Marginal Analysis
13-29


FIGURE 13-8 Fundamental cost concepts

13-30