McGraw-Hill/Irwin

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

LEARNING OBJECTIVES (LO)

AFTER READING CHAPTER 13, YOU SHOULD BE ABLE TO:

LO1

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.
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LO2

LO3

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. Explain the role of costs in pricing decisions. Describe how various combinations of price, fixed cost, and unit variable cost affect a firms breakeven point.
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LO5

LO6

LO1

NATURE AND IMPORTANCE OF PRICE

WHAT IS A PRICE?

Price Barter
Price Equation

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

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

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LO1

NATURE AND IMPORTANCE OF PRICE

PRICE AS AN INDICATOR OF VALUE

Value

Perceived Benefits Value = Price

Value-Pricing
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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

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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.

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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

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STEP 1: IDENTIFY PRICING OBJECTIVES LO2 AND CONSTRAINTS

IDENTIFYING PRICING OBJECTIVES

Pricing Objectives
Sales ($) Market Share ($ or #) Survival Social Responsibility

Unit Volume (#)

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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
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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
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STEP 1: IDENTIFY PRICING OBJECTIVES LO2 AND CONSTRAINTS

IDENTIFYING PRICING CONSTRAINTS

Type of Competitive Market

Pure Competition
Monopolistic Competition Oligopoly Pure Monopoly

Competitors Prices

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

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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

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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

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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

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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

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LO3

STEP 2: ESTIMATE DEMAND AND REVENUE

FUNDAMENTALS OF ESTIMATING REVENUE

Total Revenue (TR) Average Revenue (AR)

Demand Curves and Revenue

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MARKETING MATTERS
The Airbus vs. Boeing Face-offHow Many Can We Sell and at What Pricein a $2.7 Trillion Market?

The Products

Marketing and Pricing

Demand

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LO4

STEP 2: ESTIMATE DEMAND AND REVENUE

FUNDAMENTALS OF ESTIMATING REVENUE

Price Elasticity of Demand

Percentage Change in Quantity Demanded Percentage Change in Price

Price Elasticity of Demand (E) =

Elastic Demand Inelastic Demand Unitary Demand

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LO4

STEP 2: ESTIMATE DEMAND AND REVENUE

FUNDAMENTALS OF ESTIMATING REVENUE

Price Elasticity of Demand

Product Substitutes Necessities Large Cash Outlays

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Clothing and Gasoline

Which product is more sensitive to price changes?

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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

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FIGURE 13-8 Fundamental cost concepts

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MARKETING MATTERS
Pricing Lessons from Failed Dot-Com Start-upsUnderstand Revenues and Expenses

Brick-and-Mortar Dot-Com Failures

Travel Dot-Com Successes (So Far)

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LO6

STEP 3: DETERMINE COST, VOLUME, AND PROFIT RELATIONSHIPS

BREAK-EVEN ANALYSIS

Break-Even Analysis Break-Even Point (BEP)

Fixed Cost FC Unit Price Unit Variable Cost P UVC

BEPQuantity

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FIGURE 13-9 Profit is a maximum at the quantity at which marginal revenue and marginal cost are equal

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FIGURE 13-10 Calculating a break-even point for the picture frame store shows its profit starts at 400 framed pictures per year

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LO6

STEP 3: DETERMINE COST, VOLUME, AND PROFIT RELATIONSHIPS

BREAK-EVEN ANALYSIS

Break-Even Chart Applications of Break-Even Analysis

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FIGURE 13-11 Break-even analysis chart for a picture frame store shows the break-even point at 400 pictures

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FIGURE 13-12 The cost trade-off: Fixed versus variable costs

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Price

A price is the money or other considerations (including other goods and services) exchanged for the ownership or use of a good or service.

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Barter

Barter is the practice of exchanging goods and services for other goods and services rather than for money.

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Value

Value is the ratio of perceived benefits to price; or Value = (Perceived benefits divided by Price).

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Value-Pricing

Value-pricing is the practice of simultaneously increasing product and service benefits while maintaining or decreasing price.

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Profit Equation

The profit equation is:

Profit = Total revenue Total cost; or Profit = (Unit price Quantity sold) (Fixed cost + Variable cost).

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Pricing Objectives

Pricing objectives specify the role of price in an organizations marketing and strategic plans.

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Pricing Constraints

Pricing constraints are factors that limit the range of prices a firm may set.

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Demand Curve

A demand curve is a graph relating the quantity sold and price, which shows the maximum number of units that will be sold at a given price.

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Demand Factors

Demand factors are those that determine consumers willingness and ability to pay for goods and services.

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Total Revenue (TR)

Total revenue (TR) is the total money received from the sale of a product.

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Average Revenue (AR)

Average revenue (AR) is the average amount of money received for selling one unit of a product, or simply the price of that unit.

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Marginal Revenue (MR)

Marginal revenue (MR) is the change in total revenue that results from producing and marketing one additional unit.

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Price Elasticity of Demand

The price elasticity of demand is the percentage change in quantity demanded relative to a percentage change in price.

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Total Cost (TC)

Total cost (TC) is the total expense incurred by a firm in producing and marketing a product. Total cost is the sum of fixed cost and variable cost.

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Fixed Cost (FC)

Fixed cost (FC) is the sum of the expenses of the firm that are stable and do not change with the quantity of a product that is produced and sold.

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Variable Cost (VC)

Variable cost (VC) is the sum of the expenses of the firm that vary directly with the quantity of a product that is produced and sold.

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Unit Variable Cost (UVC)

Unit variable cost (UVC) is variable cost expressed on a per unit basis.

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Marginal Cost (UVC)

Marginal cost (UVC) is the change in total cost that results from producing and marketing one additional unit of a product.

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Marginal Analysis

Marginal analysis a continuing, concise trade-off of incremental costs against incremental revenues.

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Break-Even Analysis

Break-even analysis is a technique that analyzes the relationship between total revenue and total cost to determine profitability at various levels of output.

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Break-Even Point (BEP)

A break-even point (BEP) is the quantity at which total revenue and total cost are equal.

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Break-Even Chart

A break-even chart is a graphic presentation of the break-even analysis that shows when total revenue and total cost intersect to identify profit or loss for a given quantity sold.

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