Transcript CH13a Building the Price Foundation

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
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
LO5
LO6
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 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
NATURE AND IMPORTANCE OF PRICE
LO1
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
MARKETING MATTERS
Pricing Lessons from Failed Dot-Com
Start-ups—Understand Revenues and Expenses

Brick-and-Mortar
Dot-Com Failures

Travel Dot-Com
Successes (So Far)
13-31
LO6
STEP 3: DETERMINE COST, VOLUME,
AND PROFIT RELATIONSHIPS
BREAK-EVEN ANALYSIS

Break-Even Analysis

Break-Even Point (BEP)
BEPQuantity
Fixed Cost
FC


Unit Price Š Unit Variable Cost
P Š UVC
13-32
FIGURE 13-9 Profit is a maximum at the
quantity at which marginal revenue and
marginal cost are equal
13-33
FIGURE 13-10 Calculating a break-even
point for the picture frame store shows its
profit starts at 400 framed pictures per year
13-34
LO6
STEP 3: DETERMINE COST, VOLUME,
AND PROFIT RELATIONSHIPS
BREAK-EVEN ANALYSIS

Break-Even Chart

Applications of
Break-Even Analysis
13-35
FIGURE 13-11 Break-even analysis chart for
a picture frame store shows the break-even
point at 400 pictures
13-36
FIGURE 13-12 The cost trade-off: Fixed
versus variable costs
13-37
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.
13-38
Barter
Barter is the practice of
exchanging goods and services
for other goods and services
rather than for money.
13-39
Value
Value is the ratio of perceived
benefits to price; or
Value = (Perceived benefits
divided by Price).
13-40
Value-Pricing
Value-pricing is the practice of
simultaneously increasing product
and service benefits while
maintaining or decreasing price.
13-41
Profit Equation
The profit equation is:
Profit = Total revenue − Total cost; or
Profit = (Unit price × Quantity sold) −
(Fixed cost + Variable cost).
13-42
Pricing Objectives
Pricing objectives specify the
role of price in an organization’s
marketing and strategic plans.
13-43
Pricing Constraints
Pricing constraints are factors
that limit the range of prices a
firm may set.
13-44
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.
13-45
Demand Factors
Demand factors are those that
determine consumers’ willingness
and ability to pay for goods and
services.
13-46
Total Revenue (TR)
Total revenue (TR) is the total
money received from the sale
of a product.
13-47
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.
13-48
Marginal Revenue (MR)
Marginal revenue (MR) is the
change in total revenue that
results from producing and
marketing one additional unit.
13-49
Price Elasticity of Demand
The price elasticity of demand
is the percentage change in
quantity demanded relative to a
percentage change in price.
13-50
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.
13-51
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.
13-52
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.
13-53
Unit Variable Cost (UVC)
Unit variable cost (UVC) is
variable cost expressed on a
per unit basis.
13-54
Marginal Cost (UVC)
Marginal cost (UVC) is the
change in total cost that results
from producing and marketing
one additional unit of a product.
13-55
Marginal Analysis
Marginal analysis a continuing,
concise trade-off of incremental
costs against incremental
revenues.
13-56
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.
13-57
Break-Even Point (BEP)
A break-even point (BEP) is
the quantity at which total revenue
and total cost are equal.
13-58
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.
13-59