Transcript Pricing Foundations - Southern Methodist University

Professor Chip Besio
Cox School of Business
Southern Methodist University
Quick-take quiz on price: Answers that are
part numbers, part good judgment
1. (d) $2.7 trillion
2. (b) gasoline
3. (b) fixed cost
The “price” a buyer pays can take different
names depending on what is purchased
NATURE AND IMPORTANCE OF PRICE
PRICE AS AN INDICATOR OF VALUE

Value
Value =
Perceived Benefits
Price
$

Value-Pricing
=
$
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
The six steps in setting price
STEP 1: IDENTIFY PRICING OBJECTIVES
AND CONSTRAINTS
IDENTIFYING PRICING OBJECTIVES

Pricing Objectives
• Profit
 Managing for Long-Run Profits
 Managing for Current Profit
 Target Return (ROI)
• “The World is Flattening”
13-9
MARKETING MATTERS
How Flattening the World Affects Both Revenues
and Costs: Infosys…IKEA, and You!
STEP 1: IDENTIFY PRICING OBJECTIVES
AND CONSTRAINTS
IDENTIFYING PRICING OBJECTIVES

Pricing Objectives
• Sales ($)
• Survival
• Market Share ($ or #)
• Social
Responsibility
• Unit Volume (#)
13-11
STEP 1: IDENTIFY PRICING OBJECTIVES
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
13-12
STEP 1: IDENTIFY PRICING OBJECTIVES
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
STEP 1: IDENTIFY PRICING OBJECTIVES
AND CONSTRAINTS
IDENTIFYING PRICING CONSTRAINTS
• Type of Competitive Market
 Pure Competition
 Monopolistic Competition
 Oligopoly
 Pure Monopoly
• Competitors’ Prices
Pricing, product, and advertising strategies
available to firms in four types of
competitive markets
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
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
13-17
Demand curves for Newsweek showing the
effect on annual sales (quantity demanded
per year) by a change in price caused by (A)
a movement along and
(B) a shift of the demand curve
Demand curve for Newsweek showing the
effect on annual sales by a change in price
caused by a movement along the demand
curve
Demand curve for Newsweek showing the
effect on annual sales by a change in price
caused by a shift of the demand curve
STEP 2: ESTIMATE DEMAND
AND REVENUE
FUNDAMENTALS OF ESTIMATING REVENUE

Total Revenue (TR)

Average Revenue (AR)

Marginal Revenue (MR)

Demand Curves
and Revenue
FIGURE 13-6 Fundamental revenue
concepts
How Newsweek’s downward-sloping
demand curve affects total, average, and
marginal revenues
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
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
Clothing and Gasoline
Which product is more sensitive to price changes?
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
Fundamental cost concepts
STEP 3: DETERMINE COST, VOLUME,
AND PROFIT RELATIONSHIPS
BREAK-EVEN ANALYSIS

Break-Even Analysis

Break-Even Point (BEP)
_______Fixed Cost_________
BEPQuantity
= Unit Price – Unit Variable Cost
____FC____
=
P - UVC
STEP 3: DETERMINE COST, VOLUME,
AND PROFIT RELATIONSHIPS
BREAK-EVEN ANALYSIS

Break-Even Chart

Applications of
Break-Even Analysis
Break-even analysis chart for a picture
frame store shows the break-even point at
400 pictures
Calculating a break-even point for the
picture frame store shows its profit starts at
400 framed pictures per year