Transcript CH13 - Cal State LA - Instructional Web Server

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
WHEN MOTHER MAY NOT KNOW BEST:
THE LAUNCH OF STUBHUB.COM!

Plan for
the Start-up

How StubHub
Works Now

StubHub: Who
Benefits and
How?
13-4
FIGURE 13-1 Quick-take quiz on price:
Answers that are part numbers, part good
judgment
1. (d) $2.7 trillion
3. (b) fixed cost
2. (b) gasoline
13-5
NATURE AND IMPORTANCE OF PRICE
LO1
WHAT IS A PRICE?

Price

Barter

Price Equation
Final Price = List Price Š (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 Š Total Costs
= (Unit Price  Quantity Sold) Š (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
MARKETING MATTERS
How Flattening the World Affects Both Revenues
and Costs: Infosys…IKEA, and You!
13-12
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
FIGURE 13-5 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
13-19
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
13-20
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
13-21
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
13-22
LO3
STEP 2: ESTIMATE DEMAND
AND REVENUE
FUNDAMENTALS OF ESTIMATING REVENUE

Total Revenue (TR)

Average Revenue (AR)

Marginal Revenue (MR)

Demand Curves
and Revenue
13-23
FIGURE 13-6 Fundamental revenue
concepts
13-24
FIGURE 13-7 How Newsweek’s downwardsloping demand curve affects total, average,
and marginal revenues
13-25
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
13-26
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
13-27
LO4
STEP 2: ESTIMATE DEMAND
AND REVENUE
FUNDAMENTALS OF ESTIMATING REVENUE

Price Elasticity of Demand
• Product Substitutes
• Necessities
• Large Cash Outlays
13-28
Clothing and Gasoline
Which product is more sensitive to price changes?
13-29
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
13-30
FIGURE 13-8 Fundamental cost concepts
13-31
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)
13-32
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
13-33
FIGURE 13-9 Profit is a maximum at the
quantity at which marginal revenue and
marginal cost are equal
13-34
FIGURE 13-10 Calculating a break-even
point for the picture frame store shows its
profit starts at 400 framed pictures per year
13-35
LO6
STEP 3: DETERMINE COST, VOLUME,
AND PROFIT RELATIONSHIPS
BREAK-EVEN ANALYSIS

Break-Even Chart

Applications of
Break-Even Analysis
13-36
FIGURE 13-11 Break-even analysis chart for
a picture frame store shows the break-even
point at 400 pictures
13-37
FIGURE 13-12 The cost trade-off: Fixed
versus variable costs
13-38
VIDEO CASE 13
WASHBURN GUITARS:
USING BREAK-EVEN POINTS
TO MAKE PRICING DECISIONS
13-39
VIDEO CASE 13
WASHBURN GUITARS
1. What factors are most likely to
affect the demand for the lines
of Washburn guitars (a) bought by
a first-time guitar buyer and
(b) bought by a sophisticated
musician who wants a signature
model?
13-40
VIDEO CASE 13
WASHBURN GUITARS
2. For Washburn, what are
examples of (a) shifting the
demand curve to the right to get
a higher price for a guitar line
(movement of the demand curve)
and (b) pricing decisions involving
moving along a demand curve?
13-41
VIDEO CASE 13
WASHBURN GUITARS
3. In Washburn’s factory, what is
the break-even point for the new
line of guitars if the retail price is
(a) $349, (b) $389, and (c) $309?
Also, (d) if Washburn achieves
the sales target of 2,000 units at
the $349 retail price, what will its
profit be?
13-42
VIDEO CASE 13
WASHBURN GUITARS
4. Assume that the merger with
Parker leads to the cost
reductions projected in the case.
Then, what will be the (a) new
break-even point at a $349 retail
price for this line of guitars and
(b) new profit if it sells 2,000
units?
13-43
VIDEO CASE 13
WASHBURN GUITARS
5. If for competitive reasons,
Washburn eventually has to
move all its production back to
Asia, (a) which specific fixed and
variable costs might be lowered
and (b) what additional fixed and
variable costs might it expect to
incur?
13-44
SUPPLEMENTAL
LECTURE NOTE 13-1
TEENAGE SMOKING:
COOL, PRICE ELASTICITY,
AND $1-A-PACK CIGARETTES!
13-45
South Carolina Teenage Anti-Smoking Print Ad
What is the effect of a tax on the price elasticity of
demand for cigarettes by teenagers?
13-46
IN-CLASS ACTIVITY 13-1
PRICING A PANASONIC
HIGH DEFINITION TV
13-47
Panasonic Viera Plasma HDTV
13-48
13-49
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.
13-50
Barter
Barter is the practice of
exchanging goods and services
for other goods and services
rather than for money.
13-51
Value
Value is the ratio of perceived
benefits to price; or
Value = (Perceived benefits
divided by Price).
13-52
Value-Pricing
Value-pricing is the practice of
simultaneously increasing product
and service benefits while
maintaining or decreasing price.
13-53
Profit Equation
The profit equation is:
Profit = Total revenue − Total cost; or
Profit = (Unit price × Quantity sold) −
(Fixed cost + Variable cost).
13-54
Pricing Objectives
Pricing objectives specify the
role of price in an organization’s
marketing and strategic plans.
13-55
Pricing Constraints
Pricing constraints are factors
that limit the range of prices a
firm may set.
13-56
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.
13-57
Demand Factors
Demand factors are those that
determine consumers’ willingness
and ability to pay for goods and
services.
13-58
Total Revenue (TR)
Total revenue (TR) is the total
money received from the sale
of a product.
13-59
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.
13-60
Marginal Revenue (MR)
Marginal revenue (MR) is the
change in total revenue that
results from producing and
marketing one additional unit.
13-61
Price Elasticity of Demand
The price elasticity of demand
is the percentage change in
quantity demanded relative to a
percentage change in price.
13-62
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.
13-63
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.
13-64
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.
13-65
Unit Variable Cost (UVC)
Unit variable cost (UVC) is
variable cost expressed on a
per unit basis.
13-66
Marginal Cost (UVC)
Marginal cost (UVC) is the
change in total cost that results
from producing and marketing
one additional unit of a product.
13-67
Marginal Analysis
Marginal analysis a continuing,
concise trade-off of incremental
costs against incremental
revenues.
13-68
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.
13-69
Break-Even Point (BEP)
A break-even point (BEP) is
the quantity at which total revenue
and total cost are equal.
13-70
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.
13-71