Transcript Global Marketing and World Trade

CHAPTER
FOURTEEN
PRICING: RELATING
OBJECTIVES TO REVENUES
AND COSTS
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MARKETING, 6/e
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© The McGraw-Hill Companies, Inc., 2000
AFTER READING THIS CHAPTER YOU SHOULD
BE ABLE TO:
• Identify the elements that make up a
price.
• Recognize the constraints on a firm’s
pricing latitude and the objectives a firm
has in setting prices.
• Explain what a demand curve is and how
it affects a firm’s total and marginal
revenue.
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AFTER READING THIS CHAPTER YOU SHOULD
BE ABLE TO:
• Recognize what price elasticity of
demand means to a manager facing a
pricing decision.
• Explain the role of costs in pricing
decisions.
• Calculate a break-even point for various
combinations of price, fixed cost, and
unit variable cost.
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PP14-AA What is a Price? Barter?
Price is the money or other consideration
(including other goods and services)
exchanged for the ownership or use of a good
or service.
Barter is the practice of exchanging goods and
services for other goods and services rather
than money.
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PP14–BB The Many Names for Price
Tuition
The price paid for ...
Education
Rent
The price paid for ...
An apartment
Premium
The price paid for ...
Car insurance
Fee
The price paid for ...
Dental and
medical work
Dues
The price paid for ...
Membership in
an organization
Fare
The price paid for ...
Transportation
Wage
The price paid for ...
Hourly workers
Interest
The price paid for ...
Money
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PP14-1a The Price of Four Different Purchases
PRICE EQUATION
ITEM
PURCHASED
PRICE
=LIST PRICE
INCENTIVES &
-ALLOWANCES +EXTRA FEES
new car bought
charges
by an individual
final price
=list price
-vehicle incentive
+financing
cash discount
trade-ins
special accessories
destination
charges
gas-guzzler tax
term in college
bought by a
student
tuition
continued
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=published
tuition
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-scholarship
+special activity
other financial aid
fees
discounts for
number of credits
taken
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PP14-1b The Price of Four Different Purchases
PRICE EQUATION
ITEM
PURCHASED
PRICE
=LIST PRICE
INCENTIVES &
-ALLOWANCES +EXTRA FEES
bank loan
obtained by a
small business
principal
and interest
=amount of loan
sought
-allowance for
collateral
merchandise
bought from a
wholesaler by
a retailer
invoice
price
=list price
-quantity discount +penalty for late
cash discount
payment
seasonal discount
functional or trade
discount
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+premium for
uncertain
creditworthiness
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PP14-CC Value and Value Pricing
• Value can be defined as the ratio of perceived
benefits to price or:
value = perceived benefits/price
• Value-pricing is the practice of simultaneously
increasing product and service benefits and
maintaining or decreasing price.
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PP14-A Price, benefits, and value
Perceived product
or service attributes
Perceived substitute
product or service
attributes
Value =
Perceived benefits
Perceived price
Perceived product
or service price
Perceived
substitute product
or service price
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PP14-B Consumer perceptions of value for money spent on
products and services
High Value
• Poultry
• Fruits,
vegetables
• Meat
• Fish
• Appliances
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Medium Value
• Men’s
apparel
•Prescription
drugs
• Restaurant
meals
• Shoes
• Carpets
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• Air fares
• Telephone
service
• Fast foods
• Life
insurance
• Home
repairs
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Low Value
• College
tuition
• Auto repairs
• U.S. postage
• Auto
insurance
• Medical
services
• Lawyers fees
• Movies and
theatres
• Financial
services
• Cable TV
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PP14–DD The Profit Equation
Profit
=
Total revenue – Total cost
Total revenue
=
Unit price  Quantity sold
Total cost
=
Fixed cost + Variable cost
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PP14-2 Steps in Setting Price
Step 1
Identify pricing constraints and objectives
Step 2
Estimate demand and revenue
Step 3
Determine cost, volume, and profit relationships
Step 4
Select an approximate price level
Step 5
Set list or quoted price
Step 6
Make special adjustments to list or quoted price
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PP14-EE Pricing Constraints Identified
Pricing constraints are factors that limit the latitude of prices a
firm may set. Pricing constraints include:
• demand for the product class, product, and brand
• newness of the product: stage in the product life cycle
• single product versus a product line
• cost of producing and marketing the product
• cost of changing prices and time period they apply
• competitor prices
• type of competitive markets
–
–
–
–
pure monopoly
oligopoly
monopolistic competition
monopoly
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PP14-3a Pricing, Product, and Advertising Strategies Available to
Firms in Four Types of Competitive Markets
STRATEGIES
AVAILABLE
Price
Competition
TYPE OF COMPETITIVE MARKET
PURE MONOPOLY
OLIGOPOLY
(one seller who sets the
(few sellers who are
price for a unique product) sensitive to each other’s
prices)
none: sole seller sets price
some: price leader or
follower of competitors
Product
Differentiation
none: no other products
Extent of
advertising
little: purpose is to increase some: purpose is to
demand for product class
inform but avoid price
competition
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various: depends on
industry
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PP14-3b Pricing, Product, and Advertising Strategies Available to
Firms in Four Types of Competitive Markets
STRATEGIES
AVAILABLE
price
competition
product
differentiation
extent of
advertising
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TYPE OF COMPETITIVE MARKET
PURE COMPETITION
MONOPOLISTIC
(many sellers who follow
COMPETITION
the market price for
(many sellers who compete identical commodity
on nonprice factors)
products)
some: compete over
almost none: market
range of prices
sets price
some: differentiate
none: products are
products from competitors identical
much: purpose is to
little: purpose is to
differentiate firm’s
inform prospects that
products from competition seller’s products are
available
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PP14-4 Where Each Dollar of Your Movie Ticket Goes
10¢ = theater expenses
Theater 19 ¢
9¢ = left for theater
6¢ = miscellaneous expenses
Distributor
30 ¢
24¢ = left for distributor
20¢ = advertising &
publicity expenses
Movie Studio
51 ¢
8¢ = actors’ share of gross
23¢ = left for movie studio
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PP14-FF Pricing Objectives
Expectations that specify the role of price in
an organization’s marketing and strategic
plans are pricing objectives.
6 Broad Pricing Objectives:
1. Profit
4. Unit Volume
2. Sales
5. Survival
3. Market Share
6. Social Responsibility
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PP14-GG Concept Check
1.
2.
What do you have to do to the
list price to determine the final
price?
How does the type of competitive
market a firm is in affect its
latitude in setting price?
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PP14-HH The Demand Curve
A demand curve shows a maximum
number of products consumers will
demand/buy at a given price. Economists
stress three key factors in estimating
demand:
1. Consumer tastes
2. Price and availability of other products
3. Consumer income
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PP14-5 Illustrative Demand Curves for Newsweek Magazine
Newsweek price per unit
$3.00
2.50
2.00
1.50
Movement
along
demand
curve
Q1
1.00
.50
0
MARKETING, 6/e
Shift of
demand
curve
Q2
Q3
D1
D2
1.5 3.0 4.5 6.0 7.5 9.0 10.5 12.0
Quantity demanded per year (millions of units)
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PP14–6 Fundamental Revenue Concepts
• Total revenue (TR)
– Is the total money received from the sale of a product, or
Unit Price  Quantity Sold
• Average revenue (AR)
– Is the average amount of money received for selling one
unit of the product, or
Total Revenue/Quantity = Unit Price
• Marginal revenue (MR)
– Is the change in total revenue obtained by selling one additional unit,
or
The Slope of the Total Revenue Curve
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PP14-7a How a downward-sloping demand curve affects total,
average, and marginal revenue
B
Newsweek price per unit
$3.00 • A
2.50
2.00
Total revenue ($millions)
$10.0
A
Demand curve =
Average revenue
•B
curve
•C
•D
1.50
•E
1.00
Total revenue curve
8.0
D
C
•
6.0
4.0
B
•E
F
•
•
2.0
. 0• A
0 1.5 3.0 4.5
6.0
•G
7.5 9.0
Quantity (in millions)
•F
.50
•
•G
0
0 1.5 3.0 4.5 6.0 7.5 9.0
Quantity (in millions)
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PP14-7b How a downward-sloping demand curve affects total,
average, and marginal revenue
Point on
Demand
Curve
Price
(P)
A
$3.00
B
2.50
C
Quantity
Sold
(Q)
Total
Revenue
(P x Q)
Average
Revenue
(TR/Q=PxQ/P=P)
Marginal
Revenue
(DTR/DQ)
$3.00
$3.00
1,500,000 $3,750,000
2.50
2.00
2.00
3,000,000
6,000,000
2.00
1.00
D
1.50
4,500,000
6,750,000
1.50
.00
E
1.00
6,000,000
6,000,000
1.00
-1.00
F
.50
7,500,000
3,750,000
.50
-2.00
G
.00
9,000,000
0
.00
-3.00
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PP14-II Price Elasticity of Demand Defined
Price Elasticity of Demand is the percentage change
in quantity demanded (QD) relative to a percentage
change in price (P) and can be expressed as follows:
E = % change in QD/% change in P
Elastic Demand = % change in QD > % change in P
Inelastic Demand = % change in QD < % change in
P
Unitary Demand = % change in QD = % change in P
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PP14-C Price elasticity of demand
Elastic demand (E>1)
Percentage change in quantity demanded
is greater than percentage change in price
Price (P)
Unitary demand (E=1)
Percentage change in quantity demanded
is equal to percentage change in price
Inelastic demand (E<1)
Percentage change in quantity demanded
is less than percentage change in price
Quantity (Q)
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PP14-JJ Concept Check
1.
2.
What is the difference between a
movement along and a shift of a
demand?
What does it mean if a product
has a price elasticity of demand
that is greater than 1?
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PP14–8a Fundamental cost concepts
• Total cost (TC)
– Is the total expense incurred by a firm in producing and
marketing the product, and is the sum of the fixed
cost and variable cost defined below
• Fixed cost (FC)
– Is the sum of the expenses of the firm that are stable
and do not change with the quantity of product that
is produced and sold
• Variable cost (VC)
– Is the sum of the expenses of the firm that vary
directly with the quantity of product that is
produced and sold
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PP14–8b Fundamental Cost Concepts
Total Cost (TC) = Fixed Cost(FC) + Variable Cost(VC)
Variable cost expressed on a per unit basis is called
unit variable cost (UVC).
Marginal Cost (MC) is the change in total cost that
results from producing and marketing one additional
unit (Q).
MC = Change in TC/1 unit increase in Q = slope of TC curve
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PP14-KK Marginal Analysis
• Marginal analysis deals with the incremental
increase in cost and revenue from the last unit of
production and marketing.
• Marginal analysis infers that as long as revenue
received from the sale of an additional product
(marginal revenue) is greater than the additional cost
of production and selling it (marginal cost), a firm
will expand its output of that product.
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PP14-9 Profit maximization pricing
Marginal cost
A
Unit
price
and
cost
Marginal revenue
Total
cost
Total
B revenue
and
cost
Profit
Quantity
Loss
Total revenue
Loss
Quantity
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PP14-10 Calculating a break-even point
Quantity Price per
Sold (Q) Bushel (P)
0
$2
1,000
Total
Total
Unit
Variable
Fixed
Revenue (TR)
Variable Cost (TVC) Cost
(P x Q)
Cost (UVC) (UVC x Q) (FC)
0
1
2
2,000
2,000
2
3,000
$2,000
$2,000
-$2,000
1
1,000
2,000
3,000
-1,000
4,000
1
2,000
2,000
4,000
0
2
6,000
1
3,000
2,000
5,000
1,000
4,000
2
8,000
1
4,000
2,000
6,000
2,000
5,000
2
10,000
1
5,000
2,000
7,000
3,000
6,000
2
12,000
1
6,000
2,000
8,000
4,000
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$
Profit
(TR-TC)
0
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$
Total
Cost (TC)
(FC+VC)
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Total revenue or total cost
PP14-11 Break-even analysis chart
Total revenue
Profit



Loss
Total cost
(fixed and
variable cost)
Variable cost
Fixed cost
Quantity
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Total revenue and costs ($millions)
PP14-12 The cost trade-off: fixed versus variable costs
$10
9
8
7
6
5
4
3 Loss
2
1
TR
Profit
TC
BEP
$10
9
8
7
6
5
Variable 4
3
costs
2
1
Fixed
costs
0
2
4
6
8 10
Quantity (hundred-thousands)
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TR
Profit
Loss
TC
BEP
Variable
costs
Fixed
costs
0
2
4
6
8 10
Quantity (hundred-thousands)
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PP14-LL Concept Check
1. What is the difference between
fixed cost and variable cost?
2. What is a breakeven point?
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