Transcript PRICE
PRICE Yes, But What Does It Cost? • Price is the value that customers give up or exchange to obtain a desired product • Payment may be in the form of money, goods, services, favors, votes or anything else that has value to the other party Opportunity Costs • The value of something that is given up to obtain something else also affects the “price” of a decision • Example: the cost of going to college is charged in tuition and fees but also includes the opportunity cost of what a student cannot earn by working instead The Importance of Pricing Decisions • Price is the only P which represents revenue rather than an expense • Pricing and the Marketing Mix – Price and Place – Price and Product – Price and Promotion The price of four different purchases Steps in setting price Identify objectives & constraints Estimate demand & revenue Determine cost, volume and profit Set an approximate price level Set List or Quoted price Make adjustments to list price Identifying Pricing constraints – 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 & Time Period They Apply – Types of Competitive Markets - Competitors’ Prices Pricing Objectives • • • • • Sales or market share objectives Profit objectives Competitive effect objectives Customer satisfaction objectives Image enhancement objectives – Social Responsibility Estimating Demand • Demand refers to customers’ desire for products – How much of a product do consumers want? – How will this change as the price goes up or down? • Identify demand for an entire product category in markets the company serves • Predict what the company’s market share is likely to be The Price Elasticity of Demand • How sensitive are customers to changes in the price of a product? • Price elasticity of demand is a measure of the sensitivity of customers to changes in price. • Price elasticity of demand = Percentage change in quantity demanded / Percentage change in price Demand Curves • Shows the quantity of a product that customers will buy in a market during a period of time at various prices if all other factors remain the same • Vertical axis represents the different prices a firm might charge • Horizontal axis shows the number of units Demand Curves Influences on Price Elasticity of Demand • Availability of substitute goods or services – If a product has a close substitute, its demand will be elastic • Time period – The longer the time period, the greater the likelihood that demand will be more elastic • Income effect – Change in income affects demand for a product even if its price remains the same • normal goods, luxury goods, inferior goods Elastic and Inelastic Demand Curves Types of Costs - 1 • Variable costs - per-unit costs of production that will fluctuate depending on how many units or individual products a firm produces • Fixed costs - do not vary with the number of units produced. Costs remain the same regardless of amount produced Types of Costs - 2 • Average fixed cost is the fixed cost per unit produced (total fixed costs / number of units produced) • Total costs = variable costs plus fixed costs Break-Even Analysis • Technique used to examine the relationship between cost and price and to determine what sales volume must be reached at a given price before the company will completely cover its total costs and past which it will begin making a profit • All costs are covered but there isn’t a penny left over Break-even analysis chart Marginal Analysis • Provides a way for marketers to look at cost and demand at the same time • Examines the relationship of marginal cost to marginal revenue – marginal cost is the increase in total costs from producing one additional unit of a product – marginal revenue is the increase in total income or revenue that results from selling one additional unit of a product Marginal Analysis