Transcript What, exactly, is a price?

Chapters 13 and 14
Pricing Products
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Why are pricing decisions so important?
What is a price?
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The money or other considerations exchanged
for the ownership or use of a product
Why are pricing decisions difficult?
I. Identify Pricing Objectives
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Profit oriented objective
Profit maximization
Profit margin
Volume oriented objective
Market share
Unit sales volume
Status Quo objective
II. Estimate Demand and Revenue
Must consider what consumers are will to pay –
determines upper limit of the price
Demand Schedule – estimates of the number of units of product
buyers will purchase at different price points.
Demand Curve – A graphical portrayal of a demand schedule
Total Revenue Curve – developed by multiplying the unit price times
the quantity sold for each of the points on the demand curve
Price Elasticity of Demand – a measure of the change in demand for
a product in response to a change in price.
Elastic Demand – the percentage change in quantity demanded
exceeds the percentage change in price.
Inelastic Demand – the percentage change in price exceeds the
percentage change in quantity demanded
Effects of Availability of Substitutes
Price Elasticity Effects on Total Revenue
FIGURE 13-8
Slide 13-33
Clothing vs. Gasoline
Which is more sensitive to prices changes?
Slide 13-36
III. Determine Cost, Volume, and Profit
Relationship
A.
B.
Must consider production and marketing costs when
establishing price – determines lower limit of price
Types of Cost
Fixed cost
Variable cost
Total cost
Break-Even Analysis – analyzes the relationship
between total revenue and total cost to determine
profitability at various levels of output.
Break-even point – number of units that must be sold
in order to break even (total revenue = total cost)
Total Fixed Cost
Price – Variable cost per unit
Breakeven Problem – Picture Frame
Store
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You wish to identify how many pictures
you must sell to cover your fixed cost and
break-even. Customers will pay $100 per
framed picture. Fixed cost equal $28,000
for rent, insurance, and real estate taxes.
The unit variable cost is $30 for labor,
glass, frame, and matting materials.
Calculating a break-even point for a picture
frame store
Slide 13-45
C. Markup Pricing
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Most popular method used by wholesalers
and retailers to establish price
Doesn’t use cost of production – uses cost
of buying the product from the producer
Selling price = cost + cost(markup %)
Markup percentages are often based on
experience, past response to the markup,
product’s traditional selling price, and
competition
IV. Choose a Price Strategy to
Determine a Base Price
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Price Skimming Pricing
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Price Penetration Pricing
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When is this strategy used?
When is this strategy used?
Status Quo Pricing
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When is this strategy used?
V. Make Adjustments to Base Price
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How are adjustments to the list price
made?
Why make adjustments to the list price?
A. Discounts
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Quantity Discounts – Discounts offered to encourage
customers to buy in large quantities or to remain loyal
buyers (cumulative and noncumulative quantity
discounts).
Cash Discounts – reduction is list price that rewards
customers for paying their bills promptly.
2/10, net 30
Seasonal Discounts – used to encourage buyers to stock
inventory earlier than their normal demand would
require
Cumulative quantity discount
The buyer’s purchases are added up over the year and the
discount percentage applies to the total volume of
purchases made during the year. For example, a buyer
who purchased five hundred cases during the year
would be entitled to what percent discount from list
price?
Cases Purchased During Year
1-50
51-125
126-250
Over 250
Discount %
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2.0
4.0
7.0
Noncumulative quantity
discount
The discount is based on the size of an individual
purchase order. For example, if a buyer places
a single order for twelve cases, what percent
discount would he get on that order? If a buyer
places 50 orders for ten cases each over the
period of a year, what discount would he get?
Cases Purchased on Individual order
1-10
11-25
26-40
over 40
Discount %
.0
2.0
3.5
6.0
B. Allowances
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Trade in allowances
A reduction given when a used product is
part of the payment on a new product.
Promotional allowances
Cash payments or an extra amount of free
goods awarded to sellers in the channel of
distribution for performing advertising or
other promotions for the product.
C. Geographical Adjustments
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FOB Origin Pricing
Uniform Delivered Pricing
VI. Additional Pricing
Considerations
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Odd-even pricing
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Loss leader pricing
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Prestige Pricing
VII. Legal and Regulatory
Aspects
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Price Fixing (illegal under the Sherman Act)
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Deceptive Pricing (illegal under the Federal Trade Commission Act)
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See figure 14-9
Predatory Pricing (illegal under the Sherman Act and the Federal
Trade Commission Act)
Price Discrimination – occurs when a seller knowingly charges
different prices to competitive resellers or industrial buyers of
commodities of like grade and quality when the effect may be to
injure competition. (illegal under the Robison-Patman Act)
FIGURE 14-9 Five most common deceptive
pricing practices
Slide 14-41