Chapter foundations of Chapter M A R K E T I N G Understanding Pricing 13

Chapter Objectives 1.Discuss the concept of pricing objectives and their use. 2.Explain basic economic pricing principles and the concept of price elasticity. 3.Identify the practical problems involved in applying economics price theory concepts to actual pricing decisions. 4.Outline the major approaches to price setting. 5.Apply break-even analysis and discuss its use in pricing decisions. 6.Explain negotiated prices and competitive bidding. 7.Explain the concept of transfer pricing. 8.Discuss pricing in the public sector. Understanding Pricing

Chapter Price The value that a buyer exchanges for a good or service. Understanding Pricing

Chapter Utility The want-satisfying power of a product or service. Understanding Pricing

Chapter Types of Market Structure 1.Pure Competition 2.Monopolistic Competition 3.Oligopoly 4.Monopoly Understanding Pricing

Chapter Pure Competition and Monopolistic Competition (1 of 2) Pure Competition A market structure in which there is such a large number of buyers and sellers that no one of them has a significant influence on price. Understanding Pricing a

Chapter Pure Competition and Monopolistic Competition (2 of 2) Monopolistic Competition A market structure with a large number of buyers and sellers where heterogeneity in good and/or service and usually geographical differentiation allow the marketer some control over price. Understanding Pricing b

Chapter Oligopoly, Oligopsony, and Monopoly Oligopoly A market structure in which there are relatively few sellers. Oligopsony A market in which there are only a few buyers. Monopoly A market structure with only one seller of a product with no close substitutes. Understanding Pricing

Chapter Revenue, Cost, and Supply Curves Average Cost Obtained by dividing total cost by the quantity associated with this cost. Average Variable Cost The total variable cost divided by the related quantity. Marginal Cost The change in total cost that results from producing an additional unit of output. Understanding Pricing

Chapter Cost Curves Understanding Pricing 13 Figure

Chapter Supply Curve The marginal cost curve above its intersection with average variable cost. Understanding Pricing

Chapter Elasticity A measure of the responsiveness of purchasers and suppliers to changes in price. Understanding Pricing

Chapter Concept of Demand Elasticity 1.Elastic=Demand relatively sensitive to price 2.Inelastic=Demand relative insensitive to price Understanding Pricing

Chapter Industry or market elasticity Refers to changes in total demand resulting from general changes in price across the industry. Company elasticity Refers to the sensitivity to changes in price that a particular company or brand faces. Segment elasticity Refers to the sensitivity to changes in price that a particular market segment exhibits. Understanding Pricing

Chapter Cost-Oriented Price Setting Cost-Plus Pricing Pricing technique using base cost figure per unit to which is added a markup to cover on assigned costs and to provide a profit. Understanding Pricing

Chapter Break-even Analysis A means of determining the number of goods or services that must be sold at a given price in order to generate sufficient revenue to cover total costs. Understanding Pricing

Chapter Understanding Pricing 13 Figure Break-even Analysis

Chapter Break-even Equation (1 of 2) Understanding Pricing a Total Fixed Costs Per-Unit–Average Selling Price Variable Cost Total Fixed Costs Per-Unit Contribution to Fixed Cost Break-even Point = (in units) =

Chapter Break-even Equation (2 of 2) Understanding Pricing b Total Fixed Costs Variable Cost per Unit Selling Price Break-even Point = (in units) 1 -

Chapter The Dynamic Break-even Concept Dynamic Break-even Analysis Combines the traditional break-even analysis model with an evaluation of consumer demand. Understanding Pricing

Chapter Markup The amount a producer or channel members adds to cost in order to determine selling price. Understanding Pricing

Chapter Markups Amount added to Cost (the Markup) Selling Price Amount added to Cost (the Markup) Cost Understanding Pricing Markup Percentage on Selling Price= Markup Percentage on Cost=

Chapter Markdowns Markdown Sale (New) Price Understanding Pricing Markdown Percentage =

Chapter Stock Turnover The number of times the average inventory is sold annually. Understanding Pricing

Chapter Stock Turnovers Sales Average Inventory at Retail or Cost of Goods Sold Average Inventory at Cost Understanding Pricing Stock Turnover =

Chapter Negotiated Prices and Competitive Bidding Competitive Bidding A process by which buyers request potential suppliers to make price quotations on a proposed purchase or contract. Specifications A specific description of a needed item or job that the buyer wishes to acquire. Understanding Pricing

Chapter Negotiated Contract The terms of the contract are set through talks between the buyer and the seller. Understanding Pricing

Chapter Escalator Clause Allows the seller to adjust the final price based on changes in the costs of the products ingredients between the placement of the order and the completion of construction or delivery of the product. Understanding Pricing

Chapter International Pricing Setting prices to be charged to buyers in other countries taking into consideration exchange risk, price escalation through multiplication of channels, and transportation. Exchange Risk The risk of negotiating a price in another nations currency and finding upon delivery of the product that the currencys value has dropped in relation to your countrys currency. Price Escalation The increase in final price in a foreign market over a domestic price because of having to pay for the services of additional channel members to get the product to that market. Understanding Pricing

Chapter The Transfer Pricing Problem Transfer Price The price for sending goods from one company profit centre to another. Understanding Pricing

Chapter Profit Centre Any part of the organization to which revenue and controllable costs can be assigned, such as a department. Understanding Pricing

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