© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide 13-2 BUILDING THE PRICE FOUNDATION C HAPTER

© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide 13-5 WHERE DOT-COMS STILL THRIVE: HELPING YOU GET A $100-A-NIGHT HOTEL ROOM OVERLOOKING NEW YORK’S CENTRAL PARK Why Travel Dot-Coms Haven ’ t Tanked Travel Dot-Com Prices: A Win-Win for Both Buyers and Sellers  Saving Time  Saving Money

© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin NATURE AND IMPORTANCE OF PRICE Slide 13-7 The Many Names of Price  Price Price What Is a Price?  Barter Barter  Price Equation

© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide 13-8 FIGURE 13-2 FIGURE 13-2 The price of three different purchases

© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide 13-9 Bugatti Veyron What is its price equation?

© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide ETHICS AND SOCIAL RESPONSIBILITY ALERT Student Credit Cards— What Is the Real Price? Lower My Bills Nellie Mae

© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin NATURE AND IMPORTANCE OF PRICE Slide Price as an Indicator of Value  Value Value  Value Pricing Value Pricing  Profit Equation Profit Equation Price in the Marketing Mix

© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin FIGURE 13-3 FIGURE 13-3 Steps in setting price Slide 13-12

© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin STEP 1: IDENTIFY PRICING OBJECTIVES AND CONSTRAINTS Slide Identifying Pricing ObjectivesIdentifying Pricing Objectives  Profit Maximizing for Long-Run Profits Maximizing Current Profit Target Return

© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide FIGURE 13-4 FIGURE 13-4 Where each dollar of your movie ticket goes

© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin STEP 1: IDENTIFY PRICING OBJECTIVES AND CONSTRAINTS Slide Identifying Pricing ObjectivesIdentifying Pricing Objectives  Sales  Market Share  Unit Volume  Survival  Social Responsibility

© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin STEP 1: IDENTIFY PRICING OBJECTIVES AND CONSTRAINTS Slide Identifying Pricing ConstraintsIdentifying Pricing Constraints  Demand for the Product Class, Product, and Brand  Single Product versus a Product Line  Newness of the Product: Stage in the Product Life Cycle

© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin STEP 1: IDENTIFY PRICING OBJECTIVES AND CONSTRAINTS Slide Identifying Pricing ConstraintsIdentifying Pricing Constraints  Cost of Changing Prices and Time Period They Apply  Cost of Producing and Marketing the Product

© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin STEP 1: IDENTIFY PRICING OBJECTIVES AND CONSTRAINTS Slide Identifying Pricing ConstraintsIdentifying Pricing Constraints  Type of Competitive Markets Pure Monopoly Oligopoly Monopolistic Competition Pure Competition  Competitors’ Prices

© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide FIGURE 13-5 FIGURE 13-5 Pricing, product, and advertising strategies available to firms in four types of competitive markets

© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide Concept Check 1. What factors impact the list price to determine the final price? A: discounts, allowances, rebates, and extra fees or surcharges

© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide Concept Check 2. What is the difference between pricing objectives and pricing constraints? A: Pricing objectives involve specifying the role of price in an organization’s marketing and strategic plans whereas pricing constraints are factors that limit the range of prices a firm may set.

© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide Concept Check 3. How does the type of competitive market a firm is in affect its range in setting price? A: Different competitive markets have differences in price competition and, in turn, the nature of product differentiation and extent of advertising.

© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin STEP 2: ESTIMATE DEMAND AND REVENUE Slide Fundamentals of Estimating Demand  The Demand Curve The Demand Curve Consumer Tastes Price and Availability of Similar Products Consumer Income Demand Factors  Movement Along versus Shift of a Demand Curve

© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide Newsweek How do you estimate demand and set a price?

© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide FIGURE 13-6 FIGURE 13-6 Illustrative demand curves for Newsweek Demand curve under initial conditions Shift in the demand curve with more favorable conditions

© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide FIGURE 13-6A FIGURE 13-6A Illustrative demand curve for Newsweek (initial conditions)

© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide FIGURE 13-6B FIGURE 13-6B Illustrative demand curve for Newsweek (shift in demand)

© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin STEP 2: ESTIMATE DEMAND AND REVENUE Slide Fundamentals of Estimating Revenue  Total Revenue (TR) Total Revenue (TR)  Demand Curves and Revenue  Average Revenue (AR) Average Revenue (AR)  Marginal Revenue (MR) Marginal Revenue (MR)

© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin FIGURE 13-7 FIGURE 13-7 Fundamental revenue concepts Slide 13-32

© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide FIGURE 13-8 FIGURE 13-8 How a downward-sloping demand curve affects total, average, and marginal revenue

© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin STEP 2: ESTIMATE DEMAND AND REVENUE Slide Fundamentals of Estimating Revenue  Price Elasticity of Demand Price Elasticity of Demand Elastic Demand Inelastic Demand Unitary Demand

© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide Clothing vs. Gasoline Which is more sensitive to prices changes?

© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin STEP 3: DETERMINE COST, VOLUME, AND PROFIT RELATIONSHIPS Slide Importance of Controlling Costs  Total Cost (TC) Total Cost (TC)  Fixed Cost (FC) Fixed Cost (FC)  Variable Cost (VC) Variable Cost (VC)  Unit Variable Cost (UVC) Unit Variable Cost (UVC)  Marginal Cost (MC) Marginal Cost (MC)

© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin FIGURE 13-9 FIGURE 13-9 Fundamental cost concepts Slide 13-41

© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide MARKETING NEWSNET Pricing Lessons from the Dot-Coms— Understanding Revenues and Expenses Brick-and-Mortar Dot-Com Failures Travel Dot-Com Successes (So Far)

© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin STEP 3: DETERMINE COST, VOLUME, AND PROFIT RELATIONSHIPS Slide Marginal Analysis and Profit MaximizationMarginal Analysis and Profit Maximization  Break-Even Point (BEP) Break-Even Point (BEP)  Calculating a Break-Even Point Break-Even Analysis  Break-Even Chart Break-Even Chart  Applications of Break-Even Analysis

© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin FIGURE FIGURE Profit maximization pricing Slide 13-44

© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide FIGURE FIGURE Calculating a break-even point for a picture frame store

© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide FIGURE FIGURE Break-even analysis chart for a picture frame store

© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide FIGURE FIGURE The cost trade-off: fixed versus variable costs

© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide Price (P) Price (P) is the money or other considerations (including other goods and services) exchanged for the ownership or use of a good or service.

© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide Barter Barter is the practice of exchanging goods and services for other goods and services rather than for money.

© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide Value Value is the ratio of perceived benefits to price; or Value = (Perceived benefits divided by Price).

© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide Value-Pricing Value-pricing is the practice of simultaneously increasing product and service benefits while maintaining or decreasing price.

© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide Profit Equation A firm’s profit equation is as follows: Profit = Total revenue − Total cost; or Profit = (Unit price × Quantity sold) − Total cost.

© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide Pricing Objectives Pricing objectives involve specifying the role of price in an organization’s marketing and strategic plans.

© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide Pricing Constraints Pricing constraints involve factors that limit the range of prices a firm may set.

© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide 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.

© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide Demand Factors Demand factors are factors that determine consumers’ willingness and ability to pay for goods and services.

© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide Total Revenue (TR) Total revenue (TR) is the total money received from the sale of a product. Total revenue (TR) = unit price (P) × the quantity sold (Q) or TR = P × Q.

© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide 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.

© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide Marginal Revenue (MR) Marginal revenue (MR) is the change in total revenue that results from producing and marketing one additional unit.

© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide Price Elasticity of Demand Price elasticity of demand is the percentage change in quantity demanded relative to a percentage change in price.

© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide Total Cost (TC) Total cost (TC) is the total expense incurred by a firm in producing and marketing a product. Total cost (TC) equals the sum of fixed cost (FC) and variable cost (VC) or TC = FC + VC.

© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide 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.

© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide 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.

© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide Unit Variable Cost (UVC) Unit variable cost (UVC) is variable cost expressed on a per unit basis.

© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide Marginal Cost (MC) Marginal cost (MC) is the change in total cost that results from producing and marketing one additional unit of a product.

© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide Marginal Analysis Marginal analysis is a continuing, concise trade-off of incremental costs against incremental revenues.

© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide 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.

© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide Break-Even Point (BEP) Break-even point (BEP) is the quantity at which total revenue and total cost are equal or BEP = (FC ÷ (P−UVC)).

© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide Break-Even Chart 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.