© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin BUILDING THE PRICE FOUNDATION 13 C HAPTER

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin 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. AFTER READING THIS CHAPTER YOU SHOULD BE ABLE TO:

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Explain what a demand curve is and how it affects a firm’s total and marginal revenue. Recognize what price elasticity of demand means to a manager facing a pricing decision. AFTER READING THIS CHAPTER YOU SHOULD BE ABLE TO:

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Explain the role of costs in pricing decisions. Calculate a break-even point for various combinations of price, fixed costs, and unit variable cost. AFTER READING THIS CHAPTER YOU SHOULD BE ABLE TO:

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin WHERE DOT-COMS STILL THRIVE: HELPING YOU GET A $100 A NIGHT HOTEL ROOM OVER-LOOKING NEW YORK’S CENTRAL PARK! Why Travel Dot-Coms Haven’t Tanked Travel Dot-Com Prices: A Win-Win for Both Buyers and Sellers! BUILDING THE PRICE FOUNDATION

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin What is a Price?  Barter Barter NATURE AND IMPORTANCE OF PRICE

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Price as an Indicator of ValueValue  Value-pricing Value-pricing Price in the Marketing Mix  Profit Equation Profit Equation NATURE AND IMPORTANCE OF PRICE

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Identifying Pricing ConstraintsPricing 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 STEP 1: IDENTIFY PRICING CONSTRAINTS AND OBJECTIVES

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Identifying Pricing Constraints (cont) Cost of Changing Prices and Time Period They Apply Types of Competitive Markets  Pure monopoly  Oligopoly  Monopolistic competition  Pure competition STEP 1: IDENTIFY PRICING CONSTRAINTS AND OBJECTIVES

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Identifying Pricing Constraints (cont) Competitors’ Prices STEP 1: IDENTIFY PRICING CONSTRAINTS AND OBJECTIVES

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Identifying Pricing ObjectivesPricing Objectives Profit STEP 1: IDENTIFY PRICING CONSTRAINTS AND OBJECTIVES

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Identifying Pricing Objectives (cont) Sales Market Share Unit Volume Survival Social Responsibility STEP 1: IDENTIFY PRICING CONSTRAINTS AND OBJECTIVES

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Concept Check 1. What factors impact the list price to determine the final price? A: Subtract discounts and allowances and add extra fees.

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Concept Check 2. How does the type of competitive market a firm is in affect its latitude in setting price? A: Different competitive markets have differences in price competition and, in turn, the nature of product differentiation and extent of advertising.

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Fundamentals of Estimating Demand The Demand CurveDemand Curve STEP 2: ESTIMATE DEMAND AND SERVICE

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin The Demand Curve (cont)  Demand factors Demand factors Movement Along versus Shift of a Demand Curve STEP 2: ESTIMATE DEMAND AND SERVICE

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Fundamentals of Estimating Revenue  Total revenue Total revenue  Average revenue Average revenue  Marginal revenue Marginal revenue STEP 2: ESTIMATE DEMAND AND SERVICE

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Fundamentals of Estimating Revenue (cont) Demand Curves and Revenue STEP 2: ESTIMATE DEMAND AND SERVICE

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Fundamentals of Estimating Revenue (cont) Price Elasticity of Demand Price Elasticity for Brands and Product Classes STEP 2: ESTIMATE DEMAND AND SERVICE

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Concept Check 1. What is the difference between a movement along and a shift of a demand curve? A: A movement along the demand curve occurs when the price is lowered and quantity demanded increases, assuming that other demand factors remain unchanged. If some of these factors change, however, a shift of the demand curve results.

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Concept Check 2. What does it mean if a product has a price elasticity of demand that is greater than 1? A: Elasticities greater than 1 indicate the product is price elastic.

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin The Importance of Controlling Costs  Total cost Total cost  Fixed cost Fixed cost  Variable cost Variable cost  Marginal cost Marginal cost STEP 3: DETERMINE COST, VOLUME, AND PROFIT RELATIONSHIPS

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Marginal Analysis and Profit MaximizationMarginal Analysis STEP 3: DETERMINE COST, VOLUME, AND PROFIT RELATIONSHIPS

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Break-Even Analysis  Break-even point Break-even point  Break-even chart Break-even chart Calculating a Break-Even Point STEP 3: DETERMINE COST, VOLUME, AND PROFIT RELATIONSHIPS

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Break-Even Analysis (cont) Applications of Break-Even Analysis STEP 3: DETERMINE COST, VOLUME, AND PROFIT RELATIONSHIPS

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Concept Check 1. What is the difference between fixed costs and variable costs? A: Fixed costs are stable and do not change with the quantity of the product that is produced and sold. Variable costs vary directly with the quantity of the product that is produced and sold.

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Concept Check 2. What is a break-even point? A: The break-even point is the quantity at which total revenue and total cost are equal and beyond which profit occurs.

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin The practice or exchanging goods and services for other goods and services rather than for money. Barter

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Specifically, value can be defined as the ratio of perceived benefits to price: (Value = Perceived benefits/Price). Value

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin The practice of simultaneously increasing service and product benefits and maintaining or increasing price. Value-Pricing

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Profit = total revenue – Total cost, or Profit = (Unit Price x Quantity Sold) – Total Cost Profit Equation

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Factors that limit the latitude of price a firm may set. Pricing Constraints

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Expectations that specify the role of price in an organization’s marketing and strategic plans. Pricing Objectives

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin The summation of points representing the maximum number of products consumers will buy at a given price. Demand Curve

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Factors that determine consumers’ willingness and ability to pay for goods and services. Demand Factors

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin The total money received from the sale of a product. Total Revenue

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin The average amount of money received for selling one unit of a product. Average Revenue

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin The change in total revenue obtained by selling one additional unit. Marginal Revenue

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin The percentage change in quantity demanded relative to a percentage change in price. Price Elasticity of Demand

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin The total expense incurred by a firm in producing and marketing a product. Total cost is the sum of fixed cost and variable cost. In physical distribution decisions, the sum of all applicable costs for logistical activities. Total Cost

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin The sum of expenses of the firm that are stable and do not change with the quantity of product that is produced and sold. Fixed Cost

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin The sum of the expenses of the firm that vary directly with the quantity of product that is produced and sold. Variable Cost

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin The change in total cost that results from producing and marketing one additional unit. Marginal Cost

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin A continuing, concise trade-off of incremental costs against incremental revenues. Marginal Analysis

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin A technique that analyzes the relationship between total revenue and total cost to determine profitability at various levels of output. Break-Even Analysis

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Quantity at which total revenue and total cost are equal and beyond which profit occurs. Break-Even Point

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin A graphic presentation of the break-even analysis. Break-Even Chart