1. foundations of Chapter M A R K E T I N G Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Understanding Pricing 13

2. Chapter Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 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 13 13-1

3. Chapter Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Price The value that a buyer exchanges for a good or service. Understanding Pricing 13 13-2

4. Chapter Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Utility The want-satisfying power of a product or service. Understanding Pricing 13 13-3

5. Chapter Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Types of Market Structure 1.Pure Competition 2.Monopolistic Competition 3.Oligopoly 4.Monopoly Understanding Pricing 13 13-4

6. Chapter Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 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 13 13-5a

7. Chapter Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 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 13 13-5b

8. Chapter Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 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 13 13-6

9. Chapter Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 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 13 13-7

10. Chapter Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Cost Curves Understanding Pricing 13 Figure 13.1 13-8

11. Chapter Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Supply Curve The marginal cost curve above its intersection with average variable cost. Understanding Pricing 13 13-9

12. Chapter Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Elasticity A measure of the responsiveness of purchasers and suppliers to changes in price. Understanding Pricing 13 13-10

13. Chapter Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Concept of Demand Elasticity 1.Elastic=Demand relatively sensitive to price 2.Inelastic=Demand relative insensitive to price Understanding Pricing 13 13-11

14. Chapter Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 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 13 13-12

15. Chapter Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 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 13 13-13

16. Chapter Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 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 13 13-14

17. Chapter Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Understanding Pricing 13 Figure 13.2 13-15 Break-even Analysis

18. Chapter Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Break-even Equation (1 of 2) Understanding Pricing 13 13-16a Total Fixed Costs Per-Unit–Average Selling Price Variable Cost Total Fixed Costs Per-Unit Contribution to Fixed Cost Break-even Point = (in units) =

19. Chapter Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Break-even Equation (2 of 2) Understanding Pricing 13 13-16b Total Fixed Costs Variable Cost per Unit Selling Price Break-even Point = (in units) 1 -

20. Chapter Copyright © 2003 by Nelson, a division of Thomson Canada Limited. The Dynamic Break-even Concept Dynamic Break-even Analysis Combines the traditional break-even analysis model with an evaluation of consumer demand. Understanding Pricing 13 13-17

21. Chapter Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Markup The amount a producer or channel members adds to cost in order to determine selling price. Understanding Pricing 13 13-18

22. Chapter Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Markups Amount added to Cost (the Markup) Selling Price Amount added to Cost (the Markup) Cost Understanding Pricing 13 13-19 Markup Percentage on Selling Price= Markup Percentage on Cost=

23. Chapter Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Markdowns Markdown Sale (New) Price Understanding Pricing 13 13-20 Markdown Percentage =

24. Chapter Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Stock Turnover The number of times the average inventory is sold annually. Understanding Pricing 13 13-21

25. Chapter Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Stock Turnovers Sales Average Inventory at Retail or Cost of Goods Sold Average Inventory at Cost Understanding Pricing 13 13-22 Stock Turnover =

26. Chapter Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 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 13 13-23

27. Chapter Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Negotiated Contract The terms of the contract are set through talks between the buyer and the seller. Understanding Pricing 13 13-24

28. Chapter Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 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 13 13-25

29. Chapter Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 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 13 13-26

30. Chapter Copyright © 2003 by Nelson, a division of Thomson Canada Limited. The Transfer Pricing Problem Transfer Price The price for sending goods from one company profit centre to another. Understanding Pricing 13 13-27

31. Chapter Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Profit Centre Any part of the organization to which revenue and controllable costs can be assigned, such as a department. Understanding Pricing 13 13-28