1. McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved.

2. Identify the elements that make up a price. LO1 Recognize the objectives a firm has in setting prices and the constraints that restrict the range of prices a firm can charge. Explain what a demand curve is and the role of revenues in pricing decisions. LO3 LO2 LEARNING OBJECTIVES (LO) AFTER READING CHAPTER 13, YOU SHOULD BE ABLE TO: 13-2

3. Describe what price elasticity of demand means to a manager facing a pricing decision. Explain the role of costs in pricing decisions. LO4 LO5 LEARNING OBJECTIVES (LO) AFTER READING CHAPTER 13, YOU SHOULD BE ABLE TO: Describe how various combinations of price, fixed cost, and unit variable cost affect a firm’s breakeven point. LO6 13-3

4. WHEN MOTHER MAY NOT KNOW BEST: THE LAUNCH OF STUBHUB.COM!  Plan for the Start-up  How StubHub Works Now  StubHub: Who Benefits and How? 13-4

5. FIGURE 13-1 FIGURE 13-1 Quick-take quiz on price: Answers that are part numbers, part good judgment 1.(d) $2.7 trillion 2.(b) gasoline 3.(b) fixed cost 13-5

6. NATURE AND IMPORTANCE OF PRICE WHAT IS A PRICE? LO1  Price Price  Barter Barter  Price Equation 13-6 Final Price = list Price – (Incentives + Allowances) + Extra Fees

7. FIGURE 13-2 FIGURE 13-2 The “price” a buyer pays can take different names depending on what is purchased 13-7

8. NATURE AND IMPORTANCE OF PRICE PRICE AS AN INDICATOR OF VALUE LO1  Value Value  Value-Pricing Value-Pricing = $ $ 13-8

9. NATURE AND IMPORTANCE OF PRICE PRICE IN THE MARKETING MIX LO1  Profit Equation Profit Equation  Six Steps in Setting Price 13-9 Profit = Total Revenue – Total Costs = (Unit Price x Quantity Sold) – (Fixed Cost + Variable Cost)

10. FIGURE 13-3 FIGURE 13-3 The six steps in setting price. The first three steps are covered in Chapter 13 and the last three steps in Chapter 14. 13-10

11. STEP 1: IDENTIFY PRICING OBJECTIVES AND CONSTRAINTS IDENTIFYING PRICING OBJECTIVES LO2  Pricing Objectives Pricing Objectives Profit “The World is Flattening”  Managing for Current Profit  Managing for Long-Run Profits  Target Return (ROI) 13-11

12. MARKETING MATTERS How Flattening the World Affects Both Revenues and Costs: Infosys…IKEA, and You! 13-12

13. STEP 1: IDENTIFY PRICING OBJECTIVES AND CONSTRAINTS IDENTIFYING PRICING OBJECTIVES LO2 Sales ($) Social Responsibility Market Share ($ or #) Unit Volume (#) Survival  Pricing Objectives Pricing Objectives 13-13

14. STEP 1: IDENTIFY PRICING OBJECTIVES AND CONSTRAINTS IDENTIFYING PRICING CONSTRAINTS LO2  Pricing Constraints Pricing Constraints Demand for the Product Class (Cars), Product (Sports Cars), and Brand (Bugatti Veyron) Newness of the Product: Stage in the Product Life Cycle eBayeBay 13-14

15. STEP 1: IDENTIFY PRICING OBJECTIVES AND CONSTRAINTS IDENTIFYING PRICING CONSTRAINTS LO2 Single Product vs. a Product Line Cost of Producing and Marketing a Product Cost of Changing Prices and Time Period They Apply 13-15

16. STEP 1: IDENTIFY PRICING OBJECTIVES AND CONSTRAINTS IDENTIFYING PRICING CONSTRAINTS LO2 Type of Competitive Market  Oligopoly  Monopolistic Competition  Pure Monopoly  Pure Competition Competitors’ Prices 13-16

17. FIGURE 13-4 FIGURE 13-4 Pricing, product, and advertising strategies available to firms in four types of competitive markets 13-17

18. STEP 2: ESTIMATE DEMAND AND REVENUE FUNDAMENTALS OF ESTIMATING DEMAND LO3 The Demand Curve The Demand Curve  Price and Availability of Similar Products  Consumer Income  Consumer Tastes Demand Factors 13-18

19. FIGURE 13-5 FIGURE 13-5 Demand curves for Newsweek showing the effect on annual sales (quantity demanded per year) by a change in price caused by (A) a movement along and (B) a shift of the demand curve 13-19

20. STEP 2: ESTIMATE DEMAND AND REVENUE FUNDAMENTALS OF ESTIMATING DEMAND LO3 Movement Along vs. a Shift of Demand Curve  Movement Along a Demand Curve  Shift in the Demand Curve 13-20

21. FIGURE 13-5A FIGURE 13-5A Demand curve for Newsweek showing the effect on annual sales by a change in price caused by a movement along the demand curve 13-21

22. FIGURE 13-5B FIGURE 13-5B Demand curve for Newsweek showing the effect on annual sales by a change in price caused by a shift of the demand curve 13-22

23. STEP 2: ESTIMATE DEMAND AND REVENUE FUNDAMENTALS OF ESTIMATING REVENUE LO3  Total Revenue (TR) Total Revenue (TR)  Average Revenue (AR) Average Revenue (AR)  Demand Curves and Revenue 13-23

24. FIGURE 13-6 FIGURE 13-6 Fundamental revenue concepts 13-24

25. MARKETING MATTERS The Airbus vs. Boeing Face-off—How Many Can We Sell and at What Price…in a $2.7 Trillion Market?  The Products  Marketing and Pricing  Demand 13-25

26. STEP 2: ESTIMATE DEMAND AND REVENUE FUNDAMENTALS OF ESTIMATING REVENUE LO4  Price Elasticity of Demand Price Elasticity of Demand Elastic Demand Inelastic Demand Unitary Demand 13-26

27. STEP 2: ESTIMATE DEMAND AND REVENUE FUNDAMENTALS OF ESTIMATING REVENUE LO4 Necessities Large Cash Outlays Product Substitutes  Price Elasticity of Demand Price Elasticity of Demand 13-27

28. Clothing and Gasoline Which product is more sensitive to price changes? 13-28

29. STEP 3: DETERMINE COST, VOLUME, AND PROFIT RELATIONSHIPS THE IMPORTANCE OF CONTROLLING COSTS LO5  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)  Marginal Analysis Marginal Analysis 13-29

30. FIGURE 13-8 FIGURE 13-8 Fundamental cost concepts 13-30

31. MARKETING MATTERS Pricing Lessons from Failed Dot-Com Start-ups—Understand Revenues and Expenses  Travel Dot-Com Successes (So Far)  Brick-and-Mortar Dot-Com Failures 13-31

32. STEP 3: DETERMINE COST, VOLUME, AND PROFIT RELATIONSHIPS BREAK-EVEN ANALYSIS LO6  Break-Even Analysis Break-Even Analysis  Break-Even Point (BEP) Break-Even Point (BEP) 13-32

33. FIGURE 13-9 FIGURE 13-9 Profit is a maximum at the quantity at which marginal revenue and marginal cost are equal 13-33

34. FIGURE 13-10 FIGURE 13-10 Calculating a break-even point for the picture frame store shows its profit starts at 400 framed pictures per year 13-34

35. STEP 3: DETERMINE COST, VOLUME, AND PROFIT RELATIONSHIPS BREAK-EVEN ANALYSIS LO6  Break-Even Chart Break-Even Chart  Applications of Break-Even Analysis 13-35

36. FIGURE 13-11 FIGURE 13-11 Break-even analysis chart for a picture frame store shows the break-even point at 400 pictures 13-36

37. FIGURE 13-12 FIGURE 13-12 The cost trade-off: Fixed versus variable costs 13-37

38. Price A price is the money or other considerations (including other goods and services) exchanged for the ownership or use of a good or service. 13-38

39. Barter Barter is the practice of exchanging goods and services for other goods and services rather than for money. 13-39

40. Value Value is the ratio of perceived benefits to price; or Value = (Perceived benefits divided by Price). 13-40

41. Value-Pricing Value-pricing is the practice of simultaneously increasing product and service benefits while maintaining or decreasing price. 13-41

42. Profit Equation The profit equation is: Profit = Total revenue − Total cost; or Profit = (Unit price × Quantity sold) − (Fixed cost + Variable cost). 13-42

43. Pricing Objectives Pricing objectives specify the role of price in an organization’s marketing and strategic plans. 13-43

44. Pricing Constraints Pricing constraints are factors that limit the range of prices a firm may set. 13-44

45. 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. 13-45

46. Demand Factors Demand factors are those that determine consumers’ willingness and ability to pay for goods and services. 13-46

47. Total Revenue (TR) Total revenue (TR) is the total money received from the sale of a product. 13-47

48. 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. 13-48

49. Marginal Revenue (MR) Marginal revenue (MR) is the change in total revenue that results from producing and marketing one additional unit. 13-49

50. Price Elasticity of Demand The price elasticity of demand is the percentage change in quantity demanded relative to a percentage change in price. 13-50

51. Total Cost (TC) Total cost (TC) is the total expense incurred by a firm in producing and marketing a product. Total cost is the sum of fixed cost and variable cost. 13-51

52. 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. 13-52

53. 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. 13-53

54. Unit Variable Cost (UVC) Unit variable cost (UVC) is variable cost expressed on a per unit basis. 13-54

55. Marginal Cost (UVC) Marginal cost (UVC) is the change in total cost that results from producing and marketing one additional unit of a product. 13-55

56. Marginal Analysis Marginal analysis a continuing, concise trade-off of incremental costs against incremental revenues. 13-56

57. 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. 13-57

58. Break-Even Point (BEP) A break-even point (BEP) is the quantity at which total revenue and total cost are equal. 13-58

59. Break-Even Chart A 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. 13-59