1. Marketing II The Chang School-Ryerson University Continuing Education
CMKT 200
Instructor: Armand Gervais
preferred
Web:
Office: Bus 308
Phone: Ext 4215

2. Lecture 5 Agenda Don’t Forget Name Tags Pricing Break
Time to work in Groups on Simulation

3. BUILDING THE PRICE FOUNDATION
CHAPTER 13

4. AFTER READING THIS CHAPTER
YOU SHOULD BE ABLE TO:
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.

5. AFTER READING THIS CHAPTER
YOU SHOULD BE ABLE TO:
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.

6. AFTER READING THIS CHAPTER
YOU SHOULD BE ABLE TO:
Explain the role of costs in pricing decisions.
Calculate a break-even point for various combinations of price, fixed costs, and unit variable cost.

7. BUILDING THE PRICE FOUNDATION
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!

8. NATURE AND IMPORTANCE OF PRICE
What is a Price?
Barter

9. FIGURE 13-2 The price of four different purchases

10. NATURE AND IMPORTANCE OF PRICE
Price as an Indicator of Value
Value-pricing
Price in the Marketing Mix
Profit Equation

11. FIGURE 13-3 Steps in setting price

12. STEP 1: IDENTIFY PRICING CONSTRAINTS AND OBJECTIVES
Identifying Pricing 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

13. STEP 1: IDENTIFY PRICING CONSTRAINTS AND OBJECTIVES
Identifying Pricing Constraints (cont)
Cost of Changing Prices and Time Period They Apply Catalogues
Types of Competitive Markets
Pure monopoly
Oligopoly
Monopolistic competition
Pure competition

14. FIGURE Pricing, product, and advertising strategies available to firms in four types of competitive markets

15. STEP 1: IDENTIFY PRICING CONSTRAINTS AND OBJECTIVES
Identifying Pricing Constraints (cont)
Competitors’ Prices

16. STEP 1: IDENTIFY PRICING CONSTRAINTS AND OBJECTIVES
Identifying Pricing Objectives
Profit

17. STEP 1: IDENTIFY PRICING CONSTRAINTS AND OBJECTIVES
Identifying Pricing Objectives (cont)
Sales
Market Share
Unit Volume
Survival
Social Responsibility

18. 1. What factors impact the list price to determine the final price?
Concept Check
1. What factors impact the list price to determine the final price?
A: Subtract discounts and allowances and add extra fees.

19. 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.

20. STEP 2: ESTIMATE DEMAND AND SERVICE
Fundamentals of Estimating Demand
The Demand Curve

21. FIGURE 13-6 Illustrative demand curves for Newsweek magazine

22. STEP 2: ESTIMATE DEMAND AND SERVICE
The Demand Curve (cont)
Demand factors
Movement Along versus Shift of a Demand Curve

23. STEP 2: ESTIMATE DEMAND AND SERVICE
Fundamentals of Estimating Revenue
Total revenue
Average revenue
Marginal revenue

24. FIGURE 13-7 Fundamental revenue concepts

25. STEP 2: ESTIMATE DEMAND AND SERVICE
Fundamentals of Estimating Revenue (cont)
Demand Curves and Revenue

26. FIGURE 13-8 How a downward-sloping demand curve affects total, average, and marginal revenue

27. STEP 2: ESTIMATE DEMAND AND SERVICE
Fundamentals of Estimating Revenue (cont)
Price Elasticity of Demand
Price Elasticity for Brands and Product Classes

28. 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.
Demand Shift
Interest rates decrease more housing would be demanded at all prices?

29. A: Elasticities greater than 1 indicate the product is price elastic.
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.
Almost any discretionary good has a Elasticity less than one IE Video Cameras

30. STEP 3: DETERMINE COST, VOLUME, AND PROFIT RELATIONSHIPS
The Importance of Controlling Costs
Total cost
Fixed cost
Variable cost
Marginal cost

31. FIGURE 13-9 Fundamental cost concepts

32. STEP 3: DETERMINE COST, VOLUME, AND PROFIT RELATIONSHIPS
Marginal Analysis and Profit Maximization

33. STEP 3: DETERMINE COST, VOLUME, AND PROFIT RELATIONSHIPS
Break-Even Analysis
Break-even point
Break-even chart
Calculating a Break-Even Point

34. FIGURE 13-11 Calculating a break-even point

35. FIGURE 13-12 Break-even analysis chart

36. STEP 3: DETERMINE COST, VOLUME, AND PROFIT RELATIONSHIPS
Break-Even Analysis (cont)
Applications of Break-Even Analysis

38. 1. What is the difference between fixed costs and variable costs?
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.

39. 2. What is a break-even point?
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.

40. ARRIVING AT THE FINAL PRICE
CHAPTER 14

41. AFTER READING THIS CHAPTER
YOU SHOULD BE ABLE TO:
Understand how to establish the initial “approximate price level” using demand-oriented, cost-oriented, profit-oriented, and competition-oriented approaches.
Identify the major factors considered in deriving a final list or quoted price from the approximate price level.

42. AFTER READING THIS CHAPTER
YOU SHOULD BE ABLE TO:
Describe adjustments made to the approximate price level on the basis of geography, discounts, and allowances.
Prepare basic financial analyses useful in evaluating alternative prices and arriving at the final sales price.

43. AFTER READING THIS CHAPTER
YOU SHOULD BE ABLE TO:
Describe the principle laws and regulations affecting pricing practices.

44. ARRIVING AT THE FINAL PRICE
DURACELL KNOWS THE VALUE OF PORTABLE POWER

45. FIGURE 14-2 Four approaches for selecting an approximate price level
STEP 4: SELECT AN APPROXIMATE PRICE LEVEL
FIGURE Four approaches for selecting an approximate price level

46. STEP 4: SELECT AN APPROXIMATE PRICE LEVEL
Demand-Oriented Approaches
Skimming Pricing new tech products
Penetration Pricing price sensitive razors
Prestige Pricing luxury goods
Price Lining

47. FIGURE 14-3 Demand curves for two types of demand-oriented approaches

48. STEP 4: SELECT AN APPROXIMATE PRICE LEVEL
Demand-Oriented Approaches (cont)
Odd-Even Pricing
Target Pricing
Bundle Pricing Telecommunications companies
Yield Management Pricing

49. Concept Check
1. What are the circumstances in pricing a new product that might support skimming or penetration pricing?
A: Circumstances supporting a skimming strategy include: (1) Enough prospective customers are willing to buy the product immediately at the initial high price to make these sales profitable, (2) The high initial price will not attract competitors, (3) Lowering price has only a minor effect on increasing the sales volume and reducing the unit cost, and (4) Customers interpret the high price as signifying high quality.
Conditions supporting a penetration strategy include: (1) Many segments of the market are price sensitive, (2) A low initial price discourages competitors from entering the market, and (3) Unit production and marketing costs fall dramatically as production volumes increase.

50. 2. What is odd-even pricing?
Concept Check
2. What is odd-even pricing?
A: Odd-even pricing involves setting prices with a few dollars or cents under an even number, with the assumption that demand might drop off dramatically if the price were raised to the even number.

51. STEP 4: SELECT AN APPROXIMATE PRICE LEVEL
Cost-Oriented Approaches
Standard Markup Pricing
Cost-Plus Pricing
Experience Curve Pricing

52. STEP 4: SELECT AN APPROXIMATE PRICE LEVEL
Profit-Oriented Approaches
Target Profit Pricing
Target Return-on-Sales Pricing
Target Return-on-Investment Pricing

53. FIGURE 14-4 Results of computer spreadsheet simulation to select price to achieve a target ROI

54. STEP 4: SELECT AN APPROXIMATE PRICE LEVEL
Competition-Oriented Approaches
Customary Pricing
Above- At- or Below- Market Pricing
Loss-Leader Pricing

55. 1. What is standard markup pricing?
Concept Check
1. What is standard markup pricing?
A: Standard markup pricing entails adding a fixed percentage to the cost of all items in a specific product class.

56. A: Target-return-on-investment pricing.
Concept Check
2. What profit-based pricing approach should a manager use if he or she wants to reflect the percentage of the firm’s resources used in obtaining the profit?
A: Target-return-on-investment pricing.

57. Concept Check
3. What is the purpose of loss-leader pricing when used by a retail firm?
A: Loss-leader pricing is used to attract customers in hopes they will buy other products as well.

58. STEP 5: SET THE LIST OR QUOTED PRICE
One-Price versus Flexible-Price Policy

59. STEP 5: SET THE LIST OR QUOTED PRICE
Company, Customer, and Competitive Effects
Company Effects
Product-line pricing
Customer Effects

60. STEP 5: SET THE LIST OR QUOTED PRICE
Company, Customer, and Competitive Effects (cont)
Competitive Effects
Price war
Balancing Incremental Costs and Revenues

61. FIGURE 14-5 The power of marginal analysis in real-world decisions

62. FIGURE 14-6 Three special adjustments to list or quoted price
STEP 6: MAKE SPECIAL ADJUSTMENTS TO THE LIST OR QUOTED PRICE
FIGURE Three special adjustments to list or quoted price

63. STEP 6: MAKE SPECIAL ADJUSTMENTS TO THE LIST OR QUOTED PRICE
Discounts
Quantity Discounts
Seasonal Discounts
Trade (Functional) Discounts
Cash Discounts

64. FIGURE 14-7 The structure of trade discounts

65. STEP 6: MAKE SPECIAL ADJUSTMENTS TO THE LIST OR QUOTED PRICE
Allowances
Trade-In Allowances
Promotional Allowances
Everyday low pricing
Geographical Adjustments
FOB Origin Pricing
Uniform Delivered Pricing
Basing-Point Pricing

66. STEP 6: MAKE SPECIAL ADJUSTMENTS TO THE LIST OR QUOTED PRICE
Legal and Regulatory Aspects of Pricing
Price Fixing
Price Discrimination
Deceptive Pricing
Geographical Pricing
Predatory Pricing

67. FIGURE 14-9 Five most common deceptive pricing practices

68. Concept Check
1. Why would a seller choose a flexible-price policy over a one-price policy?
A: Flexible-price policies give sellers greater discretion in setting the final price in light of demand, cost, and competitive factors.

69. A: Cumulative quantity discount
Concept Check
2. If a firm wished to encourage repeat purchases by a buyer throughout a year, would a cumulative or noncumulative quantity discount be a better strategy?
A: Cumulative quantity discount

70. Skimming Pricing
The highest initial price that customers really desiring the product are willing to pay.

71. Penetration Pricing
Setting a low initial price on a new product to appeal immediately to the mass market.

72. Prestige Pricing
Setting a high price so that status-conscious consumers will be attracted to the product and buy it.

73. Price Lining
Setting the price of a line of products at a number of different specific pricing points.

74. Odd-Even Pricing
Setting prices a few dollars or cents under an even number, such at $19.95.

75. Target Pricing
Manufacturer deliberately adjusting the composition and features of a product to achieve the target price to consumers.

76. Bundle Pricing
The marketing of two or more products in a single “package” price.

77. Yield Management Pricing
The charging of different prices to maximize revenue for a set amount of capacity at any given time.

78. Standard Markup Pricing
Adding a fixed percentage to the cost of all items in a specific product class.

79. Cost-Plus Pricing
The practice of summing the total unit cost of providing a product or service and adding a specific amount to the cost to arrive at a price.

80. Experience Curve Pricing
A method of pricing based on the learning effect, which holds that the unit cost of many products and services declines by 10 percent to 30 percent each time a firm’s experience at producing and selling them doubles.

81. Target Profit Pricing
Setting an annual target of a specific dollar volume of profit.

82. Target Return-on-Sales Pricing
Setting a price to achieve a profit that is a specified percentage of the sales volume.

83. Target Return-on-Investment Pricing
Setting a price to achieve a return-on-investment (ROI) target.

84. Customary Pricing
A method of pricing based on tradition, a standardized channel of distribution, or other competitive factors.

85. Above- At- or Below- Market Pricing
Pricing based on market price.

86. Loss-Leader Pricing
Deliberately selling a product below its customary price to attract attention to it.

87. One-Price Policy
Setting one price for all buyers of a product or service. Also called fixed pricing.

88. Flexible-Price Policy
Setting different prices for products and services depending on individual buyers and purchase situations.

89. Product-Line Pricing
The setting of prices for all items in a product line.

90. Price War
Successive price cutting by competitors to increase or maintain their unit sales or market share.

91. Quantity Discounts
Reductions in unit costs for a larger order.

92. Promotional Allowances
Cash payment or extra amount of “free goods” awarded sellers in the channel of distribution for undertaking certain advertising or selling activities to promote a product.

93. Everyday Low Pricing
(1) The practice or replacing promotional allowances with lower manufacturer list prices. (2) Retail strategy that emphasizes consistently low prices and eliminates most markdowns.

94. FOB Origin Pricing
A method of pricing where the title of goods passes to the buyer at the point of loading.

95. Uniform Delivered Pricing
The price the seller quotes includes all transportation costs.

96. Basing-Point Pricing
Selecting one or more geographic locations (basing point) from which the list price for products plus freight expenses are charged to buyers.

97. Price Fixing
A conspiracy among firms to set prices for a product.

98. Price Discrimination
The practice of charging different prices to different buyers for goods of like trade and quality.

99. Predatory Pricing
Charging a very low price for a product with the intent of driving competitors out of business.

100. Barter
The practice or exchanging goods and services for other goods and services rather than for money.

101. Value
Specifically, value can be defined as the ratio of perceived benefits to price: (Value = Perceived benefits/Price).

102. Value-Pricing
The practice of simultaneously increasing service and product benefits and maintaining or increasing price.

103. Profit Equation
Profit = total revenue – Total cost, or Profit = (Unit Price x Quantity Sold) – Total Cost

104. Pricing Constraints
Factors that limit the latitude of price a firm may set.

105. Pricing Objectives
Expectations that specify the role of price in an organization’s marketing and strategic plans.

106. Demand Curve
The summation of points representing the maximum number of products consumers will buy at a given price.

107. Demand Factors
Factors that determine consumers’ willingness and ability to pay for goods and services.

108. Total Revenue
The total money received from the sale of a product.

109. Average Revenue
The average amount of money received for selling one unit of a product.

110. Marginal Revenue
The change in total revenue obtained by selling one additional unit.

111. Price Elasticity of Demand
The percentage change in quantity demanded relative to a percentage change in price.

112. Total Cost
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.

113. Fixed Cost
The sum of expenses of the firm that are stable and do not change with the quantity of product that is produced and sold.

114. Variable Cost
The sum of the expenses of the firm that vary directly with the quantity of product that is produced and sold.

115. Marginal Cost
The change in total cost that results from producing and marketing one additional unit.

116. Marginal Analysis
A continuing, concise trade-off of incremental costs against incremental revenues.

117. Break-Even Analysis
A technique that analyzes the relationship between total revenue and total cost to determine profitability at various levels of output.

118. Break-Even Point
Quantity at which total revenue and total cost are equal and beyond which profit occurs.

119. Break-Even Chart
A graphic presentation of the break-even analysis.

120. To Do’s for Next Class Study for Exam Exam is 2 hours multiple choice
Calculators only
Complete the assigned readings download through library
me a brief outline of your product or service for Group Project