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

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Identify the elements that make up aprice.O

Recognize the objectives a firm has insetting prices and the constraints thatrestrict the range of prices a firm cancharge.

Explain what a demand curve is andthe role of revenues in pricingdecisions.

LO3

LO2

LEARNING OBJECTIVES (LO)

AFTER READING CHAPTER 13, YOU SHOULD BE ABLE TO:

13-2

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Describe what price elasticity ofdemand means to a manager facing apricing decision.

Explain the role of costs in pricingdecisions.

LO4

LO5

LEARNING OBJECTIVES (LO)

AFTER READING CHAPTER 13, YOU SHOULD BE ABLE TO:

Describe how various combinations ofprice, fixed cost, and unit variable costaffect a firms breakeven point.

LO6

13-3

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NATURE AND IMPORTANCE OF PRICEWHAT IS A PRICE?

LO

Price

Barter

Price Equation

13-6

Final Price = list Price(Incentives + Allowances) + Extra Fees

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FIGURE 13-2 The price a buyer pays cantake different names depending on what ispurchased

13-7

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NATURE AND IMPORTANCE OF PRICEPRICE AS AN INDICATOR OF VALUE

LO

Value

Value-Pricing

Value =Perceived Benefits

Price

=$ $

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NATURE AND IMPORTANCE OF PRICEPRICE IN THE MARKETING MIX

LO

Profit Equation

Six Steps in Setting Price

13-9

Profit = Total RevenueTotal Costs

= (Unit Price x Quantity Sold)(Fixed Cost + Variable Cost)

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FIGURE 13-3 The six steps in setting price.The first three steps are covered in Chapter13 and the last three steps in Chapter 14.

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STEP 1: IDENTIFY PRICING OBJECTIVESAND CONSTRAINTS

IDENTIFYING PRICING OBJECTIVES

LO2

Pricing Objectives

Profit

The World is Flattening

Managing for Current Profit

Managing for Long-Run Profits

Target Return (ROI)

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IDENTIFYING PRICING OBJECTIVES

LO2

Sales ($)

SocialResponsibility

Market Share ($ or #)

Unit Volume (#)

Survival

Pricing Objectives

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IDENTIFYING PRICING CONSTRAINTS

LO2

Pricing Constraints

Demand for theProduct Class (Cars),Product (Sports Cars),and Brand (Bugatti Veyron)

Newness of theProduct: Stage in theProduct Life Cycle eBay

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LO2

Single Product vs.a Product Line

Cost of Producing andMarketing a Product

Cost of ChangingPrices and Time PeriodThey Apply

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LO2

Type of Competitive Market

Oligopoly

Monopolistic Competition

Pure Monopoly

Pure Competition

Competitors Prices 13-16

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STEP 2: ESTIMATE DEMANDAND REVENUE

FUNDAMENTALS OF ESTIMATING DEMAND

LO3

The Demand Curve

Price and Availabilityof Similar Products

Consumer Income

Consumer Tastes

Demand Factors 13-18

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FUNDAMENTALS OF ESTIMATING DEMAND

LO3

Movement Along vs. aShift of Demand Curve

Movement Alonga Demand Curve

Shift in theDemand Curve

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FIGURE 13-5A Demand curve for Newsweekshowing the effect on annual sales by achange in price caused by a movementalong the demand curve

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FIGURE 13-5B Demand curve for Newsweekshowing the effect on annual sales by achange in price caused by a shift of thedemand curve

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FUNDAMENTALS OF ESTIMATING REVENUE

LO3

Total Revenue (TR)

Average Revenue (AR)

Demand Curves

and Revenue 13-23

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MARKETING MATTERSThe Airbus vs. Boeing Face-offHow Many Can We Sell

and at What Pricein a $2.7 Trillion Market?

The Products Marketing

and Pricing Demand

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http://www.airbus.com/en/airbusfor/analysts/http://www.boeing.com/commercial/cmo/index.html

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LO4

Price Elasticity of Demand

Price Elasticity of Demand (E) = Percentage Change in Quantity DemandedPercentage Change in Price

Elastic Demand

Inelastic Demand

Unitary Demand13-26
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LO4

Necessities

Large Cash Outlays

Product Substitutes


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Clothing and GasolineWhich product is more sensitive to price changes?

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MARKETING MATTERSPricing Lessons from Failed Dot-Com

Start-upsUnderstand Revenues and Expenses

Travel Dot-ComSuccesses (So Far)

Brick-and-MortarDot-Com Failures

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STEP 3: DETERMINE COST, VOLUME,AND PROFIT RELATIONSHIPS

BREAK-EVEN ANALYSIS

LO6

Break-Even Analysis

Break-Even Point (BEP)

BEPQuantity

Fixed Cost

Unit Price Unit Variable Cost

FC

P UVC

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FIGURE 13 10 C l l ti b k

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FIGURE 13-10 Calculating a break-evenpoint for the picture frame store shows itsprofit starts at 400 framed pictures per year

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STEP 3: DETERMINE COST, VOLUME,AND PROFIT RELATIONSHIPS

BREAK-EVEN ANALYSIS

LO6

Break-Even Chart

Applications ofBreak-Even Analysis

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FIGURE 13 12 The cost trade off: Fixed

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FIGURE 13-12 The cost trade-off: Fixedversus variable costs

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Price

A priceis the money or otherconsiderations (including other

goods and services) exchangedfor the ownership or use of agood or service.

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Value

Value is the ratio of perceivedbenefits to price; or

Value = (Perceived benefitsdivided by Price).

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Value-Pricing

Value-pricingis the practice ofsimultaneously increasing product

and service benefits whilemaintaining or decreasing price.

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Profit Equation

The profit equation is:

Profit = Total revenue Total cost; or

Profit = (Unit priceQuantity sold) (Fixed cost + Variable cost).

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Pricing Objectives

Pricing objectives specify therole of price in an organizations

marketing and strategic plans.

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Demand Curve

A demand curve is a graphrelating the quantity sold and

price, which shows the maximumnumber of units that will be soldat a given price.

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Demand Factors

Demand factors are those thatdetermine consumers willingness

and ability to pay for goods andservices.

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Total Revenue (TR)

Total revenue (TR) is the totalmoney received from the sale

of a product.

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Average Revenue (AR)

Average revenue (AR) is theaverage amount of money

received for selling one unit ofa product, or simply the price ofthat unit.

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Marginal Revenue (MR)

Marginal revenue (MR) is thechange in total revenue that

results from producing andmarketing one additional unit.

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The price elasticity of demandis the percentage change in

quantity demanded relative to apercentage change in price.

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Total Cost (TC)

Total cost (TC) is the totalexpense incurred by a firm in

producing and marketing aproduct. Total cost is the sumof fixed cost and variable cost.

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Fixed Cost (FC)

Fixed cost (FC) is the sum ofthe expenses of the firm that are

stable and do not change withthe quantity of a product that isproduced and sold.

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Unit Variable Cost (UVC)

Unit variable cost (UVC) isvariable cost expressed on a

per unit basis.

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Marginal Analysis

Marginal analysis a continuing,concise trade-off of incremental

costs against incrementalrevenues.

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Break-Even Point (BEP)

A break-even point (BEP) isthe quantity at which total revenue

and total cost are equal.

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Break-Even Chart

A break-even chart is a graphicpresentation of the break-even

analysis that shows when totalrevenue and total cost intersectto identify profit or loss for a givenquantity sold.

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