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BUILDINGTHE PRICE

FOUNDATION

CHAPTER

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WHERE DOT-COMS STILL THRIVE: HELPING YOU GET A $100-A-NIGHT

HOTEL ROOM OVERLOOKINGNEW YORK’S CENTRAL PARK

• Why Travel Dot-Coms Haven’t Tanked

• Travel Dot-Com Prices: A Win-Win for Both Buyers and Sellers

Saving Time

Saving Money

© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin

NATURE AND IMPORTANCEOF PRICE

Slide 13-7

• The Many Names of Price

Price

• What Is a Price?

Barter

Price Equation

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FIGURE 13-2 FIGURE 13-2 The price of three different purchases

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Bugatti Veyron What is its price equation?

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ETHICS AND SOCIAL RESPONSIBILITY ALERT

Student Credit Cards—What Is the Real Price?

Lower MyBills

NellieMae

© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin

NATURE AND IMPORTANCEOF PRICE

Slide 13-11

• Price as an Indicator of Value

Value

Value Pricing

Profit Equation

• Price in the Marketing Mix

© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin

FIGURE 13-3 FIGURE 13-3 Steps in setting price

Slide 13-12

© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin

STEP 1: IDENTIFY PRICING OBJECTIVES AND CONSTRAINTS

Slide 13-13

• Identifying Pricing Objectives

Profit

• Maximizing for Long-Run Profits

• Maximizing Current Profit

• Target Return

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FIGURE 13-4 FIGURE 13-4 Where each dollar of your movie ticket goes

© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin

STEP 1: IDENTIFY PRICING OBJECTIVES AND CONSTRAINTS

Slide 13-15

• Identifying Pricing Objectives

Sales

Market Share

Unit Volume

Survival

Social Responsibility

© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin

STEP 1: IDENTIFY PRICING OBJECTIVES AND CONSTRAINTS

Slide 13-17

• Identifying Pricing Constraints

Demand for the Product Class, Product, and Brand

Single Product versus a Product Line

Newness of the Product: Stage in the Product Life Cycle

© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin

STEP 1: IDENTIFY PRICING OBJECTIVES AND CONSTRAINTS

Slide 13-19

• Identifying Pricing Constraints

Cost of Changing Prices and Time Period They Apply

Cost of Producing and Marketing the Product

© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin

STEP 1: IDENTIFY PRICING OBJECTIVES AND CONSTRAINTS

Slide 13-21

• Identifying Pricing Constraints

Type of Competitive Markets

• Pure Monopoly

• Oligopoly

• Monopolistic Competition

• Pure Competition

Competitors’ Prices

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FIGURE 13-5FIGURE 13-5 Pricing, product, and advertising strategies available to firms in four types of competitive markets

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Concept Check

1. What factors impact the list price to determine the final price?

A: discounts, allowances, rebates, and extra fees or surcharges

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Concept Check

2. What is the difference between pricing objectives and pricing constraints?

A: Pricing objectives involve specifying the role of price in an organization’s marketing and strategic plans whereas pricing constraints are factors that limit the range of prices a firm may set.

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Concept Check

3. How does the type of competitive market a firm is in affect its range in setting price?

A: Different competitive markets have differences in price competition and, in turn, the nature of product differentiation and extent of advertising.

© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin

STEP 2: ESTIMATE DEMANDAND REVENUE

Slide 13-26

• Fundamentals of Estimating Demand

The Demand Curve

• Consumer Tastes

• Price and Availability of Similar Products

• Consumer Income

• Demand Factors

Movement Along versus Shift of a Demand Curve

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Newsweek How do you estimate demand and set a price?

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FIGURE 13-6 FIGURE 13-6 Illustrative demand curves for Newsweek

Demand curve underinitial conditions

Shift in the demandcurve with more

favorable conditions

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FIGURE 13-6A FIGURE 13-6A Illustrative demand curve for Newsweek (initial conditions)

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FIGURE 13-6B FIGURE 13-6B Illustrative demand curve for Newsweek (shift in demand)

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STEP 2: ESTIMATE DEMANDAND REVENUE

Slide 13-31

• Fundamentals of Estimating Revenue

Total Revenue (TR)

Demand Curves and Revenue

Average Revenue (AR)

Marginal Revenue (MR)

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FIGURE 13-7 FIGURE 13-7 Fundamental revenue concepts

Slide 13-32

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

© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin

STEP 2: ESTIMATE DEMANDAND REVENUE

Slide 13-35

• Fundamentals of Estimating Revenue

Price Elasticity of Demand

• Elastic Demand

• Inelastic Demand

• Unitary Demand

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Clothing vs. Gasoline Which is more sensitive to prices changes?

© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin

STEP 3: DETERMINE COST, VOLUME, AND PROFIT RELATIONSHIPS

Slide 13-40

• Importance of Controlling Costs

Total Cost (TC)

Fixed Cost (FC)

Variable Cost (VC)

Unit Variable Cost (UVC)

Marginal Cost (MC)

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FIGURE 13-9 FIGURE 13-9 Fundamental cost concepts

Slide 13-41

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MARKETING NEWSNET

Pricing Lessons from the Dot-Coms—Understanding Revenues and Expenses

• Brick-and-Mortar Dot-Com Failures

• Travel Dot-Com Successes (So Far)

© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin

STEP 3: DETERMINE COST, VOLUME, AND PROFIT RELATIONSHIPS

Slide 13-43

• Marginal Analysis and Profit Maximization

Break-Even Point (BEP)

Calculating a Break-Even Point

• Break-Even Analysis

Break-Even Chart

Applications of Break-Even Analysis

© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin

FIGURE 13-10 FIGURE 13-10 Profit maximization pricing

Slide 13-44

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FIGURE 13-11 FIGURE 13-11 Calculating a break-even point for a picture frame store

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FIGURE 13-12 FIGURE 13-12 Break-even analysis chart for a picture frame store

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FIGURE 13-13 FIGURE 13-13 The cost trade-off: fixed versus variable costs

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Price (P)

Price (P) is the money or other considerations (including other goods and services) exchanged for the ownership or use of a good or service.

Price (P) is the money or other considerations (including other goods and services) exchanged for the ownership or use of a good or service.

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Barter

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

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

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Value

Value is the ratio of perceived benefitsto price; or Value = (Perceived benefits divided by Price).

Value is the ratio of perceived benefitsto price; or Value = (Perceived benefits divided by Price).

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Value-Pricing

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

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

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Profit Equation

A firm’s profit equation is as follows: Profit = Total revenue − Total cost; or Profit = (Unit price × Quantity sold)− Total cost.

A firm’s profit equation is as follows: Profit = Total revenue − Total cost; or Profit = (Unit price × Quantity sold)− Total cost.

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Pricing Objectives

Pricing objectives involve specifyingthe role of price in an organization’s marketing and strategic plans.

Pricing objectives involve specifyingthe role of price in an organization’s marketing and strategic plans.

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Pricing Constraints

Pricing constraints involve factors that limit the range of prices a firm may set.Pricing constraints involve factors that limit the range of prices a firm may set.

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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.

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.

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Demand Factors

Demand factors are factors that determine consumers’ willingness and ability to pay for goods and services.

Demand factors are factors that determine consumers’ willingness and ability to pay for goods and services.

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Total Revenue (TR)

Total revenue (TR) is the total money received from the sale of a product.Total revenue (TR) = unit price (P)× the quantity sold (Q) or TR = P × Q.

Total revenue (TR) is the total money received from the sale of a product.Total revenue (TR) = unit price (P)× the quantity sold (Q) or TR = P × Q.

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Average Revenue (AR)

Average revenue (AR) is the average amount of money received for sellingone unit of a product, or simply theprice of that unit.

Average revenue (AR) is the average amount of money received for sellingone unit of a product, or simply theprice of that unit.

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Marginal Revenue (MR)

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

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

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Price Elasticity of Demand

Price elasticity of demand is the percentage change in quantity demanded relative to a percentage change in price.

Price elasticity of demand is the percentage change in quantity demanded relative to a percentage change in price.

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Total Cost (TC)

Total cost (TC) is the total expense incurred by a firm in producing and marketing a product. Total cost (TC) equals the sum of fixed cost (FC) and variable cost (VC) or TC = FC + VC.

Total cost (TC) is the total expense incurred by a firm in producing and marketing a product. Total cost (TC) equals the sum of fixed cost (FC) and variable cost (VC) or TC = FC + VC.

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Fixed Cost (FC)

Fixed cost (FC) is the sum of the expenses of the firm that are stableand do not change with the quantityof a product that is produced and sold.

Fixed cost (FC) is the sum of the expenses of the firm that are stableand do not change with the quantityof a product that is produced and sold.

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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.

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.

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Unit Variable Cost (UVC)

Unit variable cost (UVC) is variable cost expressed on a per unit basis.Unit variable cost (UVC) is variable cost expressed on a per unit basis.

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Marginal Cost (MC)

Marginal cost (MC) is the change in total cost that results from producingand marketing one additional unit of a product.

Marginal cost (MC) is the change in total cost that results from producingand marketing one additional unit of a product.

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Marginal Analysis

Marginal analysis is a continuing, concise trade-off of incremental costs against incremental revenues.

Marginal analysis is a continuing, concise trade-off of incremental costs against incremental revenues.

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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.

Break-even analysis is a technique that analyzes the relationship between total revenue and total cost to determine profitability at various levels of output.

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Break-Even Point (BEP)

Break-even point (BEP) is the quantity at which total revenue and total cost are equal or BEP = (FC ÷ (P−UVC)).

Break-even point (BEP) is the quantity at which total revenue and total cost are equal or BEP = (FC ÷ (P−UVC)).

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Break-Even Chart

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 lossfor a given quantity sold.

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 lossfor a given quantity sold.