Basic chap014
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Transcript of Basic chap014
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C H A P T E R
Pricing Concepts for Establishing Value
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Copyright © 2014 by the McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
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L E A R N I N G O B J E C T I V E S
© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
List the four pricing orientations.
Explain the relationship between price and quantity sold.
Explain price elasticity.
Describe how to calculate a product’s break-even point.
Indicate the four types of price competitive levels.
Pricing Concepts for Establishing Value
LO1
LO2
LO3
LO4
LO5
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Price
Benefits
Sacrifice
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The Role of Price in the Marketing Mix
Price is the only marketing mix element that generates revenue
Price is usually ranked as one of the most important factors in purchase decisions
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The 5 C’s of Pricing
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1st C: Company Objectives
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2nd C: Customers
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Demand Curves
Not all are downward sloping
Prestigious products or services have upward sloping
curves
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Price Elasticity of Demand
Elastic (price sensitive)
Inelastic (price insensitive)
Consumers are less sensitive to price
increases for necessities©PhotoLink/Getty Images
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Factors Influencing Price Elasticity of Demand
Income
effect
Substitution
effect
Cross-
price
elasticity
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3rd C: Costs
Variable Costs Vary with production
volume
Fixed Costs Unaffected by
production volume
Total Cost Sum of variable and
fixed costsMichael Rosenfeld/Stone/Getty Images
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Break Even Analysis and Decision Making
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Break Even Analysis
Total Variable Cost = Variable Cost per unit X QuantityTotal Cost = Fixed Cost + Total Variable Cost
Total Revenue = Price X Quantity
Fixed CostsContribution per unit
Break-Even Point (units) =
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4th C: Competition
Less Price Competition More Price Competition
FewerFirms
ManyFirms
OligopolyA handful of firms control the market
Ingram Publishing/SuperStock.
MonopolyOne firm controls the market
©Brand X Pictures/PunchStock.
Monopolistic Comp.Many firms selling differentiated products at different prices
Steve Cole/Getty Images.
Pure CompetitionMany firms selling commodities for the same prices
©Corbis – All Rights Reserved.
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5th C: Channel Members
Manufacturers, wholesalers and retailers can have different perspectives on pricing strategies
Manufactures must protect against gray market transactions
Courtesy Apple, Inc.
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CHECK YOURSELF
1. What are the five Cs of pricing?
2. Identify the four types of company objectives.
3. What is the difference between elastic versus inelastic demand?
4. How does one calculate the break-even point in units?
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Economic Factors
Local economic conditions
Increasing disposable
income
Cross- shopping
Increasing status
consciousness
Increasing globalization
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1. How have the Internet and economic factors affected the way people react to prices?
CHECK YOURSELF
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Break-even analysis enables managers to examine the relationships among cost, price, revenue, and profit over different levels of production and sales.
Glossary
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Cross-price elasticity is the percentage change in the quantity of Product A demanded compared with the percentage change in price in Product B.
Glossary
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Fixed costs are those costs that remain essentially at the same level, regardless of any changes in the volume of production.
Glossary
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Income effect is the change in the quantity of a product demanded by consumers due to a change in their income.
Glossary
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The maximizing profits strategy assumes that if a firm can accurately specify a mathematical model that captures all the factors required to explain and predict sales and profits, it should be able to identify the price at which its profits are maximized.
Glossary
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Price is the overall sacrifice a consumer is willing to make to acquire a specific product or service.
Glossary
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The substitution effect refers to consumers’ ability to substitute other products for the focal brand.
Glossary
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Target profit pricing is implemented by firms to meet a targeted profit objective. The firms use price to stimulate a certain level of sales at a certain profit per unit.
Glossary
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Target return pricing occurs when firms employ pricing strategies designed to produce a specific return on their investment, usually expressed as a percentage of sales.
Glossary
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The total cost is the sum of the variable and fixed costs.
Glossary
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Variable costs are the costs that vary with production value.
Glossary