The Price Function of Marketing

1
The Price Function of Marketing

• Chapters 13 and 14

2
What is Price

• The money or other considerations exchanged for
  the ownership or use of a good or service.
• Barter Exchanging goods and services for other
  goods and services.
• Final Price
• Final Price List Price (Incentives
  Allowances) Extra Fees

3
Value and Profit

• Value the ratio of perceived benefits to price.
  
• Value Pricing Increasing benefits while
  maintaining or decreasing price.
• Profit Equation
• Profit Total Revenue Total Cost
• Profit (Unit Price x Quantity Sold) Total Cost

or
4
Steps in Setting Price
5
Step 1 Identify Constraints and Objectives

• Constraints factors that limit the price that
  firms may set.
• Demand
• Newness
• Single product vs. line
• Cost of production
• Cost of changing Price
• Type of competitive market
• Pure Monopoly
• Oligopoly
• Monopolistic
• Pure Competition
• Competitors price

• Objectives expectations that specify the role
  of price.
• Profit
• Sales or Market Share
• Unit Volume
• Survival
• Social Responsibility
• Customer Satisfaction

6
Step 2 Estimating Demand and Revenue

• The Demand Curve the maximum number of products
  consumers will buy at a given price.
• Demand Factors
• Consumer tastes
• Price and Availability of other products
• Consumer income

P2
Advertising Campaign
P1
Q1
Q2
7
Step 2 Estimating Demand and Revenuecont.

• Price Elasticity of Demand a measure of the
  sensitivity of customers to changes in price.
• Elastic Demand a change in price results in a
  substantial change in quantity demanded.
• computers, furniture
• Inelastic Demand a change in price that has
  little or no effect on the quantity that
  consumers are willing to buy.
• gas, milk

8
Step 3 Determine Cost, Volume, and Profit
Relationships

• Terminology
• Total Cost the total expenses incurred by a
  firm in producing and marketing a product.
• Fixed Cost expenses that do not fluctuate with
  the number of units sold.
• Variable Cost expenses that vary directly with
  the quantity of products produced.

9
Step 3 Determine Cost, Volume, and Profit
Relationshipscont.
Total Revenue

• Break-Even Analysis
• Break-Even Point the point at which the company
  doesnt lose any money and doesnt make a
  profit.
• BEP
• 4,000 units

Revenue and Cost
Total Cost
Profits
Variable Costs
400,000
Break-Even Point
Losses
200,000
Fixed Costs
Break-Even Quantity
2,000
4,000
6,000
Quantity Demanded
10
Step 3 Determine Cost, Volume, and Profit
Relationshipscont.

• Marginal Cost The increase in total cost that
  results from producing one additional unit of a
  product.
• Marginal Revenue The increase in total income
  or revenue that results from selling one
  additional unit of a product.
• Marginal Analysis
• As long as marginal revenue is greater than
  marginal cost, a firm will expand its output of
  that product.

11
Step 4 Select an Approximate Price Level
Strategies

• Profit Oriented
• Target Profit
• Target Return on Sales
• Target Return on Investment
• Competition-Oriented
• Customary
• Above-, At-, or Below-Market
• Loss-Leader

• Demand
• Skimming
• Penetration
• Prestige
• Price Lining
• Odd-Even
• Target
• Bundle
• Yield Management Pricing
• Cost-Oriented
• Standard Markup
• Cost-Plus
• Experience Curve

12
Step 5 Set The List or Quoted Price

• One-Price vs. Flexible-Price Policy
• One-Price (Fixed Pricing) Examples?
• Flexible-Price (Dynamic Pricing) Examples?
• Company, Customer, and Competitive Effects
• Company
• Product-Line Pricing
• Customer
• Perception
• Competitive Effects
• Price War

13
Step 5 Set The List or Quoted Pricecont.

• Balancing Incremental Costs and Revenues

• Information
• Advertising Investment 3,465
• Profit Margin 40
• Average Sale 450
• Closing Ratio 65
• Return on Investment 25

• This advertising program will reach over 112,000
  listeners ages 12-34 a minimum of 3.0 times. One
  out of 3,027 people who hear your ad need to come
  in the door.

• (3,465 x (1ROI)) 4,331 Net Return
• 4,331/.40 10,828 Gross Return
• 10,828/450 24 Sales
• 24/.65 37 Customers

• Break-even (0 profit) 30 Customers
• 20 Return (693 profit) 36 Customers
• 30 Return (1,040 profit) 39 Customers

14
Step 6 Make Special Adjustments to the List or
Quoted Price

• Discounts a reduction from the list price given
  as a reward.
• Quantity Discounts
• Seasonal Discounts
• Trade (Functional) Discounts
• Cash Discounts
• Allowances
• Trade-in Allowances
• Promotional Allowances

15
Step 6 Make Special Adjustments to the List or
Quoted Pricecont.

• Geographical Adjustments
• FOB (free on board)
• Pricing supplier will pay to have product
  loaded
• Origin Pricing customer pays for transportation
  from factory to store
• Delivered Pricing Seller pays loading and trans
  cost
• Uniform Delivered Pricing
• Single-Zone pricing
• Multiple-Zone pricing
• FOB with freight-allowed pricing
• Basing-point pricing

16
Step 6 Make Special Adjustments to the List or
Quoted Pricecont.

• Legal and Regulatory Aspects of Pricing
• Price Fixing Conspiracy among firms to set
  prices
• Price Discrimination charging different prices
  to different customers
• Deceptive Pricing bait and switch, conditional
  pricing, comparison pricing
• Predatory Pricing low prices to drive
  competitors out