BUILDING THE PRICE FOUNDATION

1
CHAPTER
BUILDINGTHE PRICE FOUNDATION
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WHERE DOT-COMS STILL THRIVE HELPING YOU GET A
100-A-NIGHT HOTEL ROOM OVERLOOKINGNEW YORKS
CENTRAL PARK

• Why Travel Dot-Coms Havent Tanked

• Saving Time

• Saving Money

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

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NATURE AND IMPORTANCEOF PRICE

• The Many Names of Price

• What Is a Price?

• Price

• Barter

• Price Equation

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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 CardsWhat Is the Real Price?
Lower MyBills
NellieMae
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NATURE AND IMPORTANCEOF PRICE

• Price as an Indicator of Value

• Value

• Value Pricing

• Price in the Marketing Mix

• Profit Equation

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FIGURE 13-3 Steps in setting price
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STEP 1 IDENTIFY PRICING OBJECTIVES AND
CONSTRAINTS

• Identifying Pricing Objectives

• Profit

• Maximizing for Long-Run Profits

• Maximizing Current Profit

• Target Return

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FIGURE 13-4 Where each dollar of your movie
ticket goes
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STEP 1 IDENTIFY PRICING OBJECTIVES AND
CONSTRAINTS

• Identifying Pricing Objectives

• Sales

• Market Share

• Unit Volume

• Survival

• Social Responsibility

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STEP 1 IDENTIFY PRICING OBJECTIVES AND
CONSTRAINTS

• 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

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STEP 1 IDENTIFY PRICING OBJECTIVES AND
CONSTRAINTS

• Identifying Pricing Constraints

• Cost of Producing and Marketing the Product

• Cost of Changing Prices and Time Period
  They Apply

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STEP 1 IDENTIFY PRICING OBJECTIVES AND
CONSTRAINTS

• Identifying Pricing Constraints

• Type of Competitive Markets

• Pure Monopoly

• Oligopoly

• Monopolistic Competition

• Pure Competition

• Competitors Prices

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FIGURE 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 organizations 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.
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STEP 2 ESTIMATE DEMANDAND REVENUE

• 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 Illustrative demand curves for
Newsweek
Demand curve underinitial conditions
Shift in the demandcurve with morefavorable
conditions
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FIGURE 13-6A Illustrative demand curve for
Newsweek (initial conditions)
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FIGURE 13-6B Illustrative demand curve for
Newsweek (shift in demand)
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STEP 2 ESTIMATE DEMANDAND REVENUE

• Fundamentals of Estimating Revenue

• Total Revenue (TR)

• Average Revenue (AR)

• Marginal Revenue (MR)

• Demand Curves and Revenue

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FIGURE 13-7 Fundamental revenue concepts
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FIGURE 13-8 How a downward-sloping demand curve
affects total, average, and marginal revenue
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STEP 2 ESTIMATE DEMANDAND REVENUE

• 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?
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STEP 3 DETERMINE COST, VOLUME, AND PROFIT
RELATIONSHIPS

• 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 Fundamental cost concepts
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MARKETING NEWSNET
Pricing Lessons from the Dot-ComsUnderstanding
Revenues and Expenses

• Brick-and-Mortar Dot-Com Failures

• Travel Dot-Com Successes (So Far)

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STEP 3 DETERMINE COST, VOLUME, AND PROFIT
RELATIONSHIPS

• Marginal Analysis and Profit Maximization

• Break-Even Analysis

• Break-Even Point (BEP)

• Calculating a Break-Even Point

• Break-Even Chart

• Applications of Break-Even Analysis

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FIGURE 13-10 Profit maximization pricing
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FIGURE 13-11 Calculating a break-even point for
a picture frame store
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FIGURE 13-12 Break-even analysis chart for a
picture frame store
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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.
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Barter
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).
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Value-Pricing
Value-pricing is the practice of simultaneously
increasing product and service benefits while
maintaining or decreasing price.
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Profit Equation
A firms 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 organizations marketing and
strategic plans.
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Pricing Constraints
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.
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Demand Factors
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.
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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.
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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.
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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.
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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.
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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.
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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.
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Unit Variable Cost (UVC)
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.
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Marginal Analysis
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.
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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)).
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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.
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