BUILDING THE PRICE FOUNDATION

1
Slide 13-1
2
CHAPTER
BUILDINGTHE PRICE FOUNDATION
Slide 13-2
3
AFTER READING THIS CHAPTERYOU SHOULD BE ABLE TO

1. Identify the elements that make up a price.

1. Recognize the objectives a firm has in setting
   prices and the constraints that restrict the
   range of prices a firm can charge.

1. Explain what a demand curve is and the role of
   revenues in pricing decisions.

Slide 13-3
4
AFTER READING THIS CHAPTERYOU SHOULD BE ABLE TO

1. Describe what price elasticity of demand means to
   a manager facing a pricing decision.

1. Explain the role of costs in pricing decisions.

1. Describe how various combinations of price, fixed
   cost, and unit variable cost affect a firms
   break-even point.

Slide 13-4
5
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

Slide 13-5
6
FIGURE 13-1 Quick-take quiz on price Answers
that are part numbers, part good judgment

1. (b) 275 million

1. Revenue obtained exceedsthe low unit variable
   cost

1. (d) clothing(a) jewelry/watches(c) wine (b)
   gasoline

1. (b) fixed cost

Slide 13-6
7
NATURE AND IMPORTANCEOF PRICE

• The Many Names of Price

• What Is a Price?

• Price

• Barter

• Price Equation

Slide 13-7
8
FIGURE 13-2 The price of three different
purchases
Slide 13-8
9
NATURE AND IMPORTANCEOF PRICE

• Price as an Indicator of Value

• Value

• Value Pricing

• Price in the Marketing Mix

• Profit Equation

Slide 13-11
10
FIGURE 13-3 Steps in setting price
Slide 13-12
11
STEP 1 IDENTIFY PRICING OBJECTIVES AND
CONSTRAINTS

• Identifying Pricing Objectives

• Profit

• Maximizing for Long-Run Profits

• Maximizing Current Profit

• Target Return

Slide 13-13
12
FIGURE 13-4 Where each dollar of your movie
ticket goes
Slide 13-14
13
STEP 1 IDENTIFY PRICING OBJECTIVES AND
CONSTRAINTS

• Identifying Pricing Objectives

• Sales

• Market Share

• Unit Volume

• Survival

• Social Responsibility

Slide 13-15
14
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

Slide 13-17
15
WEB LINK
Pricing 101 4,205 for a 1969 Used Hotwheels
Volkswagen Van, or 121,000 for a Mint-Condition
1952 Mickey Mantle Topps Baseball Card?
Slide 13-18
16
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

Slide 13-19
17
STEP 1 IDENTIFY PRICING OBJECTIVES AND
CONSTRAINTS

• Identifying Pricing Constraints

• Type of Competitive Markets

• Pure Monopoly

• Oligopoly

• Monopolistic Competition

• Pure Competition

• Competitors Prices

Slide 13-21
18
FIGURE 13-5 Pricing, product, and advertising
strategies available to firms in four types of
competitive markets
Slide 13-22
19

Concept Check
1. What factors impact the list price to
determine the final price?
A discounts, allowances, rebates, and extra fees
or surcharges
Slide 13-23
20

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.
Slide 13-24
21

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.
Slide 13-25
22
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

Slide 13-26
23
FIGURE 13-6 Illustrative demand curves for
Newsweek
Demand curve underinitial conditions
Shift in the demandcurve with morefavorable
conditions
Slide 13-28
24
FIGURE 13-6A Illustrative demand curve for
Newsweek (initial conditions)
Slide 13-29
25
FIGURE 13-6B Illustrative demand curve for
Newsweek (shift in demand)
Slide 13-30
26
STEP 2 ESTIMATE DEMANDAND REVENUE

• Fundamentals of Estimating Revenue

• Total Revenue (TR)

• Average Revenue (AR)

• Marginal Revenue (MR)

• Demand Curves and Revenue

Slide 13-31
27
FIGURE 13-7 Fundamental revenue concepts
Slide 13-32
28
FIGURE 13-8 How a downward-sloping demand curve
affects total, average, and marginal revenue
Slide 13-33
29
STEP 2 ESTIMATE DEMANDAND REVENUE

• Fundamentals of Estimating Revenue

• Price Elasticity of Demand

• Elastic Demand

• Inelastic Demand

• Unitary Demand

Slide 13-35
30

Concept Check
1. What is the difference between a movement
along and a shift of a demand curve?
A A movement along a demand curve occurs when
the price is lowered and the quantity demanded
increases (and vice versa), assuming that other
factors remain unchanged. However, if these
factors change, then the demand curve will shift.
Slide 13-37
31

Concept Check
2. What is total revenue and how is it
calculated?
A Total revenue (TR) is the total money received
from the sale of product. Total revenue (TR)
equals the unit price (P) times the quantity sold
(Q) or TR P Q.
Slide 13-38
32

Concept Check
3. What does it mean if a product has a price
elasticity of demand that is greater than 1?
A Elasticities greater than 1 indicate the
product is price elastic.
Slide 13-39
33
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)

Slide 13-40
34
FIGURE 13-9 Fundamental cost concepts
Slide 13-41
35
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

Slide 13-43
36
FIGURE 13-10 Profit maximization pricing
Slide 13-44
37
FIGURE 13-11 Calculating a break-even point for
a picture frame store
Slide 13-45
38
FIGURE 13-12 Break-even analysis chart for a
picture frame store
Slide 13-46
39
FIGURE 13-13 The cost trade-off fixed versus
variable costs
Slide 13-47
40

Concept Check
1. What is the difference between fixed costs and
variable costs?
A Fixed cost is the sum of the expenses of the
firm that are stable and do not change with the
quantity of the product that is produced and
sold. Variable cost is the sum of the expenses
of the firm that vary directly with the quantity
of the product that is produced and sold.
Slide 13-48
41

Concept Check
2. What is a break-even point?
A A break-even point (BEP) is the quantity at
which total revenue and total cost are equal.
Slide 13-49
42
FINDING THE BESTAIRLINE TICKET PRICE
GOING ONLINE
Slide 13-50
43
Going Online
1. Book a round-trip leaving Friday at 400 PM
from Chicagos OHare Airport (ORD) and arriving
at New York Citys La Guardia Airport (LGA).
Youll leave LGA Sunday around 500 PM to return
to ORD. Which online travel service below
provides the cheapest fare and fewest
restrictions?
Orbitz
Priceline
Travelocity
Expedia
Slide 13-51
44
TEENAGE SMOKINGCOOL, PRICE ELASTICITY, AND
1-A-PACK CIGARETTES!
SUPPLEMENTALLECTURE NOTE 13-1
Slide 13-52
45
WASHBURN INTERNATIONALGUITARS AND BREAK-EVEN
VIDEO CASE 13
Slide 13-54
46
VIDEO CASE 13 Washburn International
1. What factors are most likely toaffect the
demand for the lines of Washburn guitars (a)
bought by a first-time guitar buyer and(b)
bought by a sophisticated musician who wants a
signature model?
Slide 13-55
47
VIDEO CASE 13 Washburn International
2. For Washburn, what are examplesof (a)
shifting the demand curve to the right to get a
higher price for a guitar line (movement of the
demand curve) and (b) pricing decisions involving
moving along a demand curve?
Slide 13-56
48
VIDEO CASE 13 Washburn International
3. In Washburns Chicago plant, what is the
break-even point for the new line of guitars if
the retail price is(a) 329, (b) 359, and (c)
299? Also, (d) if Washburn achieves the sales
target of 2,000 units at the 329 retail price,
what will its profit be?
Slide 13-57
49
VIDEO CASE 13 Washburn International
4. Assume that Washburn moves its production to
Nashville and that costs are reduced as projected
in the case. Then, what will be the(a) new
break-even point at a 329 retail price for this
line of guitarsand (b) the new profit if it
sells 2,000 units?
Slide 13-58
50
VIDEO CASE 13 Washburn International
5. If for competitive reasons, Washburn
eventually has to move all its production back to
Asia, (a) which specific costs might be lowered
and (b) what additional costs might it expect to
incur?
Slide 13-59
51
HEALTH CRUISES, INC.ESTIMATING COST, VOLUME,
AND PROFIT RELATIONSHIPS
APPENDIX D CASE D-13
Slide 13-60
52
APPENDIX D CASE D-13 Health Cruises
1. What is the minimum number of passengers that
Health Cruises must sign up by November 20 to
break even with the cruise? (Show your
calculations.)
Slide 13-61
53
APPENDIX D CASE D-13 Health Cruises
2. Should Health Cruises go ahead with the
cruise, since 200 passengers had signed up as of
November 14?
Slide 13-62
54
APPENDIX D CASE D-13 Health Cruises
3. Would it be worthwhile for Health Cruises to
spend either 6,000 or 15,000 for advertising on
November 20? If so, which figure would you
recommend?
Slide 13-63
55
APPENDIX D CASE D-13 Health Cruises
4. How realistic are Carolyn Sukhans estimates
of 20 more passengers for the 6,000 advertising
campaign and 40 more passengers for the 15,000
campaign?
Slide 13-64
56
APPENDIX D CASE D-13 Health Cruises
5. Should Health Cruises consider cutting its
prices for this maiden voyage health cruise?
Slide 13-65
57
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.
Slide 13-66
58
Barter
Barter is the practice of exchanging goods and
services for other goods and services rather than
for money.
Slide 13-67
59
Value
Value is the ratio of perceived benefitsto
price or Value (Perceived benefits divided by
Price).
Slide 13-68
60
Value-Pricing
Value-pricing is the practice of simultaneously
increasing product and service benefits while
maintaining or decreasing price.
Slide 13-69
61
Profit Equation
A firms profit equation is as follows Profit
Total revenue - Total cost or Profit (Unit
price Quantity sold)- Total cost.
Slide 13-70
62
Pricing Objectives
Pricing objectives involve specifyingthe role of
price in an organizations marketing and
strategic plans.
Slide 13-71
63
Pricing Constraints
Pricing constraints involve factors that limit
the range of prices a firm may set.
Slide 13-72
64
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.
Slide 13-73
65
Demand Factors
Demand factors are factors that determine
consumers willingness and ability to pay for
goods and services.
Slide 13-74
66
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.
Slide 13-75
67
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.
Slide 13-76
68
Marginal Revenue (MR)
Marginal revenue (MR) is the change in total
revenue that results from producing and marketing
one additional unit.
Slide 13-77
69
Price Elasticity of Demand
Price elasticity of demand is the percentage
change in quantity demanded relative to a
percentage change in price.
Slide 13-78
70
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.
Slide 13-79
71
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.
Slide 13-80
72
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.
Slide 13-81
73
Unit Variable Cost (UVC)
Unit variable cost (UVC) is variable cost
expressed on a per unit basis.
Slide 13-82
74
Marginal Cost (MC)
Marginal cost (MC) is the change in total cost
that results from producingand marketing one
additional unit of a product.
Slide 13-83
75
Marginal Analysis
Marginal analysis is a continuing, concise
trade-off of incremental costs against
incremental revenues.
Slide 13-84
76
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.
Slide 13-85
77
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)).
Slide 13-86
78
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.
Slide 13-87