What is the Price

1
What is the Price?

• Dollars paid.
• Sum of value exchanged.
• Sum of sacrifices made.

2
Supply and Demand
Price
Demand
Supply
P
Quantity
Q
3
COSTS

• Total Costs Fixed Costs Variable Costs
• Fixed Costs. Stays the same regardless of amount
  sold. Examples Rent or mortgage,
• fixed labor, insurance, depreciation, etc.
• Variable Costs. Varies by the amount sold.
• Examples Materials used, variable labor,
  sales commissions, etc.

4
Price Elasticity of Demand
Electricity
Recreational vehicles
P2
P2
Elastic demand
Price
P1
P1
Inelastic demand
Q2
Q1
Q1
Q2
Quantity
Quantity
5
Price Elasticity of Demand
Change in Quantity Change in Price
OR (Q2 - Q1)/Q1 (P2 - P1)/P1

6
Elasticity of Demand Problem

• At a price of 2, Taco Hut sold 300 million Super
  Tacos. When they lowered their price to 1.50,
  sales increased to 450 million Super Tacos.
• Q1. What is the elasticity of demand?
• Q2. What are total sales at each price point.
• Q3. Variable costs average 1.25 per Super Taco.
  Calculate the contribution toward fixed costs at
  each price point.
• Q4. Why do you think Taco Hut lowered the price
  of Super Tacos?

7
Elasticity Answer

• (450-300)/300 150/300 1/2 2
• (2 - 1.5)/2 .5/2 1/4
• Sales at 2 and at 1.5
• 2 X 300 Million 600 Million
• 1.5 X 450 Million 675 Million
• Contributions (Profit Margins) at 2 and at 1.5
• (2 - 1.25) X 300 Million 225 Million
• (1.5 - 1.25) X 450 Million 112.5 Million

8
Organization/ marketing objectives
Pricing objectives
Costs
Other marketing mix variables
Pricing decisions
Channel member expectations
Buyers perceptions
Competition
Legal and regulatory issues
9
Pricing Objectives
Target Return
Profit Oriented
Maximize Profits
Dollar or Unit Sales Growth
Pricing Objectives
Sales Oriented
Growth in Market Share
Meeting Competition
Status Quo Oriented
Nonprice Competition
SURVIVAL
10
Cost-Based Pricing

• Cost Plus
• Markup Pricing
• Markup on Cost
• Markup on Selling Price

11
Cost/Plus Pricing.

• Calculate the total cost (or cost per unit) to
  produce the product. Then add a desired
  percentage to the cost to determine price.
• Example You are a general contractor making a
  bid to build a new regional shopping center. You
  traditionally use cost-plus pricing and estimate
  that your total costs will be 75 Million
  dollars. What will you bid if your target profit
  is 20 above costs?

12
Cost-Plus Answer

• 75 Million X 1.2 90 Million
• or
• 75 Million (75 Million X .2) 90 Million

13
Markup Pricing Basics

• Price Cost Markup
• Markup (in dollars) Price - Cost
• Two types of markup
• Markup on cost Markup is some of cost
• Markup on selling price Markup is some of
  selling price

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Markup Pricing Problem

• A grocer is pricing three items oranges, ice
  cream, and greeting cards. She buys the oranges
  for 40 cents per pound, the ice cream for 2.50
  per carton, and the greeting cards for 1.50
  each. Assuming markup on costs of 30 for the
  oranges, 25 for the ice cream and 50 for the
  cards, what will she price these items? What
  will she price the products if those markups are
  markups on selling price?

15
Calculate Selling Price of Oranges

• Based on Markup on Costs
• P C markup(C) C(1markup)
• P .40 (1.3) .4(1.3) 52 cents
• Based on Markup on Price
• P C markup(P)
• P .40 .3(P)
• .7P .4
• P .4/.7 57 cents

16
Selling Price of Ice Cream

• Based on Markup on Costs
• P C markup (C) C(1 markup)
• P 2.50(1.25) 2.50(1.25) 3.13
• Based on Markup on Price (MP)
• P 2.50 markup (P)
• P 2.50 .25(P)
• .75P 2.50
• P 2.50/.75 3.33

17
Price of Card

• Based on Markup on Costs
• P C markup (C) C(1 markup)
• P 1.50 (1.5) 1.50(1.5) 2.25
• Based on Markup on Price
• P 1.50 markup (P)
• P 1.50 .5(P)
• .5P 1.50
• P 1.50/.5 3.00

18
Markup Pricing

• Kelloggs lists the suggested retail price of its
  Frosted Mini-Wheats at 4.00 per box. It sets
  the wholesale price based on a markup on selling
  price of 30. What is the wholesale price of
  Frosted Mini-Wheats?

19
Cost of Frosted Mini-Wheats

• P C MP(P)
• 4 C .3(4)
• 4 C 1.2
• C 4 - 1.2 2.80

20
Customer-Oriented Pricing
Reference Prices
Price Awareness
Price/Quality Associations
Psychological Pricing
Limited Offers
Target Pricing
18-2
21
Psychological Pricing

• Odd-Even Pricing. Selling for 99.99 instead of
  100. Gasoline for 1.54 9/10.
• Prestige Pricing. Prices set at an artificially
  high level to provide prestige or a quality
  image.
• Price Lining. Setting a limited number of prices
  for selected groups or lines of merchandise.
  Taco Bells groupings.

22
Competitor-Oriented Pricing
Leader-Follower Pricing
Going-Rate Pricing
Discount or Premium Pricing
Competitive Bids
Price Wars
18-3
23
Target Costing

• First establish a products desired functions
• Next determine the price the product must sell at
  given its appeal and competition
• Then determine desired profit margin
• Subtract desired profit margin from desired price
  to determine target cost
• Finally, design the product and process so that
  total costs equal target cost

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Target Costing Problem

• You own a fine dining restaurant and are pricing
  your prize-winning full-course meal lobster
  supreme. After a careful examination of customer
  demand and competitors prices you decide to
  price lobster supreme at 35.00. You would like
  to achieve a profit margin of 35. What will be
  your target cost?

25
Target Cost of Lobster Supreme

• Price 35
• Profit Margin 35 x Price
• Target Cost Price - Profit Margin
• Target Cost 35 - (.35 x 35)
• Target Cost 22.75.

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Price Setting Strategies
Skimming Sliding Down the Demand
Curve to maximize profit Price
Umbrella Leadership Everyday Low
Prices or Value Pricing
Promotional Pricing Penetration
Pricing
18-4
27
Price Level Policies
PIONEER PRICING STRATEGIES
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Skimming vs. Penetration Pricing
Skimming
Penetration
Sell whole market at one price - no elite
markets
Capture cream - less price sensitive buyers
Intent
High volume Sacrifice profit margin
High profit margin Sacrifice volume
Focus
Invite competitors, short-term profits for
reinvestment
Keep competition out Achieve economies of scale
Result
18-5
29
Promotional Pricing vs.Everyday Low Price
(EDLP)

• Promotional Pricing. Offer occasional price
  specials, coupons, etc. to generate enthusiasm,
  feature a brand, encourage brand switching.
• Everyday Low Price. Price all products at
  moderately lower prices, then keep them there
  every day without offering special promotions.

30
Target Return Pricing and Breakeven Pricing
31
Breakeven Chart
Total Revenue (10 per unit)
120,000
Total Costs
Profits
Breakeven Point
80,000
Revenue Costs
Total Variable Cost (5 per unit)
Losses
40,000
Total Fixed Cost (40,000)
4000
8000
12,000
16,000
Quantity (Units)
32
Basic Breakeven Formula

• Total Revenues Total Costs
• Total Revenues Fixed Costs Variable Costs
• TR FC VC or
• PQ FC (AVCQ), where
• P Price Q Quantity
• FC Fixed Costs AVC Average Variable Costs
• (Variable Costs per unit)

33
Breakeven Formula

• Breakeven Point (Units to Sell to Breakeven)
• Fixed Cost
• Per unit contribution to fixed costs
• Fixed Costs
• Price - Variable Costs/Unit

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Basic Target Profit Formula

• Total Revenues Total Costs Target Profit
• TR FC VC TP
• PQ FC (AVCQ) TP, where
• P Price Q Quantity
• FC Fixed Costs AVC Average Variable Costs
• (Variable Costs per unit)
• TP Target Profit

35
Profit-Target Formula

• Units to sell to meet target profit
• Fixed Costs Target Profit
• Price - Variable Costs/Unit

36
Breakeven and Profit-Target Analysis

• You are introducing a new videogame. Fixed Costs
  are 75,000, Average Variable Costs are 10 per
  unit.
• Q1. Calculate the breakeven point for prices of
  25, 30, and 40.
• Q2. Calculate the number of units you would have
  to sell to earn 300,000 in profits at each of
  these price points.

37
Breakeven Answers

• At 25.
• 75,000/(25-10) 75,000/15 5,000 games
• At 30
• 75,000/(30-10) 75,000/20 3,750 games
• At 40
• 75,000/(40-10) 75,000/30 2,500 games

38
Profit-Target Answers

• At 25
• 375,000/(25-10) 25,000
• At 30
• 375,000/(30-10) 18,750
• At 40
• 375,000/(40-10) 12,500