part eight pricing decisions
DESCRIPTION
Part Eight Pricing Decisions. 21. Pricing Concepts 22. Setting Prices. Chapter 21 Pricing Decisions. Objectives. Understand nature and importance of price Identify characteristics of price and nonprice competition Explore demand curves and price elasticity of demand - PowerPoint PPT PresentationTRANSCRIPT
21 | 2Copyright © Houghton Mifflin Company. All rights reserved.
Part EightPricing Decisions
21. Pricing Concepts
22. Setting Prices
Chapter 21Pricing Decisions
21 | 4Copyright © Houghton Mifflin Company. All rights reserved.
Objectives
• Understand nature and importance of price• Identify characteristics of price and nonprice
competition• Explore demand curves and price elasticity of
demand• Examine relationships among demand, costs,
and profits• Describe key factors that may influence pricing
decisions• Consider issues affecting pricing of products for
business markets
21 | 5Copyright © Houghton Mifflin Company. All rights reserved.
The Nature of Price
The value exchanged for products in a marketing exchange
21 | 6Copyright © Houghton Mifflin Company. All rights reserved.
Terms Used To Describe Price
• Tuition
• Premium
• Fine
• Fee
• Fare
• Toll
• Rent
• Commission
• Dues
• Deposit
• Tips
• Interest
• Taxes
21 | 7Copyright © Houghton Mifflin Company. All rights reserved.
The Importance of Price to Marketers
Profit = Total Revenue – Total CostsProfits = (Price x Quantity Sold) – Total Costs
21 | 8Copyright © Houghton Mifflin Company. All rights reserved.
Price and Nonprice Competition
• Price Competition Emphasizes price as an issue and matches
or beats competitors’ price To compete effectively- firm should be the
low-cost seller Standardized products Frequent price changes Provides flexibility
21 | 9Copyright © Houghton Mifflin Company. All rights reserved.
Nonprice Competition
Emphasizes distinctive product:• Features• Quality• Promotion• Packaging• Other
Distinction must be effective
21 | 10Copyright © Houghton Mifflin Company. All rights reserved.
Analysis Of Demand
• Demand Curve
• Demand Fluctuations
• Assessing Price Elasticity
21 | 11Copyright © Houghton Mifflin Company. All rights reserved.
Demand Curve
A graph of the quantity expected to be sold at various prices if other factorsremain constant
21 | 12Copyright © Houghton Mifflin Company. All rights reserved.
Demand Curve, Price-Quantity Relationship and Increase in Demand
21 | 13Copyright © Houghton Mifflin Company. All rights reserved.
Demand Curve, Relationship Between Price and Quantity for Prestige Products
21 | 14Copyright © Houghton Mifflin Company. All rights reserved.
Demand Fluctuations
• Changes in buyers’ needs
• Variations in effectiveAness of other marketing mix variables
• Presence of substitutes
• Environment factors
21 | 15Copyright © Houghton Mifflin Company. All rights reserved.
Elasticity Of Demand
21 | 16Copyright © Houghton Mifflin Company. All rights reserved.
Price/Demand Elasticity
Elastic- change in price causes opposite change in total revenue• Price = Total Revenue • Price = Total Revenue
Inelastic- change in price causes same change in total revenue• Price = Total Revenue • Price = Total Revenue
21 | 17Copyright © Houghton Mifflin Company. All rights reserved.
Price Elasticity Of Demand
Price Elasticity of
Demand= (% Change In Quantity Demanded)
% Change in Price
21 | 18Copyright © Houghton Mifflin Company. All rights reserved.
Demand, Cost, and Profit Relationships
• Marginal Analysis– Fixed costs– Average fixed cost– Variable costs– Average variable cost– Total cost– Average total cost– Marginal cost (MC) – Marginal revenue (MR)
21 | 19Copyright © Houghton Mifflin Company. All rights reserved.
Costs AndTheir Relationships
21 | 20Copyright © Houghton Mifflin Company. All rights reserved.
Typical Marginal Costs And Average Total Cost Relationship
21 | 21Copyright © Houghton Mifflin Company. All rights reserved.
Typical Marginal Revenue And Average Revenue Relationship
21 | 22Copyright © Houghton Mifflin Company. All rights reserved.
Marginal Analysis Method For Determining Most Profitable Price
21 | 23Copyright © Houghton Mifflin Company. All rights reserved.
Combining Marginal Cost And Marginal Revenue Concepts For Optimal Profit
21 | 24Copyright © Houghton Mifflin Company. All rights reserved.
Demand, Cost, and Profit Relationships
• Break-Even Analysis– Break-even point – point at which the costs of
producing a product equal the revenue made from selling the product
21 | 25Copyright © Houghton Mifflin Company. All rights reserved.
Determining TheBreak-Even Point
21 | 26Copyright © Houghton Mifflin Company. All rights reserved.
Breakeven Point
Breakeven Point =
Fixed CostsPer-Unit Contribution to Fixed Costs
(Price – Variable Costs)
21 | 27Copyright © Houghton Mifflin Company. All rights reserved.
Factors ThatAffect Pricing Decisions
21 | 28Copyright © Houghton Mifflin Company. All rights reserved.
Organizational AndMarketing Objectives
• Set prices consistent with organization’s goals and mission
• Pricing decisions should be compatible with firm’s marketing objectives
21 | 29Copyright © Houghton Mifflin Company. All rights reserved.
Costs
• Why price below cost?
– Match competition
– Generate cash flow
– Increase market share
• Focus on cost reduction
• Costs shared with others in product line
21 | 30Copyright © Houghton Mifflin Company. All rights reserved.
Pricing Decisions Influence Other Mix Variables
• Demand
• Distribution– Intensive
– Selective
– Exclusive
• Promotion– Premium = little advertising, personal selling
– Complex = potential buyer confusion
21 | 31Copyright © Houghton Mifflin Company. All rights reserved.
Channel Member Expectations
• Profit
• Competing product
• Time/resources required
• Discounts
• Support activities- associated costs
21 | 32Copyright © Houghton Mifflin Company. All rights reserved.
Reference Prices
• Internal- developed in buyer’s mind through experience with product
• External- comparison price provided by others
21 | 33Copyright © Houghton Mifflin Company. All rights reserved.
Context Of Price-Buyers Characterized
• Value-conscious - concerned about price and quality
• Price-conscious - want to pay low prices
• Prestige-sensitive - purchase products that signify prominence and status
21 | 34Copyright © Houghton Mifflin Company. All rights reserved.
Competition
• Monopoly– Whatever market will bear– Government regulation
• Oligopoly– Barriers to entry– Little advantage in price cuts
• Monopolistic Competition– Distinguishable product– Usually nonprice competition
• Perfect competition– All products the same– No flexibility in pricing
21 | 35Copyright © Houghton Mifflin Company. All rights reserved.
Business-To-BusinessPrice Discounting
21 | 36Copyright © Houghton Mifflin Company. All rights reserved.
Trade (Functional) Discount
A reduction off the list price by a producer to an intermediary for performing certain functions
21 | 37Copyright © Houghton Mifflin Company. All rights reserved.
Quantity Discount
Deduction from list price that reflect(s) the economies of purchasing in large quantities
21 | 38Copyright © Houghton Mifflin Company. All rights reserved.
Cumulative Discount
A quantity discount aggregated over a stated time period
21 | 39Copyright © Houghton Mifflin Company. All rights reserved.
Noncumulative Discounts
A one-time price reduction based on the number of units purchased, the dollar value of the order, or the product mix purchased
21 | 40Copyright © Houghton Mifflin Company. All rights reserved.
Cash Discount
A price reduction given to buyer for prompt payment or cash payment
21 | 41Copyright © Houghton Mifflin Company. All rights reserved.
Seasonal Discount
A price reduction to buyers that purchase goods or services out of season
21 | 42Copyright © Houghton Mifflin Company. All rights reserved.
Allowance
A concession in price to achieve a desired goal
21 | 43Copyright © Houghton Mifflin Company. All rights reserved.
Geographic Pricing
• F.O.B.– Factory– Destination
• Uniform geographic (Postage-Stamp)
• Zone
• Base-point
• Freight Absorption