13 CHAPTER BUILDING THE PRICE FOUNDATION 2003 Mc

13 CHAPTER BUILDING THE PRICE FOUNDATION © 2003 Mc. Graw-Hill Companies, Inc. , Mc. Graw-Hill/Irwin

AFTER READING THIS CHAPTER YOU SHOULD BE ABLE TO: • Identify the elements that make up a price. • Recognize the constraints on a firm's pricing latitude and the objectives a firm has in setting prices. © 2003 Mc. Graw-Hill Companies, Inc. , Mc. Graw-Hill/Irwin

AFTER READING THIS CHAPTER YOU SHOULD BE ABLE TO: • Explain what a demand curve is and how it affects a firm’s total and marginal revenue. • Recognize what price elasticity of demand means to a manager facing a pricing decision. © 2003 Mc. Graw-Hill Companies, Inc. , Mc. Graw-Hill/Irwin

AFTER READING THIS CHAPTER YOU SHOULD BE ABLE TO: • Explain the role of costs in pricing decisions. • Calculate a break-even point for various combinations of price, fixed costs, and unit variable cost. © 2003 Mc. Graw-Hill Companies, Inc. , Mc. Graw-Hill/Irwin

BUILDING THE PRICE FOUNDATION WHERE DOT-COMS STILL THRIVE: HELPING YOU GET A $100 A NIGHT HOTEL ROOM OVER-LOOKING NEW YORK’S CENTRAL PARK! • Why Travel Dot-Coms Haven’t Tanked • Travel Dot-Com Prices: A Win-Win for Both Buyers and Sellers! © 2003 Mc. Graw-Hill Companies, Inc. , Mc. Graw-Hill/Irwin

NATURE AND IMPORTANCE OF PRICE • What is a Price? § Barter © 2003 Mc. Graw-Hill Companies, Inc. , Mc. Graw-Hill/Irwin

NATURE AND IMPORTANCE OF PRICE • Price as an Indicator of Value § Value-pricing • Price in the Marketing Mix § Profit Equation © 2003 Mc. Graw-Hill Companies, Inc. , Mc. Graw-Hill/Irwin

STEP 1: IDENTIFY PRICING CONSTRAINTS AND OBJECTIVES • 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 Cost of Producing and Marketing the Product © 2003 Mc. Graw-Hill Companies, Inc. , Mc. Graw-Hill/Irwin

STEP 1: IDENTIFY PRICING CONSTRAINTS AND OBJECTIVES • Identifying Pricing Constraints (cont) • Cost of Changing Prices and Time Period • They Apply Types of Competitive Markets § Pure monopoly § Oligopoly § Monopolistic competition § Pure competition © 2003 Mc. Graw-Hill Companies, Inc. , Mc. Graw-Hill/Irwin

STEP 1: IDENTIFY PRICING CONSTRAINTS AND OBJECTIVES • Identifying Pricing Constraints (cont) • Competitors’ Prices © 2003 Mc. Graw-Hill Companies, Inc. , Mc. Graw-Hill/Irwin

STEP 1: IDENTIFY PRICING CONSTRAINTS AND OBJECTIVES • Identifying Pricing Objectives • Profit © 2003 Mc. Graw-Hill Companies, Inc. , Mc. Graw-Hill/Irwin

STEP 1: IDENTIFY PRICING CONSTRAINTS AND OBJECTIVES • Identifying Pricing Objectives (cont) • Sales • Market Share • Unit Volume • Survival • Social Responsibility © 2003 Mc. Graw-Hill Companies, Inc. , Mc. Graw-Hill/Irwin

Concept Check 1. What factors impact the list price to determine the final price? A: Subtract discounts and allowances and add extra fees. © 2003 Mc. Graw-Hill Companies, Inc. , Mc. Graw-Hill/Irwin

Concept Check 2. How does the type of competitive market a firm is in affect its latitude in setting price? A: Different competitive markets have differences in price competition and, in turn, the nature of product differentiation and extent of advertising. © 2003 Mc. Graw-Hill Companies, Inc. , Mc. Graw-Hill/Irwin

STEP 2: ESTIMATE DEMAND SERVICE • Fundamentals of Estimating Demand • The Demand Curve © 2003 Mc. Graw-Hill Companies, Inc. , Mc. Graw-Hill/Irwin

STEP 2: ESTIMATE DEMAND SERVICE • The Demand Curve (cont) § Demand factors • Movement Along versus Shift of a Demand Curve © 2003 Mc. Graw-Hill Companies, Inc. , Mc. Graw-Hill/Irwin

STEP 2: ESTIMATE DEMAND SERVICE • Fundamentals of Estimating Revenue § Total revenue § Average revenue § Marginal revenue © 2003 Mc. Graw-Hill Companies, Inc. , Mc. Graw-Hill/Irwin

STEP 2: ESTIMATE DEMAND SERVICE • Fundamentals of Estimating Revenue (cont) • Demand Curves and Revenue © 2003 Mc. Graw-Hill Companies, Inc. , Mc. Graw-Hill/Irwin

STEP 2: ESTIMATE DEMAND SERVICE • Fundamentals of Estimating Revenue (cont) • Price Elasticity of Demand • Price Elasticity for Brands and Product Classes © 2003 Mc. Graw-Hill Companies, Inc. , Mc. Graw-Hill/Irwin

Concept Check 1. What is the difference between a movement along and a shift of a demand curve? A: A movement along the demand curve occurs when the price is lowered and quantity demanded increases, assuming that other demand factors remain unchanged. If some of these factors change, however, a shift of the demand curve results. © 2003 Mc. Graw-Hill Companies, Inc. , Mc. Graw-Hill/Irwin

Concept Check 2. 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. © 2003 Mc. Graw-Hill Companies, Inc. , Mc. Graw-Hill/Irwin

STEP 3: DETERMINE COST, VOLUME, AND PROFIT RELATIONSHIPS • The Importance of Controlling Costs § Total cost § Fixed cost § Variable cost § Marginal cost © 2003 Mc. Graw-Hill Companies, Inc. , Mc. Graw-Hill/Irwin

STEP 3: DETERMINE COST, VOLUME, AND PROFIT RELATIONSHIPS • Marginal Analysis and Profit Maximization © 2003 Mc. Graw-Hill Companies, Inc. , Mc. Graw-Hill/Irwin

STEP 3: DETERMINE COST, VOLUME, AND PROFIT RELATIONSHIPS • Break-Even Analysis § Break-even point § Break-even chart • Calculating a Break-Even Point © 2003 Mc. Graw-Hill Companies, Inc. , Mc. Graw-Hill/Irwin

STEP 3: DETERMINE COST, VOLUME, AND PROFIT RELATIONSHIPS • Break-Even Analysis (cont) • Applications of Break-Even Analysis © 2003 Mc. Graw-Hill Companies, Inc. , Mc. Graw-Hill/Irwin

Concept Check 1. What is the difference between fixed costs and variable costs? A: Fixed costs are stable and do not change with the quantity of the product that is produced and sold. Variable costs vary directly with the quantity of the product that is produced and sold. © 2003 Mc. Graw-Hill Companies, Inc. , Mc. Graw-Hill/Irwin

Concept Check 2. What is a break-even point? A: The break-even point is the quantity at which total revenue and total cost are equal and beyond which profit occurs. © 2003 Mc. Graw-Hill Companies, Inc. , Mc. Graw-Hill/Irwin