Chapter 13- Building The Price Foundation

Front 1

Price

Back 1

Price is unique
It is where all other business decisions come together.

"RIGHT" Price= customers must be willing to pay it and and it must generate enough sales dollars to cover costs/ earn profit

Front 2

Nature and Importance of Price:

many different names for prices

Back 2

tuition, rent, interest, premium, fee, dues, fare, salary, commission, wage, price

Front 3

Price

Back 3

the money or other considerations (including other goods and services) exchanged for the ownership or use of a good or service.

may have addition charges added to a list price

Front 4

Barter

Back 4

practice of exchanging goods and services for other goods and services rather than for money.

Front 5

Price Equation

Back 5

Price= LIST PRICE
-INCENTIVES AND ALLOWANCES
+EXTRA FEES

ex. List= $1200000
Rebate= $100,000
Allowance= $5395
Fees= 26317+ 5000=31317
P=1200000-(105395)+31317=$1,135,922

Front 6

Value

Back 6

the ratio of perceived benefits to price

V= Perceived Benefits/ Price

increase benefits= increased value
(ie. large pizza for same price)

Front 7

Value Pricing

Back 7

the practice of simultaneously increasing product and service benefits while maintaining or decreasing price

*sometimes higher price=higher value
value= judgment by consumer of the worth and desirability of product

Front 8

Profit Equation

Back 8

Profit= Total revenue - Total Cost
=(Unit price x Quantity sold)-Total cost

price effects quantity sold. also indirectly effects costs.

Front 9

Six major Steps involved in the the Process Organizations go through in setting Prices

Back 9

1)ID pricing objectives and constraints
2) Estimate demand and revenue
3) Determine cost, volume and Profit relationships
4)Select an appropriate price level
5)Set list or quoted price
6)Make special adjustments to list or quoted price

Front 10

1)Identifying Pricing Objectives and Constraints

Back 10

Objectives- Profit, Sales, Market Share, Unit Volume, Survival, Social Responsibility

Constraints- Demand, Newness/Life Cycle, etc

Front 11

A. Pricing Objectives

Back 11

specifying the role of price in an organization's marketing and strategic plans

Front 12

a. Profit

Back 12

1)managing for long-run profits: gives up immediate profit in exchange for achieving higher market share by developing quality products. Products priced low to get higher market share.

2)Maximizing current profit: set for a quarter or year. Common because targets can be set and performance measured quickly.

3) target return objective: board of directors set profit goal(20% of ROI)

Front 13

b. Sales

Back 13

once profit is high enough to stay in business, may want to increase sales revenue= increase in market share/profit

*more easily translated into targets for managers

Front 14

c. Market Share

d. Unit Volume

Back 14

c. the ratio of the firms sales revenue to those of the industry. Objective used when sales are flat or declining

d. objective to max the quantity of products produced or sold. May be bad if achieved through price cutting

Front 15

e. Survival

d. Social Responsibility

Back 15

e. self exp.

f. firm may forgo profit or sales for recognizing its obligations to customers and society in general. EX. Drug pricing

Front 16

B. Pricing Constraints

Back 16

factors that limit the range of prices a firm may set.

ie. consumer demand, factors inside and outside the organization

Front 17

a. demand for the Product Class, Product, and brand

Back 17

class(cars), product(sports cars), brand(Bugatti) demand effects the price a seller can charge

luxury vs. necessity

higher demand= higher price

Front 18

b. newness of the product: Stage of Life Cycle

c. Single Product vs. Product Line

Back 18

b. newer product/ early in life cycle= higher price that can be charged. fads may= jump in price later.

c. new product form/ only one available= higher price. More products/competition= consistency in price with others.

Front 19

d. Cost of Producing and Marketing the Product

e. Cost of Changing Prices and the time period they Apply

Back 19

d. long run prices mus cover Production and Marketing

e. cost of changing prices/time period can be high if there are lots of hard materials that list the current info(Catalog). Web= not much cost

Front 20

f. Type of Competitive Markets

(Four types)

Back 20

Pure Monopoly

Oligopoly

Monopolistic Competition

Pure Competition

Front 21

1) pure monopoly

Back 21

One seller who sets the price for a unique product EX. Microsoft

Extent Of Competition: None; sole seller sets price

Extent of Product Differentiation: None; no other producers

E o Advertising: Little; purpose is to decrease demand for product class

Front 22

2)oligopoly

Back 22

few sellers who are sensitive to each other's prices= Price Wars

Extent Of Competition:Some; Price leader or follower of competitors

Extent of Product Differentiation: Various; Depends on industry

E o Advertising: Some; Purpose is to avoid price competition

Front 23

3)monopolistic competition

Back 23

many sellers who compete on non-price factors (McDonalds, Burger King)

Extent Of Competition:Some; compete over range of prices

Extent of Product Differentiation:Some; differentiate from competitors

E o Advertising:MUCH! differentiat!

Front 24

4)Pure Competition

Back 24

many sellers who follow the market price for identical, commodity products (agricultural)

Extent Of Competition:almost none; market sets price

Extent of Product Differentiation:NONE!

E o Advertising:Little; inform that seller's product is available

Front 25

g. competitor's prices

Back 25

firm is constrained by competitor's prices

Front 26

Step 2: Estimate Demand and Revenue

A) Demand

Back 26

Lower price= higher demand.

Balancing selling more (lower price)with covering costs

Front 27

Demand Curve

Back 27

A graph relating the quantity sold and the price, which shows the max number of units sold at a given price.

Decrease in price= increase in demand ( \ )

Front 28

Three key factors in estimating demand:

a. Consumer tastes (want factor)

b. Price and Availability of Similar products (want factor)

c. Consumer income (ability factor)

Back 28

a. tastes depend on demographics, culture and technology

b. decrease price of competitor or availability increases= decreased demand for us(for substitutes)

c. increase in income= increase in demand

Front 29

Demand factors

Back 29

factors that determine consumers' willingness and ability to pay for goods and services

Consumer tastes (want factor), Price and Availability of Similar products (want factor), Consumer income (ability factor) and PRICE

Front 30

Movements along the Demand Curve

Back 30

result of a change in price. (ie. decrese $50= increase in quantity of 100)

it assumes that consumer tastes, price and availability of substitutes, and consumer income stay the same)

Front 31

Shifts in the Demand Curve

Back 31

IE. Advertising= increase in DEMAND for the product

InCresed income= Increased DEMAND (shift right)

*more product is demanded at every price

Front 32

B)Estimating REVENUE

"revenues generated"

Back 32

the monies received by the firm for selling its products

Front 33

Total Revenue

Back 33

the total money received form the sale of a product.

TR= P x Q

*multiply x and y intercepts

Front 34

Average Revenue

Back 34

the average amount of money received for selling one unit of the product, or simply the price of a unit.

AR= Total Rev/ Quantity Sold= Price

*rearrange TR for price

Front 35

Marginal Revenue

Back 35

the change in total revenue that results from producing and marketing one more additional unit.

MR= change in TR/ 1 unit increase in Q
= Slope of the TR curve

Front 36

Demand Curves and Revenue

Back 36

As price changes, the quantity changes

*it can be dangerous to extend a demand curve beyond the range of prices for which it applies, AND they are usually curved(straight line is unrealistic)

Demand curve= AVG REV curve
(

Front 37

Total revenue curve

Back 37

total rev= multiply x(Quantity) an y(Price)-int of demand curve.

The TR increases to a maximum and then decreases

Front 38

Marginal Revenue

Back 38

positive or negative depending on the maximum of the TR curve
-when price(y) is above the MAX TOTAL REVENUE quantity it is positive
-when price is below the MAX TOTAL REVENUE quantity it is negative
NEVER operate where negative

*always falls 2x as fast as the demand curve (slope is steeper)

Front 39

**Price Elasticity of Demand

Back 39

the percentage change in quantity demanded relative to a percentage change in price.

E= % change in Quantity/ % change in Price
*always positive

how sensitive the consumer demand and the firm's revenues are to changes in price

Front 40

Three forms of Elasticity:

1)Elastic Demand

Back 40

when a one % decrease in price produces more than a 1% increase in quantity demanded (increase in total revenue)

Price Elasticity > 1

sensitive to change: small price change = big quantity change (change price)

Front 41

2) Inelastic Demand

Back 41

When a one percent decrease in price produces less than a one percent increase in quantity demanded. (Decrease sales revenue)

E < 1

*don't want to change price if revenue will fall!

Front 42

3) Unitary Demand

Back 42

when the percentage change in price is identical to the percentage change in quantity

Front 43

Factors that determine elasticity

Back 43

1) More substitutes= price elastic

2) necessities= inelastic

3)large percentage of income/cash outlay = elastic

Front 44

Step 3: Determine cost, Volume and Profit Relationships

Back 44

costs or expenses are the monies the firm pays out to it's employees and suppliers

Front 45

Total Cost

Back 45

The total expense incurred by a firm in producing and marketing a product. The sum of the fixed cost and variable cost.

TC= FC + VC

Front 46

Fixed cost

Back 46

the sum of the expenses of the firm that are stable and do not change with the quantity of a product that is produced and sold. EX. Rent, executive salaries,and insurance.

Front 47

Variable cost

Back 47

the sum of the expenses of the firm that vary directly with the with the quantity of a product that is produced and sold.
EX. Direct labor and direct materials

Front 48

Unit Variable Cost

Back 48

variable cost expressed on a per unit basis

UVC= Total VC/ Quantity

Front 49

Marginal Cost

Back 49

the change in total cost that results from producing and marketing one additional unit of a product.

MC= change in TC/ 1 unit increase in Q= slope of TC curve

Front 50

Marginal Analysis

Back 50

a continuing, concise trade-off of incremental costs against incremental revenues

people will do it as long as return > cost
aka.
marg revenue > marg. cost = increase output

Front 51

Break- Even Analysis

Back 51

a technique that analyzes the relationship between total revenue and total cost to determine profitability at various levels of output

Front 52

Break-Even Point (BEP)

Back 52

the quantity at which total revenue and total cost are equal.

profit comes from all units sold beyond the BEP

BEP= FC/ (P/unit- UVC)

Front 53

EX of Calculating Break Even

Back 53

Price/unit= $100
FC= $28000
UVC= $30

BEP= $28000/ (100-30)= 400 pictures
*above this quantity= profit

Front 54

Marginal Rev. vs. Marginal Cost

Back 54

Marginal cost starts out highish, drops a little, then increases with the quantity of units sold

Marginal is downward sloping. Increases in quantity decrease marginal revenue.

Front 55

*Message of Marginal Analysis

Back 55

Operate up to the point where marginal revenue equals marginal cost.

MR=MC

up until that point the increase in TR is greater than the increase in TC. beyond, it is less.

Front 56

more on MR= MC

Back 56

at MR=MC total revenue is furthest away form total cost, they are parallel, and profit is at a MAXIMUM

Front 57

Break- even chart

Back 57

A graphic Presentation of the break even analysis. (y-axis= total revenue, x-axis= quantity)

*shows that total revenue and total cost intersect and are equal at BEP and profit is zero)

Front 58

Applications of Break- Even Analysis

Back 58

study the impact on profit of changes in price, fixed cost, and variable cost

EX. in book: Automation
- Increase fixed cost, decrease variable cost
BEP change= 333333->500000
BUT what does it do to Profit

Front 59

EX in book: what does increase in fixed cost and decrease in variable cost do to PROFIT?

Back 59

P= (P X Q)-[FC+ (UVC X Q)]

the increase in fixed costs and decrease in variable costs actually caused an increase in profits

NOTE: BEP increased and Profit increased
*increase in quantity sold for high fixed cost firms= more profit