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59 Cards in this Set

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  • Back
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
Nature and Importance of Price:

many different names for prices
tuition, rent, interest, premium, fee, dues, fare, salary, commission, wage, price
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
practice of exchanging goods and services for other goods and services rather than for money.
Price Equation

ex. List= $1200000
Rebate= $100,000
Allowance= $5395
Fees= 26317+ 5000=31317
the ratio of perceived benefits to price

V= Perceived Benefits/ Price

increase benefits= increased value
(ie. large pizza for same price)
Value Pricing
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
Profit Equation
Profit= Total revenue - Total Cost
=(Unit price x Quantity sold)-Total cost

price effects quantity sold. also indirectly effects costs.
Six major Steps involved in the the Process Organizations go through in setting Prices
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
1)Identifying Pricing Objectives and Constraints
Objectives- Profit, Sales, Market Share, Unit Volume, Survival, Social Responsibility

Constraints- Demand, Newness/Life Cycle, etc
A. Pricing Objectives
specifying the role of price in an organization's marketing and strategic plans
a. Profit
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)
b. Sales
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
c. Market Share

d. Unit Volume
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
e. Survival

d. Social Responsibility
e. self exp.

f. firm may forgo profit or sales for recognizing its obligations to customers and society in general. EX. Drug pricing
B. Pricing Constraints
factors that limit the range of prices a firm may set.

ie. consumer demand, factors inside and outside the organization
a. demand for the Product Class, Product, and brand
class(cars), product(sports cars), brand(Bugatti) demand effects the price a seller can charge

luxury vs. necessity

higher demand= higher price
b. newness of the product: Stage of Life Cycle

c. Single Product vs. Product Line
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.
d. Cost of Producing and Marketing the Product

e. Cost of Changing Prices and the time period they Apply
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
f. Type of Competitive Markets

(Four types)
Pure Monopoly


Monopolistic Competition

Pure Competition
1) pure monopoly
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
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
3)monopolistic competition
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!
4)Pure Competition
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
g. competitor's prices
firm is constrained by competitor's prices
Step 2: Estimate Demand and Revenue

A) Demand
Lower price= higher demand.

Balancing selling more (lower price)with covering costs
Demand Curve
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 ( \ )
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)
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
Demand factors
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
Movements along the Demand Curve
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)
Shifts in the Demand Curve
IE. Advertising= increase in DEMAND for the product

InCresed income= Increased DEMAND (shift right)

*more product is demanded at every price
B)Estimating REVENUE

"revenues generated"
the monies received by the firm for selling its products
Total Revenue
the total money received form the sale of a product.

TR= P x Q

*multiply x and y intercepts
Average Revenue
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
Marginal Revenue
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
Demand Curves and Revenue
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
Total revenue curve
total rev= multiply x(Quantity) an y(Price)-int of demand curve.

The TR increases to a maximum and then decreases
Marginal Revenue
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)
**Price Elasticity of Demand
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
Three forms of Elasticity:

1)Elastic Demand
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)
2) Inelastic Demand
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!
3) Unitary Demand
when the percentage change in price is identical to the percentage change in quantity
Factors that determine elasticity
1) More substitutes= price elastic

2) necessities= inelastic

3)large percentage of income/cash outlay = elastic
Step 3: Determine cost, Volume and Profit Relationships
costs or expenses are the monies the firm pays out to it's employees and suppliers
Total Cost
The total expense incurred by a firm in producing and marketing a product. The sum of the fixed cost and variable cost.

Fixed cost
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.
Variable cost
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
Unit Variable Cost
variable cost expressed on a per unit basis

UVC= Total VC/ Quantity
Marginal Cost
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
Marginal Analysis
a continuing, concise trade-off of incremental costs against incremental revenues

people will do it as long as return > cost
marg revenue > marg. cost = increase output
Break- Even Analysis
a technique that analyzes the relationship between total revenue and total cost to determine profitability at various levels of output
Break-Even Point (BEP)
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)
EX of Calculating Break Even
Price/unit= $100
FC= $28000
UVC= $30

BEP= $28000/ (100-30)= 400 pictures
*above this quantity= profit
Marginal Rev. vs. Marginal Cost
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.
*Message of Marginal Analysis
Operate up to the point where marginal revenue equals marginal cost.


up until that point the increase in TR is greater than the increase in TC. beyond, it is less.
more on MR= MC
at MR=MC total revenue is furthest away form total cost, they are parallel, and profit is at a MAXIMUM
Break- even chart
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)
Applications of Break- Even Analysis
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
EX in book: what does increase in fixed cost and decrease in variable cost do to PROFIT?
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