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Marketing 305 - Chapter 13
Building the Price Foundation
Terms in this set (44)
-The money or other considerations (including products and services) exchanged for the ownership or use of a product or service.
-The practice of exchanging products and services for other products and services rather than for money.
-Barter transactions account for billions of dollars annually in domestic and international trade.
The Price Equation
FINAL PRICE = List Price - (Incentives + Allowances) + Extra Fees
-A consumer's near-instantaneous access to competitor's prices for the same offering exists today for both products and services through online websites, apps, and smartphones.
-Price transparency has reduced barriers to entry and helped launch countless online startups; because they avoid the many expenses inherent in brick-and-mortar businesses, these firms are able to promote lower prices and other benefits to consumers.
-The ratio of perceived benefits to price, or
VALUE = Perceived Benefits/Price
-This equation shows that for a given price, as perceived benefits increase, value increases too.
-The practice of simultaneously increasing product and service benefits while maintaining or decreasing price.
-In this context, "value' involves the judgment by a consumer of the worth of a product relative to substitutes that satisfy the same need.
-Through the process of comparing the costs and benefits of substitute items, a "reference value" emerges.
PROFIT = Total Revenue - Total Cost
= (Unit Price x Quantity Sold) - (Fixed Cost + Variable Cost)
6 Steps in Setting Price (in the Marketing Mix)
-The importance of price in the marketing mix necessitates an understanding of 6 major steps in the process organizations go through in setting prices:
1) Identify pricing objectives and constraints
2) Estimate demand and revenue
3) Determine cost, volume, and profit relationships
4) Select an approximate price level
5) Set list or quoted price
6) Make special adjustments to list or quoted price
*In this chapter, will only look at Steps 1-3
Step 1: Identify Pricing Objectives and Constraints
-Pricing objectives reflect corporate goals, while pricing constraints relate to conditions existing in the marketplace.
-Specify the role of price in an organization's marketing and strategic plans; is not always solely based on profit.
-Factors that limit the range of prices a firm may set.
~Demand for the Product Class, Product, and Brand;
~Newness of the Product: Stage in the Product Life Cycle;
~Cost of Producing and Marketing the Product;
~Cost of changing Prices and Time Period They Apply;
~Single Product vs. a Product Line;
~Type of Competitive Market;
~Competitors' Prices and Consumers' Awareness of Them;
~Legal and Ethical Considerations
Profit (as a Pricing Objective)
-3 different objectives relate to a firm's profit, which is often measured in terms of return on investment (ROI) or return on assets (ROA).
-These objectives have different implications for pricing strategy:
1) Managing for Long-Run Profits
2) Maximizing Current Profit
3) Target Return
Managing for Long-Term Profits
-When companies give up immediate profit by developing quality products to penetrate competitive markets over the long term.
-Products are priced relatively low compared to their cost to develop, but the firm expects to make greater profits later because of its high market share.
Maximizing Current Profit
-Common in many firms because the targets can be set and performance measured quickly, such as for a quarter or a year.
-American firms are sometimes criticized for this short-run orientation.
-Occurs when a firm sets a profit goal (such as 20% for pretax ROI), usually determined by its board of directors.
-Increased sales revenue can lead to increases in market share and profit.
-Has the advantage of being translated easily into meaningful targets for marketing managers responsible for a product line or brand.
-Disadvantage is that while cutting the price on one product in a firm's line may increase sales revenue, it may also reduce the sales revenue of related products.
Market Share ($ or #)
-The ratio of the firm's sales revenues or unit sales to those of the industry (competitors plus the firm itself).
-Although increased market share is a primary goal of some firms, others see it as a means to other ends: increasing sales and profits.
Unit Volume (#)
-When a firm uses the quantity produced or sold as a pricing objective.
-Can be counterproductive if a volume objective is achieved, say, by drastic price cutting that drives down profit.
-In some instances, profits, sales, and market share are less important than mere survival.
-Ex.: FAO (a specialty toy retailer) not being able to match the price cuts offered by big discount retailers like Target and Walmart.
-A firm may forgo higher profit on sales and follow a pricing objective that recognizes its obligations to customers and society in general.
Demand for the Product Class, Product, and Brand
-The number of potential buyers for the product class (cars), product group (family sedans) and specific brand (Toyota Camry V6) clearly affects the price a seller can charge.
-Whether the item is a luxury or a necessity also affects the price that can be charged.
-Generally, the greater the demand for a product, the higher the price that can be set.
Newness of the Product: Stage in the Product Life Cycle
-The newer a product and the earlier it is in its life cycle, the higher the price that can usually be charged.
Type of Competitive Market
-The seller's price is constrained by the type of market in which it competes.
-4 Types of Competitive Markets
1) Pure Competition
2) Monopolistic Competition
4) Pure Monopoly
-Many seller who follow the market price for identical, commodity products.
-Almost no price competition; market sets the price.
-No product differentiation; products are identical.
-Little advertising; purpose is to inform prospects that seller's products are available.
-Many sellers who compete on nonprice factors.
-Some price competition; compete over range of prices.
-Some product differentiation; differentiate products from competitors.
-Much advertising; purpose is to differentiate firm's products from competitors.
-Ex.: Peanut Butter
-Few sellers who are sensitive to each other's prices.
-Some price competition; price leader or follower of competitors.
-Various product differentiation; depends on the industry.
-Some advertising; purpose is to inform but avoid price competition.
-Ex.: Aluminum sold to large jetliners avoid price competition which could lead to disastrous price wars, in which they all lose money.
-One seller who sets the price for a unique product.
-No price competition; sole seller sets price.
-No product differentiation; no other producers.
-Little advertising; purpose is to create demand for product class.
-A graph relating the quantity sold and price, which shows the maximum number of units that will be sold at a given price.
-Those factors that determine consumers' willingness and ability to pay for products and services.
~Price and Availability of Similar Products
(along with price)
Total Revenue (TR)
-The total money received from the sale of a product
TR = Unit Price x Quantity Sold
= P x Q
Average Revenue (AR)
-The average amount of money received for selling one unit of a product, or simply the price of that unit.
AR = Total Revenue/Quantity Sold = P
Marginal Revenue (MR)
-The change in total revenue that results from producing and marketing one additional unit of a product
MR = Change in TR/1 unit increase in Q
= Change in TR/Change in Q
= slope of the TR curve
Price Elasticity of Demand (E)
-The percentage change in quantity demanded relative to a percentage change in price.
-Elasticity = Sensitvity
E = % Change in Quantity Demanded/% Change in
-Exists when a 1% decrease in price produces more than a 1% increase in quantity demanded, thereby actually increasing total revenue. This results in a price elasticity that is greater than 1 with elastic demand.
-The reverse is also true: a slight increase in price results in a relatively large decrease in demand.
-So marketers may cut price to increase consumer demand, the units sold, and total revenue for a product with elastic demand.
-Exists when a 1% decrease in price produces less than a 1% increase in quantity demanded, thereby actually decreasing total revenue.
Total Cost (TC)
-Total expense incurred by a firm in producing and marketing a product.
-Total cost is the sum of fixed cost and variable cost.
TC = FC + VC
Fixed Cost (FC)
-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.
Variable Cost (VC)
-The sum of the expenses of the firm that vary directly with the quantity of a product that is produced and sold.
-So, as the quantity sold doubles, the variable cost doubles.
Unit Variable Cost (UVC)
-Variable cost expressed on a per unit basis for a product.
Marginal Cost (MC)
-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
= Change in TC/Change in Q
= slope of TC curve
-A continuing, concise trade-off of incremental costs against incremental revenues.
-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.
BEPq = Fixed Cost/Unit Price - Unit Variable Cost
= FC/P - UVC
-A graphic presentation of the break-even analysis that shows when total revenue and total cost intersect to identify profit or loss for a given quantity sold.
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