Marketing Kerin Chapter 13

There are six steps in setting price:

(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; and (6) make special adjustments to the list or quoted price.

What is the difference between a movement along and a shift of a demand curve?

A movement along a demand curve (up or down) for a product occurs when its price is lowered/increased and the quantity demanded for it increases/decreases, assuming the other factors such as consumer tastes, promotion (advertising and/or sales promotion), price and availability of substitute products, and/or consumer incomes, remain unchanged. However, if one or more of these factors do change, then the demand curve for a product will shift to the right or left based on whether the change(s) were favorable or not.

If competitive market circumstances are such that there is some leader-follower price competition, some product differentiation, and the purpose of advertising is to inform, but avoid price competition, then __________ must exist in the industry.

A pure monopoly. The few sellers in an oligopoly try to avoid price competition because it can lead to disastrous price wars in which all lose money. Yet, firms in such industries stay aware of a competitor's price cuts or increases and may follow suit. The products can be undifferentiated or differentiated, and informative advertising that avoids head-to-head price competition is used.

pricing constraints

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

break-even point (bep)

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

Explain what a demand curve is and the role of revenues in pricing decisions.

A demand curve is a graph relating the quantity sold and price, which shows the maximum number of units that will be sold at a given price. Three demand factors affect price: (a) consumer tastes, (b) price and availability of substitute products, and (c) consumer income. These demand factors determine consumers' willingness and ability to pay for goods and services. Assuming these demand factors remain unchanged, if the price of a product is lowered or raised, then the quantity demanded for it will increase or decrease, respectively. Three important forms of revenues impact a firm's pricing decisions: (a) total revenue, which is the total money received from the sale of a product; (b) average revenue, which is the average amount of money received for selling one unit of a product (which is simply the price of the unit); and (c) marginal revenue, which is the change in total revenue that results from producing and marketing one additional unit.

Describe how various combinations of price, fixed cost, and unit variable cost affect a firm's break-even point.

Break-even analysis is a technique that analyzes the relationship between total revenue and total cost to determine profitability at various levels of output. The break-even point is the quantity at which total revenue and total cost are equal. Assuming no change in price, if the costs of a firm's product increase due to higher fixed costs (manufacturing or advertising) or variable costs (direct labor or materials), then its break-even point will be higher. And if total cost is unchanged, an increase in price will reduce the break-even point.

Explain the role of costs in pricing decisions.

Five important costs impact a firm's pricing decisions: (a) total cost, or total expenses, the sum of fixed cost and variable cost incurred by a firm in producing and marketing a product;(b) fixed cost, the sum of expenses of the firm that are stable and do not change with the quantity of a product that is produced and sold; (c) variable cost, the sum of expenses of the firm that vary directly with the quantity of a product that is produced and sold; (d) unit variable cost, variable cost expressed on a per unit basis; and (e) marginal cost, the change in total cost that results from producing and marketing one additional unit of the product.

what is the difference between fixed costs and variable costs?

Fixed cost is 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 is the sum of the expenses of the firm that vary directly with the quantity of a product that is produced and sold.

How does the type of competitive market a firm is in affect its range in setting price?

In a market characterized by pure competition, the marketplace determines the price an individual firm can set. In a market characterized by monopolistic competition, there is some price competition among firms, which allows an individual firm to set a price within a range of prices. In an oligopoly, a firm may either be a price follower and set a price based on the prices set by its competitors to avoid a price war. In a pure monopoly, the firm, being the only one in the market, can set any price it wants.

What factors impact the list price to determine the final price?

Incentives, such as cash discounts, allowances, and rebates, as well as extra fees or surcharges.

Describe what price elasticity of demand means to a manager facing a pricing decision.

Price elasticity of demand measures the responsiveness of units of a product sold to a change in price, which is expressed as the percentage change in the quantity of a product demanded divided by the percentage change in price. Price elasticity is important to marketing managers because a change in price usually has an important effect on the number of units of the product sold and on total revenue.

price elasticity of demand (more)

Price elasticity with elastic, not inelastic demand, is always greater than 1. The more substitutes a product has, the more likely it is to be price elastic. Seasonal demand for items like snowblowers does impact price elasticity of demand since it is the product not the time period when sold that is the key issue. Items that require a large cash outlay compared with a person's disposable income are price elastic. With inelastic demand, reducing price decreases total revenue.

What is price?

Price is the money or other considerations (including other products and services) exchanged for the ownership or use of a product or service.

Identify the elements that make up a price.

Price is the money or other considerations (such as barter)exchanged for the ownership or use of a good or service. Although price typically involves money, the amount exchanged is often different from the list or quoted price because of incentives (rebates, discounts, etc.), allowances (trade), and extra fees(finance charges, surcharges, etc.).

What is the difference between pricing objectives and pricing constraints?

Pricing objectives involve specifying the role of price in an organization's marketing and strategic plans whereas pricing constraints are factors that limit the range of prices a firm may set.

Recognize the objectives a firm has in setting prices and the constraints that restrict the range of prices a firm can charge.

Pricing objectives specify the role of price in a firm's marketing strategy and may include profit, sales revenue, market share, unit volume, survival, or some socially responsible price level. Pricing constraints that restrict a firm's pricing flexibility include demand, product newness, other products sold by the firm, production and marketing costs, cost of price changes, type of competitive market, and the prices of competitive substitutes.

What is total revenue and how is it calculated?

Total Revenue (TR) is the total money received from the side of product. Total revenue equals the product's unit price (P) times the quantity sold (Q). P x Q = TR

what is a break-even point?

a break-even point (bep) is the quantity at which total revenue and total cost are equal.

marginal analysis

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

demand curve

a graph relating the quantity sold and price, which shows the maximum number of units that will be sold at a given price.

break-even chart

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.

break-even analysis

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

demand factors

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

What does it mean if a product has a price elasticity of demand that is greater than one?

price elasticities greater than one indicate the product is price elastic.

The vertical axis of a demand curve graph represents

price per unit

profit equation

profit = total revenue - total cost or profit = (unit price x quantity sold) - (fixed cost + variable cost)

pricing objectives

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

average revenue (AR)

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

marginal cost (mc)

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

marginal revenue (mr)

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

price elasticity of demand

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

barter

the practice of exchanging products and services for other products and services rather than for money.

value-pricing

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

value

the ratio of perceived benefits to price; or value = (perceived benefits/price)

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.

total cost (tc)

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

total revenue (tr)

the total money received from the sale of a product.

unit variable cost (uvc)

variable cost expressed on a per unit basis for a product.

When General Mills divides the sales revenue of its breakfast cereals in a single year by the total breakfast cereal sales of all its competitors plus its own for that same year, it is calculating its

Market Share. Market share is the ratio of a firm's sales revenues or unit sales to those of the industry (competitors plus the firm itself).

price

Price is the money or other considerations (including other products and services) exchanged for the ownership or use of a product or service.