chapter 13

six steps in setting price

1. identifying 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.

consumer tastes

As we saw in chapter 3, these depend on many factors such as demographics, culture, and technology. Because consumer tastes can change quickly, up-to-date marketing research is essential to estimate demand.

cost of changing prices and time period they apply

If scandanavian airlines asks General Electric to provide spare jet engines to power the new Boeing 737 it just bought, GE can easily set a new price for the engines to reflect its latest information since only one buyer has to be informed

market share (a pricing objective)

Market share is the ration of them firms sales revenues or unit sales to those of the industry (competitiors plus the firm itself). companies often persue a market share objective when industry sales are relatively flat or declining.

demand for the product class, product, and brand.

The number of potential buyers for the product class (cars), product (sports cars), and brand( Tesla Roadster Sport) clearly affects the price a seller can charge. So does whether the item is a luxury-- like the Tesla---or a neccessity-- like bread and a roof over you head.

marginal analysis

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

social responsibility (a pricing objective)

a firm may forgo higher profit on sales and follow a pricing objective that recognizes its obligations to customers and society in general.

competitiors' prices

a firm must know what specific prices its present and potential competitors ae charging now and are likely to charge in the near future.

elastic demand

a product in which a slight decrease in price results in a relatively large increase in demand or units sold.

inelastic demand

a product in which a slight increase or decrease in price will not significantly affect the demand or units sold for the product.

monopolistic competition

doxens of regional, private brands of peanut butter compete with national brands like skippy and jif.

movement along a demand curve

ex. the price of newsweek is lowered from 2.00 to 1.50 an issue, the quantity demanded increases from 3 million to 4.5 million units per year. This is an example of a movement along a demand curve. (see graph)

pure competition

hundreds of local grain elevators sell corn whose price per bushel is set by the marketplace.

pricing objectives

involve specifying the role of price in an organization's marketing and strategic plans. To the extent possible, these pricing objectives are carried to lower levels in the organization such as in setting objectives for marketing managers responsible for an individual brand.

unit variable cost

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

large cash outlays

items that require a large cash outlay compared with a persons disposable income are price elastic. ex. cars and yatchs are price elastic, soft drinks tend to be price inelastic.

unit volume (a pricing objective)

many firms use unit volume, the quantity produced or sold. These firms often sell multiple products at very different prices and need to match the unit volume demanded by customers with price and production capacity.

neccesities

products and services considered to neccesities are price inelastic. ex. open heart surgery is price inelastic and airline tickets for a vacation are price elastic.

profit equation

profit=total revenue-total costs= (unit price x quality sold)- (fixed cost + variable cost)

value-pricing

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

break-even point

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

value

value= the perceived benefits/ price

single product versus a product line

when Sony introduced its walkman CD player it was not only unique and in the introductory stage of its product life cycle but also the only portable CD player Sony sold.

price elasticity of demand

with a downward sloping demand curve, marketing managers are especially interested in how sensitive consumers demand and the firms revenues are to changes in the products price. This can be measure by the percentage of change in quantity demanded over the percentage change in price.

pure monopoly

In 1994, Johnson & Johnson (J&J) revolutinzized the treatment of coronary heart diseases by introducing the stent-- a tiny mesh tube "spring" that props open clogged arteries. Initially a monopoly, J&J stuck with its early 1595price and acheived $1 billion in sales and 91 percent market share by the end of 1996.

survival (a pricing objective)

In some instances, profits, sales, and market share are less important objectives of the firm than mere survival. for example specialty toy retailers increasingly are facing survival problems because they can't match price cuts by big discount retailers like target and walmart.

type of competitive market

The sellers price is constrained by the type of market in which it competes, economists generally delineate four types of competetive markets.

variable cost

is the sum of thr expenses of the firm that vary directly with the quantity of a product that is produced and sold. for example as the quantity sold doubles, the variable cost doubles. examples are the direct labor and direct materials used in producing the product and the sales commissions that are tied directly to the quantity sold. TC=FC+VC

oligopoly

the few sellers of aluminum or large jetliners try to avoid price ompetition because it can lead to a disastrous price wars in which all lose money.

Price and availability of similar products

the laws of demand work for one's competitors too. If the price of time magazine falls more people will buy it. That then means fewer people will buy Newsweek. Time is considered by economists to be for Newsweek.

product subsistutes

the more subsistutes a product has the more likely the product is to be price elastic. ex- a new sweater, shirt, or blouse has many possible subsistutes and is price elastic but gasoline has almost no subsitutes and is price inelastic.

newness of the product: stage in the product life cycle

the newer a product and the earlier in its life cycle, the higher is the price that can usually be charged. willing to spend up to 5,000 for a new - definition (HD).

barter

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

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.

shift in the demand curve

ex. if advertising causes more people to want newsweek, newstand demand is increased or if consuer income rises than the demand for all magazines including newsweek, increases. now the initial curve no longer represents the newstand demand instead a new curve must be drawn. d2 represents the new demand for newsweek. in this caswe the shift is to the right from d1 to d2. only one variable changed... the demand but not the price. (see graph)

demand factors

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

pricing constraints

factors that limit the range of prices a firm may set. Consumer demand for product clearly affects the price that can be changed.

price equation

final price=list price-(incentives + allowances) + extra fees

sales - (a pricing objective)

given that a firms profit is high enough for it to remain in business, an objective may be to increase sales revenue, which will in turn lead to increases in market share and profit.

consumer income

in general, as real consumer income (allowing for inflation) increases, demand for product also increases.

Cost of Producing and marketing a product

in the long run, a firms price cover all the costs of producing and marketing a product.If the price doesn't cover these costs the firm will fail.

break-even analysis

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

average revenue

is the average amount of money received for sellling one unit of a product, or simply the price of that unit. average revenue is the total revenue dvided by the quantity sold. AR= TR/Q

marginal cost

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

marginal revenue

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

price

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

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. examples of fixed costs are rent on the building executive salaries, and insurance.

total cost

is 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

is the total money receieved from the sale of a product. If TR= total revenue, p=unit price of the product, and q= quantity of the product sold then TR=PxQ

unitary demand

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