Chapter 13

Six 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 relations 4. Select an approximate price level 5. Set list or quoted price 6. Make special adjustments to list or quoted price

Demand Factors

1. Price 2. Consumer tastes 3. Price and availability of similar products 4. Consumer income

Profit Equation

= Total revenue - Total cost = (Unit price X Quantity sold) - (Fixed cost + Variable cost)

Demand Curve

A graph that relates the quantity sold and price, showing the maximum number of units that will be sold at a given price.

Pure Competition

A large number of suppliers offer very similar products.

Oligopoly

A market structure in which a few large firms dominate a market

Monopolistic Competition

A market structure in which many companies sell products that are similar but not identical

Pure Monopoly

An industry with a single firm that produces a product for which there are no close substitutes and in which significant barriers to entry prevent other firms from entering the industry to compete for profits

Marginal Cost

Change in the total cost that results from producing and marketing one additional unit of a product _________________________=Change in TC (Total Cost) / 1 Unit increase in Q (quantity)

Price Transparency

Consumer's access to competitors' prices for the same offering

Inelastic Demand

Exists when a 1% decrease in price produces less than a 1% increase in quantity demanded, thereby actually decreasing total revenues.

Elastic demand

Exists when a 1% decrease in price produces more than a 1% increase in quantity demanded, thereby actually increasing total revenues.

Price

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

Barter

Practice of exchanging products and services for other products and services rather than for money

Type of Competitive Market

Pure Competition Monopolistic Competition Oligopoly Pure Monopoly

Value

Ratio of perceived benefits to price ___________ = Perceived benefits Price

Fixed Cost

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

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

Total Revenue

The amount of money received by firms when they sell a good or service. _____ = P x Q. (price X quantity)

Value Pricing

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

Market Share

The ratio of sales revenue of the firm to the total sales revenue of all firms in the industry, including the firm itself.

The Price Equation

______________ = List Price - Incentives and Allowances + Extra Fees

Marginal Analysis

a continuing, concise trade-off of incremental costs against incremental revenues As long as revenue received from the sale of an additional unit of a product (marginal revenue) is greater than the additional cost of producing and selling it (marginal cost), a firm will expand its output of that product.

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

Price Elasticity of Demand

a measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as percentage change in quantity demanded relative to a percentage change in price ___________ = Percentage change in quantity demanded/Percentage change in price

Reference Value

comparing the costs and benefits of substitute items ex. Big Mac, small soft drink and small fries -separately $6.73 -together Big Mac "Extra Value Meal" $5.59

Consumer-Driven Pricing Action

e.g. when a consumer sees a tv in-store and then goes home and orders it online for less

Pricing Constraints

factors that limit the range of prices a firm may set

Break-even Analysis

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

Break-even point

quantity at which total revenue and total cost are equal. Profit comes from all units sold beyond BEP BEP=fixed cost / (unit price-unit variable cost)

Pricing Objectives

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

Average Revenue

the average amount of money received for selling one unit of a product, or simply the price of that unit total revenue divided by the quantity of the product sold _______=TR/Q=P

Marginal Revenue

the change in total revenue resulting from the sale of one additional unit of a product ____________=Change in TR/1 unit increase in Q

Unit volume

the quantity produced or sold

Unit Variable Cost

the variable cost expressed on a per unit basis for a product: _________________= VC/Q (variable cost/quantity) affect a firms break even point

Total Cost

total expenses incurred by a firm in producing and marketing a product. Sum of fixed cost and variable cost