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Part Eight Pricing Decisions

Part Eight Pricing Decisions. 21. Pricing Concepts 22. Setting Prices. Chapter 21 Pricing Decisions. Objectives. Understand nature and importance of price Identify characteristics of price and nonprice competition Explore demand curves and price elasticity of demand

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Part Eight Pricing Decisions

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  1. Part EightPricing Decisions 21. Pricing Concepts 22. Setting Prices

  2. Chapter 21Pricing Decisions

  3. Objectives • Understand nature and importance of price • Identify characteristics of price and nonprice competition • Explore demand curves and price elasticity of demand • Examine relationships among demand, costs, and profits • Describe key factors that may influence pricing decisions • Consider issues affecting pricing of products for business markets

  4. The Nature of Price The value exchanged for products in a marketing exchange

  5. Tuition Premium Fine Fee Fare Toll Rent Commission Dues Deposit Tips Interest Taxes Terms Used To Describe Price

  6. The Importance of Price to Marketers Profit = Total Revenue – Total Costs Profits = (Price x Quantity Sold) – Total Costs

  7. Price and Nonprice Competition • Price Competition • Emphasizes price as an issue and matches or beats competitors’ price • To compete effectively- firm should be the low-cost seller • Standardized products • Frequent price changes • Provides flexibility

  8. Nonprice Competition • Emphasizes distinctive product: • Features • Quality • Promotion • Packaging • Other • Distinction must be effective

  9. Analysis Of Demand • Demand Curve • Demand Fluctuations • Assessing Price Elasticity

  10. Demand Curve A graph of the quantity expected to be sold at various prices if other factorsremain constant

  11. Demand Curve, Price-Quantity Relationship and Increase in Demand

  12. Demand Curve, Relationship Between Price and Quantity for Prestige Products

  13. Demand Fluctuations • Changes in buyers’ needs • Variations in effectiveAness of other marketing mix variables • Presence of substitutes • Environment factors

  14. Elasticity Of Demand

  15. Price/Demand Elasticity • Elastic- change in price causes opposite change in total revenue • Price  = Total Revenue  • Price  = Total Revenue  • Inelastic- change in price causes same change in total revenue • Price  = Total Revenue  • Price  = Total Revenue 

  16. Price Elasticity of Demand (% Change In Quantity Demanded) % Change in Price = Price Elasticity Of Demand

  17. Demand, Cost, and Profit Relationships • Marginal Analysis • Fixed costs • Average fixed cost • Variable costs • Average variable cost • Total cost • Average total cost • Marginal cost (MC) • Marginal revenue (MR)

  18. Costs AndTheir Relationships

  19. Typical Marginal Costs And Average Total Cost Relationship

  20. Typical Marginal Revenue And Average Revenue Relationship

  21. Marginal Analysis Method For Determining Most Profitable Price

  22. Combining Marginal Cost And Marginal Revenue Concepts For Optimal Profit

  23. Demand, Cost, and Profit Relationships • Break-Even Analysis • Break-even point – point at which the costs of producing a product equal the revenue made from selling the product

  24. Determining TheBreak-Even Point

  25. Fixed Costs Per-Unit Contribution to Fixed Costs (Price – Variable Costs) Breakeven Point = Breakeven Point

  26. Factors ThatAffect Pricing Decisions

  27. Organizational AndMarketing Objectives • Set prices consistent with organization’s goals and mission • Pricing decisions should be compatible with firm’s marketing objectives

  28. Costs • Why price below cost? • Match competition • Generate cash flow • Increase market share • Focus on cost reduction • Costs shared with others in product line

  29. Pricing Decisions Influence Other Mix Variables • Demand • Distribution • Intensive • Selective • Exclusive • Promotion • Premium = little advertising, personal selling • Complex = potential buyer confusion

  30. Channel Member Expectations • Profit • Competing product • Time/resources required • Discounts • Support activities- associated costs

  31. Reference Prices • Internal- developed in buyer’s mind through experience with product • External- comparison price provided by others

  32. Context Of Price-Buyers Characterized • Value-conscious - concerned about price and quality • Price-conscious - want to pay low prices • Prestige-sensitive - purchase products that signify prominence and status

  33. Competition • Monopoly • Whatever market will bear • Government regulation • Oligopoly • Barriers to entry • Little advantage in price cuts • Monopolistic Competition • Distinguishable product • Usually nonprice competition • Perfect competition • All products the same • No flexibility in pricing

  34. Business-To-BusinessPrice Discounting

  35. Trade (Functional) Discount A reduction off the list price by a producer to an intermediary for performing certain functions

  36. Quantity Discount Deduction from list price that reflect(s) the economies of purchasing in large quantities

  37. Cumulative Discount A quantity discount aggregated over a stated time period

  38. Noncumulative Discounts A one-time price reduction based on the number of units purchased, the dollar value of the order, or the product mix purchased

  39. Cash Discount A price reduction given to buyer for prompt payment or cash payment

  40. Seasonal Discount A price reduction to buyers that purchase goods or services out of season

  41. Allowance A concession in price to achieve a desired goal

  42. Geographic Pricing • F.O.B. • Factory • Destination • Uniform geographic (Postage-Stamp) • Zone • Base-point • Freight Absorption

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