Chapter 13 Book notes

Nature and Importance of price

What is Price?
It is the money or other considerations exchanged for the ownership or
use of a product or service
BARTERpractice of exchanging products and services for other
products and services rather than for money
Price and the Global Marketplace
To generate profits in todays global marketplace, international firms look
around the world to find both new markets to increase revenues and
suppliers whose efficiencies and lower hourly wages can reduce the prices
the buying firms must pay
Price as an Indicator of Value
Price is often to indicate value when it is compared with the perceived
benefits such as quality, durability, and so on of a product or service
VALUE= perceived benefits/price ( this relationship shows that for a
given price, as perceived benefits increase, value increases)
VALUE PRICING the practice of simultaneously increasing product
and service benefits while maintaining or decreasing price
Price in the Marketing Mix
Pricing is a critical decision made by a marketing executive because price
has a direct effect on a firms profits (profit=total revenue-total cost)
6 major steps in the process that 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
STEP 1: Identify Pricing Objectives and Constraints
Indentify Pricing Objectives
Pricing objectives involve specifying the role of price in an organizations
marketing and strategic plans
Profit- 3 different objectives relate to a firms profit which is often
measured in terms of return on investment (ROI) or return on assets
(ROA)
Managing for long-run profits- in which companies, give up
intermediate profit by developing quality products to penetrate
competitive markets over the long term
Maximizing current profit- such as for a quarter year, is common in
many firms because the targets can be set and performance
measured quickly

 Target return- objective occurs when a firm sets a profit goal usually
determined by its board of directos
Sales- given that a firms profit is high enough for it to remain in
business, an objective may be too increase sales revenue, which will in
turn lead to increases in market share and profit
Market-share- this is the ratio of the firms sales revenues or unit sales
to those of the industry
Unit Volume- the quantity produced or sold, as a pricing objective
Survival
Social Responsibility- a firm may forgo higher profit sales and follow a
pricing objective that recognizes its obligations to customers and
society in general
Identifying Pricing Constraints
These are factors that limit the range of prices a firm may set (consumer
demand clearly affects the price that can be charged)
Demand for the Product Class, Product and Brand- the number of
potential buyers for the product class, product, and brand clearly
affects the price a seller can charge
Newness of the Product: Stage in the Product Life Cycle- the newer a
product and the earlier it is in the life cycle, the higher the price that
can usually be charged
Single Product versus a Product Line
Cost of Producing and Marketing the Product- in the long run a firms
price must cover all the costs of producing and marketing a product
Cost of Changing Prices and Time Period they apply
Type of Competitive Market-the sellers price is constrained by the type
of market in which it competes (pure competition, monopolistic
competition, oligopoly, pure monopoly)
Competitors Prices- a firm must know what specific prices its present
and potential competitors are charging now and are likely to charge in
the near future
STEP 2: Estimate Demand and Revenue
Basic to Setting a products price is the extent of customer demand for it
Fundamentals of Estimating Demand
DEMAND CURVE- a graph relating to the quantity sold and price, which
shows the maximum number of units that will be sold at a given price
DEMAND FACTORS- factors that determine consumers willingness and
ability to pay for products and services
Fundamentals of Estimating Revenue
Demand curves lead directly to 3 related revenue concepts critical to
pricing decisions
Total revenue- total money received from the sale of a product
Average revenue- the average amount of money received for selling
one unit of a product (the total revenue/quantity sold)

 Marginal revenue- 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
Elastic demand- a product with elastic demand is one in which a
slight decrease in price results in a relatively large increase in
demand or units sold, the reverse is also true
Inelastic Demand- a product with inelastic demand means that
slight increases or decreases in price will not significantly affect the
demand or units sold for the product
Decisions Involving Price Elasticity
The more substitutes a product or service has, the more likely it is to
be price elastic
STEP 3: Determine Cost, Volume, and Profit Relationships
The importance of controlling costs
5 concepts are important in pricing decisions
Total cost- the total expense incurred by a firm in producing and
marketing a product
Fixed cost-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-the sum of the expenses of the firm that vary directly
with the quantity of a product that is produced and sold
Unit variable cost- variable cost expressed on a per unit basis for a
product
Marginal cost-the change in total cost that results from producing and
marketing one additional unit of a product
Marginal Analysis and Profit Maximization
MARGINAL ANALYSIS- a continuing, concise trade-off of incremental costs
against incremental revenues ( means that people will continue to do
something as long as the incremental return exceeds the incremental
BREAK-EVEN ANALYSIS- 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
BREAK EVEN CHART- shows a graphic presentation of the break-even
analysis
Applications of Break-Even Analysis
Break-even analysis is used extensively in marketing, most frequently to
study the impact on profit of changes in price, fixed cost, and variable cost