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IntroductionIntroduction• Price: the exchange value of a
good or service
some unit of value given up for something of value
CustomerNeeds
ProductCompetition
PromotionCompetition
DistributionCompetition
Nonprice CompetitionNonprice Competition
Emphasize value and therefore increase quality
The Importance of Price to MarketersThe Importance of Price to Marketers• Manage demand
• Adapt to competitive environment
• Psychology of the consumer
• BOTTOMLINE issues
The Nature of PriceThe Nature of Price
Profits = Total Revenues - Total Costs
or
Profits =(Price x Quantity Sold) - Total Costs
Steps in Setting the Right PriceSteps in Setting the Right Price
Results lead to the right price
Fine tune with pricing tacticsFine tune with pricing tactics
Choose a price strategyChoose a price strategy
Estimate demand, costs, and profitsEstimate demand, costs, and profits
Establish pricing objectivesEstablish pricing objectives
Pricing ObjectivesPricing Objectives
Profit-orientedProfit-oriented• Profit Maximization:
• Target-Return Objectives:achieving a specified return on
either sales or investment
ROI = Net Profit after taxes Total assets
Pricing ObjectivesPricing Objectives
Profitability
Sales-orientedSales-oriented
• Sales maximization:
• Market-share objectives:for controlling a portion of the market
Pricing ObjectivesPricing Objectives
Meeting Competition
Meeting Competition
• Passive (status quo pricing)
• Value Pricing (starts with the customer, consider the competition and then sets the right price)
Profitability
Volume
Pricing ObjectivesPricing Objectives
Meeting Competition
PrestigePrestige
• Prestige Objectives: set at a relatively high level to help promote a high quality image
Profitability
Volume
PRICE DETERMINATION IN ECONOMIC THEORYPRICE DETERMINATION IN ECONOMIC THEORY
• Demand: schedule of the amounts of a firm’s good or service that consumers purchase at different prices during a specified period
• Supply: schedule of the amounts of a good or service that firms will offer for sale at different prices during a specified time period.
Determination of DemandThe Demand Curve Price/Quantity Relationship
Determination of DemandThe Demand Curve Price/Quantity Relationship
Q1 200K
Quantity
$2.50 P1
D1
Pri
ce
Determination of DemandDetermination of Demand
200K 300K 400K
Quantity
$2.50 P1
D1
Pri
ce
$2.00 P2
$1.50 P3
The Concept Of Elasticity In Pricing StrategyThe Concept Of Elasticity In Pricing Strategy• Elasticity: measure of consumers
responsiveness to changes in price
Price Elasticity of Demand
% Change in Quantity Demanded
% Change in Price=
If Abs(elasticity) > 1 then DEMAND is ELASTIC
If Abs(elasticity) < 1 then DEMAND is INELASTIC
Determinants Of ElasticityDeterminants Of Elasticity
Availabilityof Substitutes
Luxury orNecessity
Portion ofBudget
Time
Determination of Demand - INELASTIC Determination of Demand - INELASTIC
Q2 Q1 Quantity
P1
P2
Pri
ce
Demand is not very sensitive to price increases
Determination of Demand - ELASTIC Determination of Demand - ELASTIC
Q2Quantity
P1
P2
Q1
Pri
ceDemand is very sensitive to price increases
Some Elasticity CalculationsSome Elasticity Calculations• % Change in Price = 10% (increase)• % Change in Quantity = -20% (decrease)• Abs(Elasticity) =
• Elastic?
Some Elasticity CalculationsSome Elasticity Calculations
• % Change in Price = +10% (increase)• % Change in Quantity = -5% (decrease)• Abs(Elasticity) =
• Elastic?
Elasticity and RevenuesElasticity and Revenues• Baseline Case• 100 units sold @ $ 10 each• Total Revenues = $ 10 * 100 units = $1000.
• Case I• Let us drop price to $8.• Demand increases to 110 units.• Revenue =• Abs(Elasticity) =
Elasticity and RevenuesElasticity and Revenues
• Case II• Let us drop price to $8.• Demand increases to 150 units.• Revenue = • Abs (Elasticity)=
Elasticity and RevenuesElasticity and Revenues
When Price DECREASES, Total Revenues INCREASE for __________ products
When Price DECREASES, Total Revenues DECREASE for _________ products
Elasticity and RevenuesElasticity and RevenuesPrice Goes...Price Goes... Revenue Goes...Revenue Goes... Demand is...
Down Up Elastic
Down Down Inelastic
Up Up Inelastic
Up Down Elastic
Careful : Revenues DO not equal profitability!
Analysis of Demand, Cost, and Profit RelationshipsAnalysis of Demand, Cost, and Profit Relationships•Fixed Costs – do not vary with # units produced
•Variable Costs – varies with # units produced
•Total Costs = Fixed Costs + Variable costs
Analysis of Demand, Cost, and Profit Relationships
Fixed CostsBreakeven Point = _______________________________
Per Unit Contribution to Fixed Costs
=Fixed Costs___________________
• (Price - Variable Costs) (per unit)!
Breakeven Analysis:
Evaluation of Breakeven AnalysisEvaluation of Breakeven Analysis
• Effective tool in assessing the sales required for covering costs and achieving specified levels of profit. Sensitivity analysis.
• Easily understood
Analysis of Demand, Cost, and Profit Relationships
Determining the Breakeven Point
Quantity (Units of Production)
Fixed Costs
Total Revenue
Total Costs
BreakevenPointD
olla
rs
Analysis of Demand, Cost, and Profit Relationships
Determining the Breakeven Point
Units of Production
Fixed Costs
Total Revenue
Total Costs
BreakevenPointD
olla
rs
Losses
Analysis of Demand, Cost, and Profit Relationships
Determining the Breakeven Point
Units of Production
Fixed Costs
Total Revenue
Total Costs
BreakevenPoint
Profits
Do
llars
Breakeven AnalysisBreakeven Analysis
• Selling Price = $ 100 per unit• Variable costs = $ 50 per unit• Total Fixed Costs = $150, 000• Contribution =
Breakeven Point = _______________________________Per Unit Contribution to Fixed Costs
Fixed Costs
Breakeven (continued)Breakeven (continued)
• Breakeven point (in terms of unit sales) = _____ units
• Breakeven point (in terms of $ sales volume) = ____________ = $300,000
Factors that influence price:Product Life CycleFactors that influence price:Product Life Cycle
IntroductoryStage
GrowthStage
DeclineStage
$
High
$Stable
$Decrease
MaturityStage
$Decrease