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8/3/2019 Fall Ch13 Notes
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Schedule
I cant add points to your total score or let you make
up research waves that took place weeks/months
ago
I do not have additional extra credit assignments for
you to complete
Please do not ask me for more points (record is) for
any reason (scholarship/GPA/health/tough semester) Please do not ask to take the exam early
Final Grades will be posted as soon as possible
Divide by 1,000 (not 1,030)
8/3/2019 Fall Ch13 Notes
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Ch. 13 - Pricing Concepts Internal/External Factors of Price
Pricing Objectives
Elasticity
Cost-based Pricing
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Ch. 13 - Pricing Concepts New Product Pricing
Methods of Pricing
Product Mix Pricing Strategies
Price Adjustment Strategies
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What is Price?
$ - what you pay for
something or
The that you
exchange for the benefits
of having or using the
product/service (i.e. time,
psychological costs, other
resources)
Value = Benefits -
Service
Benefits
Brand
Benefits
Product
Benefits
Price &
Other
Costs
Value
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Internal Factors of Price
1. Marketing Objectives
to to gain
to infer a level of
to survive
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Internal Factors of Price
2. Marketing Mix Strategy
price needs to be consistent with other3Ps (needs to reflect advertising, etc.)
3. Costs
your costs affect your profit, so set the
optimal price
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External Factors of Price
1. Demand for your product
2. Competition
Competitors prices
Strength of competition
3. Economy
Cost of components (natural resources)
Economic conditions
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maintaining pricemeeting competitions price
-Oriented
profit maximizationsatisfactory profits
return on investment
PricingObjectives
-Oriente
market sharesales maximization
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Price Elasticity
Tells us how much the demand for a
product will change with a change inprice
% CHANGE IN
% CHANGE
E =
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Factors That Affect Elasticity
Availability of
Price relative to purchasing power
Product durability
A products other uses
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Elasticity of Demand
DemandDemandDemandDemand
Consumers buy more or lessof a product when theprice changes
DemandDemand
DemandDemand
An increase or decrease inprice will not significantlyaffect demand
UnitaryUnitaryElasticityElasticity
UnitaryUnitaryElasticityElasticity
An increase in sales exactlyoffsets a decrease in prices,and revenue is unchanged
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Elasticity of Demand
Price Goes...Price Goes... Revenue Goes...Revenue Goes... Demand is...Demand is...
Down Up
Down Down
Up Up
Up Down
Up or Down Stays the Same
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Inelastic Demand
If demand hardly changes with a price
change, the demand is inelastic
This describes products that are less
price-sensitive and have very few
substitutesEx:
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Inelastic Demand
RelativelyInelastic
Quantity
Price
Demand
A relatively large increase in
price results in only a small
decrease in quantitydemanded.
E is less than 1.0
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Elastic Demand
Relatively Elastic
Quantity
Price
A relatively small decrease
in price results in a
substantial increase inquantity demanded.
Demand
E is greater than 1.0
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Methods of Cost-based Pricing
Profit Revenue Costs
Price x
unitssold
Fixed Costs +Variable Costs
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Methods of Cost-based Pricing
Methods for determining an initial price for the
product or service
1. Markup pricing
keystoning ( )
2. Break-even pricing
3. Profit maximization pricing
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Setting price where price = markup + cost
Markup on selling price = (selling price - cost)
selling price
Cost = (1-markup on selling price) (selling price)
Selling price = cost(1-markup on selling price)
1. Markup Pricing
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Markup Pricing: Example ofMarkup Chains
Cost = $47.60
Markup = $8.40
Selling price
= $56.00
Cost = $56.00
Markup = $14.00
Selling price= $70.00
Selling price
= $100.00
Cost = $70.00
Markup = $30.00
Producer
15%
Producer
15%
Wholesaler
20%
Wholesaler
20%
Retailer
30%
Retailer
30%
Markup
on Selling
Price
Markup
on Selling
Price
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Markup Chain Pricing
Given the following information what is theretailers cost? Producers selling price? Andproducers dollar markup?
Retailers selling price = $ 30.00
Wholesalers markup on selling price = 20%
Retailers markup on selling price = 33.33%
Manufacturers cost = $12.00
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Markup Pricing: Example ofMarkup Chains
Cost = $12.00
Markup = $
Selling price
= $
Cost =
Markup =
Selling price
= $
Selling price
= $30.00$30.00
Cost =
Markup =
ProducerProducer Wholesaler
20%
Wholesaler
20%
Retailer
33.33%
Retailer
33.33%
Markup
on Selling
Price
Markup
on Selling
Price
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Markup Chain Pricing
Given the following information what is theretailers selling price?
Manufacturers cost = $1.80
Wholesalers markup on selling price = 20%
Retailers markup on selling price = 30%
Manufacturers markup on selling price = 10%
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Markup Pricing: Example ofMarkup Chains
Cost = $1.80
Markup = $
Selling price
= $
Cost = $
Markup = $
Selling price
= $
Selling price
= $
Cost = $
Markup = $
Producer
10%
Producer
10%
Wholesaler
20%
Wholesaler
20%Retailer
30%
Retailer
30%
Markup
on Selling
Price
Markup
on Selling
Price
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Markup Pricing: Practice
1. If selling price is $120, cost is $75, what is markup on selling price?
2. If selling price is $200, cost is $120, what is markup on selling price?
3. If markup on selling price is 45%, selling price is $150, what is the
cost? 4. If markup on selling price is 60%, selling price is $325, what is cost?
5. Cost is $125, markup on selling price is 40%, selling price =?
6. Cost is $95, markup on selling price is 35%, selling price =?
1. 37.5%2. 40%3. $82.50
4. $130.005. $208.336. $146.15
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So now
Selling Price
Cost
Markup
Cost %
Markup %
+
100 %
=
Selling Price =Markup $ + Cost $
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Three Variables: SP, MU%, Cost
Selling Price =$1000
Cost = $700
Markup
Cost %
Markup %
+
100 %
=
Selling Price =Markup $ + Cost $
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Three Variables: SP, MU%, Cost
Selling Price =$
Cost = $100
Markup
Cost %
Markup % = 75%
+
100 %
=
Selling Price =Markup $ + Cost $
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Three Variables: SP, MU%, Cost
Selling Price =$300
Cost = $
Markup
Cost %
Markup % = 66.7%
+
100 %
=
Selling Price =Markup $ + Cost $
2 B k E A l i S tti
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2. Break-Even Analysis: Setting
price to cover fixed costs
Quantity (units)
Price
($)
Fixed Costs
TotalR
even
ue
TotalCo
sts
Profits
Losses
Break Even
$15,000
$20,000
10,000
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Break-Even Pricing
Break-EvenQuantity
=Total Fixed Costs
Fixed cost Contribution
Fixed cost
Contribution = Price - Avg. Variable Cost
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Break-even Point Calculations
Fixed cost (FC) = $15,000
Selling Price (SP) = $2.00
Variable cost per unit (VC) = .50
Fixed cost contribution = $1.50
Break even point in units = FC(SP - VC)
Break even point in dollars = BEP units * SP
BEP units = units
BEP dollars = $
BEP units = units
BEP dollars = $
3 P fit M i i ti3 P fit M i i ti
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In an ideal situation, marketers will operate at the pointwhere marginal costs (MC) equal marginal revenue(MR).
MC
MR
COSTS &
REVENUES
UNITS PRODUCED & SOLD
3. Profit Maximization3. Profit Maximization:Marginal Cost = Marginal Revenue
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Profit Maximization
( )1 ( )1 ( )1 ( )1 ( )1 ( )1 ( )1 ( )1
Total Total Marginal Marginal Mrginal
Quantity Price Revenue Cost Profit Revenue Cost Profit
Q P TR TC (TR - TC) MR MC (MR - MC)
1 $111 $1 $111 ($ )111
1 $111 $111 $111 ($ )111 $111 $11 $11
1 $111 $111 $111 ($ )11 $111 $11 $111
1 $111 $111 $111 $11 $11 $11 $11
1 $111 $111 $111 $11 $11 $11 $11
1
$11
$111
$111
$111
$11
$11
$11
1 $11 $111 $111 $111 $11 $11 $1
1 $11 $111 $111 $11 ($ )11 $11 ($ )11
1 $11 $111 $111 $1 ($ )11 $11 ($ )11
1 $11 $111 $111 ($ )111 ($ )11 $11 ($ )111
11$11
$111
$111
($ )111
($ )11
$111
($ )111
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Other Determinants of Price
Perceived QualityPerceived Quality
Promotion StrategyPromotion Strategy
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The Competition
High prices may induce firms to
Competition can lead to
Global competition may force firms to
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Distribution Strategy
ManufacturersManufacturers Wholesalers/RetailersWholesalers/Retailers
Offer a larger profitmargin or trade
allowanceUse exclusive distribution
Franchising
Avoid business withprice-cutting discounters
Develop brand loyalty
Sell against thebrand
Buy gray-marketgoods
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Distribution Strategy
Stocking well-known
branded items at
Selling againstthe brand
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Given: a certain level of demand
elasticity of demand and costs,
marketers estimate revenues/profitsthat can be generated at variousprices
Setting the Right Price
S d
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Fine tune with pricing tacticsFine tune with pricing tactics
Choose a price strategyChoose a price strategy
Results lead to the right price
How to Set a Price on a Product orService
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New-Product Pricing Strategies
Market- pricing
High initial price
Innovators and early adopters
Market- pricing
Low initial price
Attract large number of buyers quickly
.
Suggest similar quality and value as competition
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Skimming
Price Skimming
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Penetration
Penetration Pricing
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New-Product Pricing Strategies
Strategy
Strategy
Price
StrategyStrategy
Strategy
Strategy
Strategy
Strategy
Higher Lower
Higher
Quality
Lower
Skimming Penetration
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Which Price Strategy?
.
When the pricing objective foran inelastic product is to attract
new customers based onquality, THIS strategy should beused
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Establishpricegoals
Estimate demand,
costs, and profits
Choose aprice strategy
Fine-tunebase price
Set price$x.yy
Evaluateresults
Skimming
Status quo
Penetration
Low $
High $
Setting the Price
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Product Mix Pricing Strategies
1. pricing
Levels of PricePoints
Pay more for
extras
Hotel rooms Customers willingnessto pay
Priceceiling $$$
Pricefloor
$
Product1
Product2
Product3
Price
range
for
brand/productline
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Product Mix Pricing Strategies
2. Captive-product pricing
mentality
3. Price bundling
Combine related goods, sell for one
price, package deals
Could be example of co-branding
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Price Adjustment Strategies
1. Discounts, Allowances, Rebates
Cash - pay cash upfront
Quantity - buy in bulk
Seasonal - buy during non-peak times
Promotional allowance - $ to dealer for
promoting products
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Price Adjustment Strategies
2. Flexible (variable) pricing
Different segments pay different rates
Off-peak daily rate changes
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Price Adjustment Strategies
3. Psychological (odd-even) pricing
The 99 principle
Reference pricing
What you expect to pay for a product in that category
(SUV = ?)
Unit pricing states price in a recognized unit of measurement
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Price Adjustment Strategies
4. Other pricing tactics
Single-price tactic (Everything $1)Bait pricing
Two-part pricing - country club
Loss leaders (leader pricing)
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A Summary of Pricing
1. How do you set your price?
Markup pricing
Break-even pricing
Profit maximization pricing
2. How do you adjust your price?
Tactics
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In summary, what affects price?
1 The
2 Distribution strategy
3 Promotion strategy
4 The relationship of price to quality
5
6
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Substitute or Complement?
When a decrease in priceonone product results in a
decrease in salesof asecond product, the two
products are said to be THIS.