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McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

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Presentation on theme: "McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved."— Presentation transcript:

1 McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

2 LEARNING OBJECTIVES (LO) AFTER READING CHAPTER 11, YOU SHOULD BE ABLE TO: LO1 Describe the nature and importance of pricing and the approaches used to select an approximate price level. Explain what a demand curve is and the role of revenues in pricing decisions. LO3 LO2 Explain the role of costs in pricing decisions and describe how various combinations of price, fixed cost, and unit variable cost affect a firm’s breakeven point. 11-2

3 LEARNING OBJECTIVES (LO) AFTER READING CHAPTER 11, YOU SHOULD BE ABLE TO: Recognize the objectives a firm has in setting prices and the constraints that restrict the range of prices a firm can charge. Describe the steps taken in setting a final price. LO4 LO5 11-3

4 VIZIO, INC.—WHERE VISION MEETS VALUE ™ IN HDTV 11-4

5 NATURE AND IMPORTANCE OF PRICE WHAT IS A PRICE?: THE PRICE EQUATION LO1  Price Price  Barter  Price Equation Veyron vs. Euro- Fighter Drag Race 11-5

6 FIGURE 11-1 FIGURE 11-1 The “price” a buyer pays can take different names depending on what is purchased 11-6

7 NATURE AND IMPORTANCE OF PRICE PRICE AS AN INDICATOR OF VALUE LO1  Value Value =$$  Profit Equation Profit Equation 11-7

8 FIGURE 11-2 FIGURE 11-2 Four approaches for selecting an approximate price level 11-8

9 GENERAL PRICING APPROACHES DEMAND-ORIENTED PRICING APPROACHES LO1  Skimming Pricing  Penetration Pricing  Prestige Pricing  Odd-Even Pricing $ vs. $

10 MARKETING MATTERS Energizer’s Lesson in Price Perception— Value Lies in the Eye of the Beholder LO

11 GENERAL PRICING APPROACHES DEMAND-ORIENTED PRICING APPROACHES LO1  Bundle Pricing  Yield Management Pricing  Target Pricing 11-11

12 GENERAL PRICING APPROACHES COST-ORIENTED PRICING APPROACHES LO1  Standard Markup Pricing Cost Selling Price 11-12

13 FIGURE 11-A FIGURE 11-A Markups for a manufacturer, wholesaler, and retailer on a home appliance sold to consumers for $

14 GENERAL PRICING APPROACHES COST-ORIENTED PRICING APPROACHES LO1  Cost-Plus Pricing  Experience Curve Pricing Experience Curve Pricing Percentage of Cost Fixed Fee 11-14

15  Target Profit Pricing  Target Return-on-Sales Pricing  Target Return-on-Investment (ROI) Pricing GENERAL PRICING APPROACHES PROFIT-ORIENTED PRICING APPROACHES LO

16 GENERAL PRICING APPROACHES COMPETITION-ORIENTED PRICING APPROACHES LO1  Above-, At- or Below-Market Pricing  Loss-Leader Pricing  Customary Pricing 11-16

17 USING MARKETING DASHBOARDS Are Red Bull Prices Above, At, or Below the Market? Price Premium (%) LO

18 ESTIMATING DEMAND AND REVENUE FUNDAMENTALS OF ESTIMATING DEMAND LO2  Demand Curve Demand Curve Consumer Tastes Price and Availability of Similar Products Consumer Income Demand Factors 11-18

19 FIGURE 11-3 FIGURE 11-3 Demand curves for Newsweek showing the effect on annual sales (quantity demanded per year) by a change in price caused by (A) a movement along and (B) a shift of the demand curve 11-19

20 FIGURE 11-3A FIGURE 11-3A Demand curve for Newsweek showing the effect on annual sales by a change in price caused by a movement along the demand curve 11-20

21 FIGURE 11-3B FIGURE 11-3B Demand curve for Newsweek showing the effect on annual sales by a change in price caused by a shift of the demand curve 11-21

22  Price Elasticity of Demand Price Elasticity of Demand Elastic Demand Inelastic Demand ESTIMATE DEMAND AND REVENUE FUNDAMENTALS OF ESTIMATING DEMAND LO2 Necessities Product Substitutes Large Cash Outlays 11-22

23 FIGURE 11-B FIGURE 11-B Fundamental revenue concepts  Total Revenue Total Revenue 11-23

24 FIGURE 11-4 FIGURE 11-4 Fundamental cost concepts  Total Cost (TC) Total Cost (TC) 11-24

25 DETERMINING COST, VOLUME, AND PROFIT RELATIONSHIPS BREAK-EVEN ANALYSIS AND BEP LO3  Break-Even Analysis Break-Even Analysis  Break-Even Point (BEP) 11-25

26 FIGURE 11-5 FIGURE 11-5 Calculating a break-even point for the picture frame store shows its profit starts at 400 framed pictures per year 11-26

27 STEP 3: DETERMINE COST, VOLUME, AND PROFIT RELATIONSHIPS BREAK-EVEN ANALYSIS LO3  Break-Even Chart  Applications of Break-Even Analysis 11-27

28 FIGURE 11-6 FIGURE 11-6 Break-even analysis chart for a picture frame store shows the break-even point at 400 pictures 11-28

29 PRICING OBJECTIVES AND CONSTRAINTS IDENTIFYING PRICING OBJECTIVES LO4  Pricing Objectives Pricing Objectives Profit  Managing for Current Profit  Managing for Long-Run Profits  Target Return (ROI) 11-29

30 FIGURE 11-7 FIGURE 11-7 Where each dollar spent by consumers for designer denim jeans goes 11-30

31 Sales ($) Social Responsibility Market Share ($ or #) Unit Volume (#) Survival PRICING OBJECTIVES AND CONSTRAINTS IDENTIFYING PRICING OBJECTIVES LO4  Pricing Objectives Pricing Objectives 11-31

32 Demand for the Product Class (Cars), Product (Sports Cars), and Brand (Bugatti Veyron)  Pricing Constraints Pricing Constraints PRICING OBJECTIVES AND CONSTRAINTS IDENTIFYING PRICING CONSTRAINTS LO4 Newness of the Product: Stage in the Product Life Cycle 11-32

33 Cost of Producing and Marketing a Product PRICING OBJECTIVES AND CONSTRAINTS IDENTIFYING PRICING CONSTRAINTS LO4 Competitors’ Prices  Pricing Constraints Pricing Constraints 11-33

34 PRICING OBJECTIVES AND CONSTRAINTS IDENTIFYING PRICING CONSTRAINTS LO4 Legal and Ethical Considerations  Price Discrimination  Price Fixing  Predatory Pricing  Deceptive Pricing  Pricing Constraints Pricing Constraints 11-34

35 FIGURE 11-C FIGURE 11-C Several pricing practices are affected by legal and regulatory restrictions, which benefit both consumers and firms 11-35

36 FIGURE 11-D FIGURE 11-D Five most common deceptive pricing practices 11-36

37 PRICING OBJECTIVES AND CONSTRAINTS IDENTIFYING PRICING CONSTRAINTS LO4 Cost of Changing Prices and Time Period They Apply Type of Competitive Market  Pure Competition  Monopolistic Competition  Oligopoly  Pure Monopoly  Pricing Constraints Pricing Constraints 11-37

38 FIGURE 11-E FIGURE 11-E Pricing, product, and advertising strategies available to firms in four types of competitive markets 11-38

39 SETTING A FINAL PRICE SET THE LIST PRICE: CHOOSING A PRICE POLICY LO5  One-Price Policy  Flexible Price Policy CarMax Ad 11-39

40 MAKING RESPONSIBLE DECISIONS Flexible Pricing—Is There Discrimination in Bargaining for a New Car? Buying a New Car: Some Folks Pay More LO

41 SETTING A FINAL PRICE ADJUST THE LIST PRICE: DISCOUNTS LO5  Quantity  Trade (Functional)  Seasonal  Cash 11-41

42 FIGURE 11-F FIGURE 11-F The structure of trade discounts affects the manufacturer’s selling price and the margins made by resellers in the marketing channel 11-42

43 SETTING A FINAL PRICE ADJUST THE LIST PRICE: ALLOWANCES LO5  Trade-In  Every Day Low Pricing (EDLP)  Promotional 11-43

44 SETTING A FINAL PRICE ADJUST THE LIST PRICE: GEOGRAPHY LO5  FOB Origin Pricing 11-44

45 SETTING A FINAL PRICE ADJUST THE LIST PRICE: GEOGRAPHY LO5  Uniform Delivered Pricing: Single Zone U.S. Postal Service Priority Mail Flat Rate Prices from Denver to anywhere in the U.S.  Envelope: $5.15  Small Box: $5.35  Medium Box: $11.35  Large Box: $

46 SETTING A FINAL PRICE ADJUST THE LIST PRICE: GEOGRAPHY LO5  Uniform Delivered Pricing: Multiple-Zone 11-46

47 SETTING A FINAL PRICE ADJUST THE LIST PRICE: GEOGRAPHY LO5  Uniform Delivered Pricing: Basing-Point 11-47

48 WASHBURN GUITARS: USING BREAK-EVEN POINTS TO MAKE PRICING DECISIONS VIDEO CASE

49 VIDEO CASE 11 WASHBURN GUITARS 1. What factors are most likely to affect the demand for the lines of Washburn guitars (a) bought by a first-time guitar buyer and (b) bought by a sophisticated musician who wants a signature model? 11-49

50 VIDEO CASE 11 WASHBURN GUITARS 2. For Washburn, what are examples of (a) shifting the demand curve to the right to get a higher price for a guitar line (movement of the demand curve) and (b) pricing decisions involving moving along a demand curve? 11-50

51 VIDEO CASE 11 WASHBURN GUITARS 3. In Washburn’s factory, what is the break-even point for the new line of guitars if the retail price is (a) $349, (b) $389, and (c) $309? Also, (d) if Washburn achieves the sales target of 2,000 units at the $349 retail price, what will its profit be? 11-51

52 VIDEO CASE 11 WASHBURN GUITARS 4. Assume that the merger with Parker leads to the cost reductions projected in the case. What will be the (a) new break- even point at a $349 retail price for this line of guitars and (b) new profit if it sells 2,000 units? 11-52

53 VIDEO CASE 11 WASHBURN GUITARS 5. If for competitive reasons, Washburn eventually has to move all its production back to Asia, (a) which specific fixed and variable costs might be lowered and (b) what additional fixed and variable costs might it expect to incur? 11-53

54 Price (P) A price (P) is the money or other considerations (including other products and services) exchanged for the ownership or use of a product or service

55 Value Value is the ratio of perceived benefits to price; or Value = (Perceived benefits divided by Price)

56 Profit Equation The profit equation is: Profit = Total revenue − Total cost; or Profit = (Unit price × Quantity sold) − (Fixed cost + Variable cost)

57 Demand Curve A demand curve is a graph relating the quantity sold and price, which shows the maximum number of units that will be sold at a given price

58 Price Elasticity of Demand The price elasticity of demand is the percentage change in quantity demanded relative to a percentage change in price

59 Total Revenue (TR) Total revenue (TR) is the total money received from the sale of a product

60 Total Cost (TC) Total cost (TC) is the total expense incurred by a firm in producing and marketing a product. Total cost is the sum of fixed cost and variable cost

61 Break-Even Analysis Break-even analysis is a technique that analyzes the relationship between total revenue and total cost to determine profitability at various levels of output

62 Pricing Objectives Pricing objectives specify the role of price in an organization’s marketing and strategic plans

63 Pricing Constraints Pricing constraints are factors that limit the range of prices a firm may set


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