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McGraw-Hill/Irwin
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
LEARNING OBJECTIVES (LO)
AFTER READING CHAPTER 11, YOU SHOULD BE ABLE TO:
LO1
LO2
LO3
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.
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
LEARNING OBJECTIVES (LO)
AFTER READING CHAPTER 11, YOU SHOULD BE ABLE TO:
LO4
LO5
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.
11-3
VIZIO, INC.—WHERE VISION
MEETS VALUE™ IN HDTV
VIZIO (founded in 2002)
• Motto – “Where Vision Meets
Value”; “Everybody deserves the
latest technology”
• Why Costco?
• Manufacturing – in Taiwan
(AmTran Technology)
• Product Development &
Marketing – US
• In 2012, entered PCs,
tablet, laptop, stereo, …
11-4
NATURE AND IMPORTANCE OF PRICE
LO1
WHAT IS A PRICE?: THE PRICE EQUATION

Price

Barter

Price Equation
Veyron
vs.
EuroFighter
Drag
Race
Final Price = List Price – (Incentives + Allowances) + Extra Fees
11-5
FIGURE 11-1 The “price” a buyer pays can
take different names depending on what is
purchased
11-6
LO1
NATURE AND IMPORTANCE OF PRICE
PRICE AS AN INDICATOR OF VALUE

Value
Value =
$

Perceived Benefits
Price
=
$
Profit Equation
Profit = Total Revenue Š Total Costs
= (Unit Price  Quantity Sold) Š (Fixed Cost + Variable Cost)
11-7
FIGURE 11-2 Four approaches for selecting
an approximate price level
11-8
LO1
GENERAL PRICING APPROACHES
DEMAND-ORIENTED PRICING APPROACHES


Skimming
Pricing
Prestige
Pricing


Penetration
Pricing
Odd-Even
Pricing
$500.00
vs.
$499.99
11-9
MARKETING MATTERS
LO1
Energizer’s Lesson in Price Perception—
Value Lies in the Eye of the Beholder
11-10
LO1
GENERAL PRICING APPROACHES
DEMAND-ORIENTED PRICING APPROACHES

Target Pricing

Bundle Pricing

Yield Management Pricing
11-11
LO1
GENERAL PRICING APPROACHES
COST-ORIENTED PRICING APPROACHES

Standard Markup
Pricing
• Cost
• Selling Price
11-12
FIGURE 11-A Markups for a manufacturer,
wholesaler, and retailer on a home appliance
sold to consumers for $100
11-13
LO1
GENERAL PRICING APPROACHES
COST-ORIENTED PRICING APPROACHES

Cost-Plus Pricing
• Percentage of Cost
• Fixed Fee

Experience Curve Pricing
11-14
LO1
GENERAL PRICING APPROACHES
PROFIT-ORIENTED PRICING APPROACHES

Target Profit Pricing

Target Return-on-Sales Pricing

Target Return-on-Investment
(ROI) Pricing
11-15
GENERAL PRICING APPROACHES
LO1
COMPETITION-ORIENTED PRICING APPROACHES

Customary Pricing

Above-, At- or Below-Market Pricing

Loss-Leader Pricing
11-16
USING MARKETING DASHBOARDS
LO1
Are Red Bull Prices
Above, At, or Below the Market?
Price Premium (%)
Price Premium (%) =
Dollar Sales ($) Market Share for a Brand
–1
Unit Volume (#) Market Share for a Brand
11-17
LO2
ESTIMATING DEMAND AND REVENUE
FUNDAMENTALS OF ESTIMATING DEMAND

Demand Curve
• Consumer Tastes
• Price and Availability
of Similar Products
• Consumer Income
• Demand Factors
11-18
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
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
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
LO2
ESTIMATE DEMAND AND REVENUE
FUNDAMENTALS OF ESTIMATING DEMAND

Price Elasticity of Demand
Price Elasticity of Demand (E) =
Percentage Change in Quantity Demanded
Percentage Change in Price
• Elastic Demand
• Inelastic Demand
• Product Substitutes
• Necessities
• Large Cash Outlays
11-22
FIGURE 11-B Fundamental revenue concepts

Total Revenue
11-23
FIGURE 11-4 Fundamental cost concepts

Total Cost (TC)
11-24
LO3
DETERMINING COST, VOLUME,
AND PROFIT RELATIONSHIPS
BREAK-EVEN ANALYSIS AND BEP

Break-Even Analysis

Break-Even Point (BEP)
BEPQuantity
Fixed Cost
FC


Unit Price Š Unit Variable Cost
P Š UVC
11-25
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
LO3
STEP 3: DETERMINE COST, VOLUME,
AND PROFIT RELATIONSHIPS
BREAK-EVEN ANALYSIS

Break-Even Chart

Applications of
Break-Even Analysis
11-27
FIGURE 11-6 Break-even analysis chart for
a picture frame store shows the break-even
point at 400 pictures
11-28
LO4
PRICING OBJECTIVES AND CONSTRAINTS
IDENTIFYING PRICING OBJECTIVES

Pricing Objectives
• Profit
 Managing for Long-Run Profits
 Managing for Current Profit
 Target Return (ROI)
11-29
FIGURE 11-7 Where each dollar spent by
consumers for designer denim jeans goes
11-30
LO4
PRICING OBJECTIVES AND CONSTRAINTS
IDENTIFYING PRICING OBJECTIVES

Pricing Objectives
• Sales ($)
• Survival
• Market Share ($ or #)
• Social
Responsibility
• Unit Volume (#)
11-31
LO4
PRICING OBJECTIVES AND CONSTRAINTS
IDENTIFYING PRICING CONSTRAINTS

Pricing Constraints
• Demand for the
Product Class (Cars),
Product (Sports Cars),
and Brand (Bugatti Veyron)
• Newness of the
Product: Stage in the
Product Life Cycle
11-32
LO4
PRICING OBJECTIVES AND CONSTRAINTS
IDENTIFYING PRICING CONSTRAINTS

Pricing Constraints
• Cost of Producing and
Marketing a Product
• Competitors’ Prices
11-33
LO4
PRICING OBJECTIVES AND CONSTRAINTS
IDENTIFYING PRICING CONSTRAINTS

Pricing Constraints
• Legal and Ethical Considerations
 Price Fixing
 Deceptive Pricing
 Price Discrimination
 Predatory Pricing
11-34
FIGURE 11-C Several pricing practices are
affected by legal and regulatory restrictions,
which benefit both consumers and firms
11-35
FIGURE 11-D Five most common deceptive
pricing practices
11-36
LO4
PRICING OBJECTIVES AND CONSTRAINTS
IDENTIFYING PRICING CONSTRAINTS

Pricing Constraints
• Cost of Changing Prices
and Time Period They Apply
• Type of Competitive Market
 Pure Competition
 Oligopoly
 Monopolistic Competition
 Pure Monopoly
11-37
FIGURE 11-E Pricing, product, and
advertising strategies available to firms in
four types of competitive markets
11-38
SETTING A FINAL PRICE
LO5
SET THE LIST PRICE: CHOOSING A PRICE POLICY
CarMax
Ad

One-Price Policy

Flexible Price Policy
11-39
MAKING RESPONSIBLE DECISIONS
LO5
Flexible Pricing—Is There Discrimination
in Bargaining for a New Car?
Buying a New Car: Some Folks Pay More
11-40
SETTING A FINAL PRICE
LO5
ADJUST THE LIST PRICE: DISCOUNTS

Quantity

Seasonal

Trade (Functional)

Cash
11-41
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
LO5
SETTING A FINAL PRICE
ADJUST THE LIST PRICE: ALLOWANCES

Trade-In

Promotional

Every Day Low Pricing (EDLP)
11-43
LO5
SETTING A FINAL PRICE
ADJUST THE LIST PRICE: GEOGRAPHY

FOB Origin Pricing
11-44
LO5
SETTING A FINAL PRICE
ADJUST THE LIST PRICE: GEOGRAPHY

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: $15.45
11-45
LO5
SETTING A FINAL PRICE
ADJUST THE LIST PRICE: GEOGRAPHY

Uniform Delivered Pricing: Multiple-Zone
11-46
LO5
SETTING A FINAL PRICE
ADJUST THE LIST PRICE: GEOGRAPHY

Uniform Delivered Pricing: Basing-Point
11-47
VIDEO CASE 11
WASHBURN GUITARS:
USING BREAK-EVEN POINTS
TO MAKE PRICING DECISIONS
11-48
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
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
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
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 breakeven point at a $349 retail price
for this line of guitars and (b) new
profit if it sells 2,000 units?
11-52
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
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.
11-54
Value
Value is the ratio of perceived
benefits to price; or
Value = (Perceived benefits
divided by Price).
11-55
Profit Equation
The profit equation is:
Profit = Total revenue − Total cost; or
Profit = (Unit price × Quantity sold) −
(Fixed cost + Variable cost).
11-56
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.
11-57
Price Elasticity of Demand
The price elasticity of demand
is the percentage change in
quantity demanded relative to a
percentage change in price.
11-58
Total Revenue (TR)
Total revenue (TR) is the total
money received from the sale
of a product.
11-59
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.
11-60
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.
11-61
Pricing Objectives
Pricing objectives specify the
role of price in an organization’s
marketing and strategic plans.
11-62
Pricing Constraints
Pricing constraints are factors
that limit the range of prices a
firm may set.
11-63