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McGraw-Hill/Irwin
Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved.
NATURE AND IMPORTANCE OF PRICE
LO1
WHAT IS A PRICE?

Price

Barter

Price Equation
Final Price = List Price Š (Incentives + Allowances) + Extra Fees
13-2
FIGURE 13-2 The “price” a buyer pays can
take different names depending on what is
purchased
13-3
LO1
NATURE AND IMPORTANCE OF PRICE
PRICE IN THE MARKETING MIX

Profit Equation
Profit = Total Revenue Š Total Costs
= (Unit Price  Quantity Sold) Š (Fixed Cost + Variable Cost)

Six Steps in Setting Price
13-4
FIGURE 13-3 The six steps in setting price.
The first three steps are covered in Chapter
13 and the last three steps in Chapter 14.
13-5
STEP 1: IDENTIFY PRICING OBJECTIVES
LO2
AND CONSTRAINTS
IDENTIFYING PRICING OBJECTIVES

Pricing Objectives
• Profit
 Managing for Long-Run Profits
 Managing for Current Profit
 Target Return (ROI)
13-6
STEP 1: IDENTIFY PRICING OBJECTIVES
LO2
AND CONSTRAINTS
IDENTIFYING PRICING OBJECTIVES

Pricing Objectives
• Sales ($)
• Survival
• Market Share ($ or #)
• Social
Responsibility
• Unit Volume (#)
13-7
STEP 1: IDENTIFY PRICING OBJECTIVES
LO2
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
eBay
13-8
STEP 1: IDENTIFY PRICING OBJECTIVES
LO2
AND CONSTRAINTS
IDENTIFYING PRICING CONSTRAINTS
• Single Product vs.
a Product Line
• Cost of Producing and
Marketing a Product
• Cost of Changing
Prices and Time Period
They Apply
13-9
STEP 1: IDENTIFY PRICING OBJECTIVES
LO2
AND CONSTRAINTS
IDENTIFYING PRICING CONSTRAINTS
• Type of Competitive Market
 Pure Competition
 Monopolistic Competition
 Oligopoly
 Pure Monopoly
• Competitors’ Prices
13-10
FIGURE 13-4 Pricing, product, and
advertising strategies available to firms in
four types of competitive markets
13-11
LO3
STEP 2: ESTIMATE DEMAND
AND REVENUE
FUNDAMENTALS OF ESTIMATING DEMAND
• The Demand Curve
 Consumer Tastes
 Price and Availability
of Similar Products
 Consumer Income
• Demand Factors
13-12
LO3
STEP 2: ESTIMATE DEMAND
AND REVENUE
FUNDAMENTALS OF ESTIMATING DEMAND
• Movement Along vs. a
Shift of Demand Curve
 Movement Along
a Demand Curve
 Shift in the
Demand Curve
13-13
LO3
STEP 2: ESTIMATE DEMAND
AND REVENUE
FUNDAMENTALS OF ESTIMATING REVENUE

Total Revenue (TR)

Marginal Revenue (MR)

Demand Curves
and Revenue
13-14
FIGURE 13-6 Fundamental revenue
concepts
13-15
LO4
STEP 2: ESTIMATE DEMAND
AND REVENUE
FUNDAMENTALS OF ESTIMATING REVENUE

Price Elasticity of Demand
Price Elasticity of Demand (E) =
Percentage Change in Quantity Demanded
Percentage Change in Price
• Elastic Demand
• Inelastic Demand
• Unitary Demand
13-16
LO4
STEP 2: ESTIMATE DEMAND
AND REVENUE
FUNDAMENTALS OF ESTIMATING REVENUE

Price Elasticity of Demand
• Product Substitutes
• Necessities
• Large Cash Outlays
13-17
LO5
STEP 3: DETERMINE COST, VOLUME,
AND PROFIT RELATIONSHIPS
THE IMPORTANCE OF CONTROLLING COSTS

Total Cost (TC)

Fixed Cost (FC)

Variable Cost (VC)
13-18
FIGURE 13-8 Fundamental cost concepts
13-19
LO6
STEP 3: DETERMINE COST, VOLUME,
AND PROFIT RELATIONSHIPS
BREAK-EVEN ANALYSIS

Break-Even Analysis

Break-Even Point (BEP)
BEPQuantity
Fixed Cost
FC


Unit Price Š Unit Variable Cost
P Š UVC
13-20