chapter 17 pricing concepts. introductionintroduction price: the exchange value of a good or service...
TRANSCRIPT
![Page 1: Chapter 17 Pricing Concepts. IntroductionIntroduction Price: the exchange value of a good or service some unit of value given up for something of value](https://reader035.vdocument.in/reader035/viewer/2022062720/56649f125503460f94c24fb4/html5/thumbnails/1.jpg)
Chapter 17Chapter 17Pricing ConceptsPricing Concepts
Chapter 17Chapter 17Pricing ConceptsPricing Concepts
![Page 2: Chapter 17 Pricing Concepts. IntroductionIntroduction Price: the exchange value of a good or service some unit of value given up for something of value](https://reader035.vdocument.in/reader035/viewer/2022062720/56649f125503460f94c24fb4/html5/thumbnails/2.jpg)
IntroductionIntroductionIntroductionIntroduction• Price: the exchange value of a
good or service
some unit of value given up for something of value
![Page 3: Chapter 17 Pricing Concepts. IntroductionIntroduction Price: the exchange value of a good or service some unit of value given up for something of value](https://reader035.vdocument.in/reader035/viewer/2022062720/56649f125503460f94c24fb4/html5/thumbnails/3.jpg)
Other TermsOther TermsOther TermsOther Terms
• Terms Used• Tuition• Fare• Fine• Tip• Bribe
![Page 4: Chapter 17 Pricing Concepts. IntroductionIntroduction Price: the exchange value of a good or service some unit of value given up for something of value](https://reader035.vdocument.in/reader035/viewer/2022062720/56649f125503460f94c24fb4/html5/thumbnails/4.jpg)
Price CompetitionPrice CompetitionPrice CompetitionPrice Competition
CustomerCustomerNeedsNeeds
PricePriceCompetitionCompetition
Slippery slope.
![Page 5: Chapter 17 Pricing Concepts. IntroductionIntroduction Price: the exchange value of a good or service some unit of value given up for something of value](https://reader035.vdocument.in/reader035/viewer/2022062720/56649f125503460f94c24fb4/html5/thumbnails/5.jpg)
CustomerCustomerNeedsNeeds
ProductProductCompetitionCompetition
PromotionPromotionCompetitionCompetition
DistributionDistributionCompetitionCompetition
Nonprice CompetitionNonprice CompetitionNonprice CompetitionNonprice Competition
Emphasize value and therefore increase quality AUCTION
![Page 6: Chapter 17 Pricing Concepts. IntroductionIntroduction Price: the exchange value of a good or service some unit of value given up for something of value](https://reader035.vdocument.in/reader035/viewer/2022062720/56649f125503460f94c24fb4/html5/thumbnails/6.jpg)
The Importance of Price to The Importance of Price to MarketersMarketersThe Importance of Price to The Importance of Price to MarketersMarketers• Manage demandManage demand
• Adapt to competitive environmentAdapt to competitive environment
• Psychology of the consumerPsychology of the consumer
• BOTTOMLINE issuesBOTTOMLINE issues
![Page 7: Chapter 17 Pricing Concepts. IntroductionIntroduction Price: the exchange value of a good or service some unit of value given up for something of value](https://reader035.vdocument.in/reader035/viewer/2022062720/56649f125503460f94c24fb4/html5/thumbnails/7.jpg)
The Nature of PriceThe Nature of PriceThe Nature of PriceThe Nature of Price
Profits = Total Revenues - Total Costs
or
Profits =(Price x Quantity Sold) - Total Costs
![Page 8: Chapter 17 Pricing Concepts. IntroductionIntroduction Price: the exchange value of a good or service some unit of value given up for something of value](https://reader035.vdocument.in/reader035/viewer/2022062720/56649f125503460f94c24fb4/html5/thumbnails/8.jpg)
Steps in Setting the Right Steps in Setting the Right PricePriceSteps in Setting the Right Steps in Setting the Right PricePrice
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
![Page 9: Chapter 17 Pricing Concepts. IntroductionIntroduction Price: the exchange value of a good or service some unit of value given up for something of value](https://reader035.vdocument.in/reader035/viewer/2022062720/56649f125503460f94c24fb4/html5/thumbnails/9.jpg)
Pricing ObjectivesPricing ObjectivesPricing 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
![Page 10: Chapter 17 Pricing Concepts. IntroductionIntroduction Price: the exchange value of a good or service some unit of value given up for something of value](https://reader035.vdocument.in/reader035/viewer/2022062720/56649f125503460f94c24fb4/html5/thumbnails/10.jpg)
Pricing ObjectivesPricing ObjectivesPricing ObjectivesPricing Objectives
Profitability
Sales-orientedSales-oriented
• Sales maximization:
• Market-share objectives:for controlling a portion of the market
![Page 11: Chapter 17 Pricing Concepts. IntroductionIntroduction Price: the exchange value of a good or service some unit of value given up for something of value](https://reader035.vdocument.in/reader035/viewer/2022062720/56649f125503460f94c24fb4/html5/thumbnails/11.jpg)
Price and Market SharePrice and Market SharePrice and Market SharePrice and Market Share
![Page 12: Chapter 17 Pricing Concepts. IntroductionIntroduction Price: the exchange value of a good or service some unit of value given up for something of value](https://reader035.vdocument.in/reader035/viewer/2022062720/56649f125503460f94c24fb4/html5/thumbnails/12.jpg)
Pricing ObjectivesPricing ObjectivesPricing ObjectivesPricing Objectives
Meeting Competition
Meeting Competition
• Value PricingProfitability
Volume
![Page 13: Chapter 17 Pricing Concepts. IntroductionIntroduction Price: the exchange value of a good or service some unit of value given up for something of value](https://reader035.vdocument.in/reader035/viewer/2022062720/56649f125503460f94c24fb4/html5/thumbnails/13.jpg)
Pricing ObjectivesPricing ObjectivesPricing ObjectivesPricing Objectives
Meeting Competition
PrestigePrestige
• Prestige Objectives: set at a relatively high level
Profitability
Volume
![Page 14: Chapter 17 Pricing Concepts. IntroductionIntroduction Price: the exchange value of a good or service some unit of value given up for something of value](https://reader035.vdocument.in/reader035/viewer/2022062720/56649f125503460f94c24fb4/html5/thumbnails/14.jpg)
Competitive EnvironmentCompetitive EnvironmentCompetitive EnvironmentCompetitive Environment
• Number ofsellers
• Productdifferences
• Importance ofmarket mix
• Large numberof sellers
• Similar products
• Distribution isimportant
• Large numberof sellers
• Unique butsubstitutable
• Pricing isimportant-
• Differentiated
• products
• A few largecompetitors
• Similarproducts
• Promotion iskey to achieveperceivedproductdifferences
• Singleproducer
• Unique andunsubstitutable
• Unimportant
BASIS OFCOMPARISON
PURECOMPETITION
MONOPOLISTICCOMPETITION OLIGOPOLY MONOPOLY
Number of sellersMany One
![Page 15: Chapter 17 Pricing Concepts. IntroductionIntroduction Price: the exchange value of a good or service some unit of value given up for something of value](https://reader035.vdocument.in/reader035/viewer/2022062720/56649f125503460f94c24fb4/html5/thumbnails/15.jpg)
PRICE DETERMINATION IN PRICE DETERMINATION IN ECONOMIC THEORYECONOMIC THEORYPRICE DETERMINATION IN PRICE DETERMINATION IN ECONOMIC THEORYECONOMIC 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.
![Page 16: Chapter 17 Pricing Concepts. IntroductionIntroduction Price: the exchange value of a good or service some unit of value given up for something of value](https://reader035.vdocument.in/reader035/viewer/2022062720/56649f125503460f94c24fb4/html5/thumbnails/16.jpg)
Determination of DemandDetermination of DemandThe Demand Curve The Demand Curve Price/Quantity RelationshipPrice/Quantity Relationship
Determination of DemandDetermination of DemandThe Demand Curve The Demand Curve Price/Quantity RelationshipPrice/Quantity Relationship
Q1 200KQ1 200K
QuantityQuantity
$2.50 P1$2.50 P1
DD11
Pri
ceP
rice
![Page 17: Chapter 17 Pricing Concepts. IntroductionIntroduction Price: the exchange value of a good or service some unit of value given up for something of value](https://reader035.vdocument.in/reader035/viewer/2022062720/56649f125503460f94c24fb4/html5/thumbnails/17.jpg)
Determination of DemandDetermination of DemandDetermination of DemandDetermination of Demand
200K 300K 200K 300K
QuantityQuantity
$2.50 P1$2.50 P1
DD11
Pri
ceP
rice
$2.00 P2$2.00 P2
![Page 18: Chapter 17 Pricing Concepts. IntroductionIntroduction Price: the exchange value of a good or service some unit of value given up for something of value](https://reader035.vdocument.in/reader035/viewer/2022062720/56649f125503460f94c24fb4/html5/thumbnails/18.jpg)
Determination of DemandDetermination of DemandDetermination of DemandDetermination of Demand
200K 300K 400K 200K 300K 400K
QuantityQuantity
$2.50 P1$2.50 P1
DD11
Pri
ceP
rice
$2.00 P2$2.00 P2
$1.50 P3$1.50 P3
![Page 19: Chapter 17 Pricing Concepts. IntroductionIntroduction Price: the exchange value of a good or service some unit of value given up for something of value](https://reader035.vdocument.in/reader035/viewer/2022062720/56649f125503460f94c24fb4/html5/thumbnails/19.jpg)
Determination of Demand Determination of Demand Price/Quantity Relationship Price/Quantity Relationship and Demand Increasingand Demand Increasing
Determination of Demand Determination of Demand Price/Quantity Relationship Price/Quantity Relationship and Demand Increasingand Demand Increasing
200K 400K200K 400K
QuantityQuantity
PP1 1 $2.50
DD11
DD22
Pri
ceP
rice
Shifting Demand Curves
![Page 20: Chapter 17 Pricing Concepts. IntroductionIntroduction Price: the exchange value of a good or service some unit of value given up for something of value](https://reader035.vdocument.in/reader035/viewer/2022062720/56649f125503460f94c24fb4/html5/thumbnails/20.jpg)
The Concept Of Elasticity In The Concept Of Elasticity In Pricing StrategyPricing StrategyThe Concept Of Elasticity In The Concept Of Elasticity In Pricing StrategyPricing 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
![Page 21: Chapter 17 Pricing Concepts. IntroductionIntroduction Price: the exchange value of a good or service some unit of value given up for something of value](https://reader035.vdocument.in/reader035/viewer/2022062720/56649f125503460f94c24fb4/html5/thumbnails/21.jpg)
Determinants Of ElasticityDeterminants Of ElasticityDeterminants Of ElasticityDeterminants Of Elasticity
Availabilityof Substitutes
Luxury orNecessity
Portion ofBudget
Time
![Page 22: Chapter 17 Pricing Concepts. IntroductionIntroduction Price: the exchange value of a good or service some unit of value given up for something of value](https://reader035.vdocument.in/reader035/viewer/2022062720/56649f125503460f94c24fb4/html5/thumbnails/22.jpg)
Determination of Demand - INELASTIC Determination of Demand - INELASTIC Determination of Demand - INELASTIC Determination of Demand - INELASTIC
QQ22 Q Q11 QuantityQuantity
PP11
PP22
Pri
ceP
rice
Demand is not very sensitive to price increases
![Page 23: Chapter 17 Pricing Concepts. IntroductionIntroduction Price: the exchange value of a good or service some unit of value given up for something of value](https://reader035.vdocument.in/reader035/viewer/2022062720/56649f125503460f94c24fb4/html5/thumbnails/23.jpg)
Determination of Demand - ELASTIC Determination of Demand - ELASTIC Determination of Demand - ELASTIC Determination of Demand - ELASTIC
QQ22QuantityQuantity
PP11
PP22
QQ11
Pri
ceP
rice
Demand is very sensitive to price increases
![Page 24: Chapter 17 Pricing Concepts. IntroductionIntroduction Price: the exchange value of a good or service some unit of value given up for something of value](https://reader035.vdocument.in/reader035/viewer/2022062720/56649f125503460f94c24fb4/html5/thumbnails/24.jpg)
Some Elasticity Some Elasticity CalculationsCalculationsSome Elasticity Some Elasticity CalculationsCalculations• % Change in Price = 10% (increase)• % Change in Quantity = -20% (decrease)• Abs(Elasticity) =
• Elastic?
![Page 25: Chapter 17 Pricing Concepts. IntroductionIntroduction Price: the exchange value of a good or service some unit of value given up for something of value](https://reader035.vdocument.in/reader035/viewer/2022062720/56649f125503460f94c24fb4/html5/thumbnails/25.jpg)
Some Elasticity Some Elasticity CalculationsCalculationsSome Elasticity Some Elasticity CalculationsCalculations
• % Change in Price = +10% (increase)• % Change in Quantity = -5% (decrease)• Abs(Elasticity) =
• Elastic?
![Page 26: Chapter 17 Pricing Concepts. IntroductionIntroduction Price: the exchange value of a good or service some unit of value given up for something of value](https://reader035.vdocument.in/reader035/viewer/2022062720/56649f125503460f94c24fb4/html5/thumbnails/26.jpg)
Elasticity and RevenuesElasticity and RevenuesElasticity 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.• Elasticity = • Revenue =
![Page 27: Chapter 17 Pricing Concepts. IntroductionIntroduction Price: the exchange value of a good or service some unit of value given up for something of value](https://reader035.vdocument.in/reader035/viewer/2022062720/56649f125503460f94c24fb4/html5/thumbnails/27.jpg)
Elasticity and RevenuesElasticity and RevenuesElasticity and RevenuesElasticity and Revenues
• Case II• Let us drop price to $8.• Demand increases to 150 units.• Demand = • Revenue =
![Page 28: Chapter 17 Pricing Concepts. IntroductionIntroduction Price: the exchange value of a good or service some unit of value given up for something of value](https://reader035.vdocument.in/reader035/viewer/2022062720/56649f125503460f94c24fb4/html5/thumbnails/28.jpg)
Elasticity and RevenuesElasticity and RevenuesElasticity and RevenuesElasticity and Revenues
When Price DECREASES, Total Revenues INCREASE for __________ products
When Price DECREASES, Total Revenues DECREASE for _________ products
![Page 29: Chapter 17 Pricing Concepts. IntroductionIntroduction Price: the exchange value of a good or service some unit of value given up for something of value](https://reader035.vdocument.in/reader035/viewer/2022062720/56649f125503460f94c24fb4/html5/thumbnails/29.jpg)
Elasticity and RevenuesElasticity and RevenuesElasticity and RevenuesElasticity and RevenuesPrice Goes...Price Goes...Price Goes...Price Goes... Revenue Goes...Revenue Goes...Revenue Goes...Revenue Goes... Demand is...Demand is...
Down Up Elastic
Down Down Inelastic
Up Up Inelastic
Up Down Elastic
Careful : Revenues DO not equal profitability!
![Page 30: Chapter 17 Pricing Concepts. IntroductionIntroduction Price: the exchange value of a good or service some unit of value given up for something of value](https://reader035.vdocument.in/reader035/viewer/2022062720/56649f125503460f94c24fb4/html5/thumbnails/30.jpg)
Analysis of Demand, Cost, Analysis of Demand, Cost, and Profit Relationshipsand Profit RelationshipsAnalysis of Demand, Cost, Analysis of Demand, Cost, and Profit Relationshipsand Profit Relationships•Fixed Costs – do not vary with # units produced
•Variable Costs – varies with # units produced
•Total Costs = Fixed Costs + Variable costs
![Page 31: Chapter 17 Pricing Concepts. IntroductionIntroduction Price: the exchange value of a good or service some unit of value given up for something of value](https://reader035.vdocument.in/reader035/viewer/2022062720/56649f125503460f94c24fb4/html5/thumbnails/31.jpg)
Analysis of Demand, Cost, and Profit Relationships
Fixed CostsFixed CostsBreakeven Point =Breakeven Point = ______________________________________________________________
Per Unit Contribution to Fixed CostsPer Unit Contribution to Fixed Costs
==Fixed CostsFixed Costs______________________________________
Price - Variable CostsPrice - Variable Costs
Breakeven Analysis:
![Page 32: Chapter 17 Pricing Concepts. IntroductionIntroduction Price: the exchange value of a good or service some unit of value given up for something of value](https://reader035.vdocument.in/reader035/viewer/2022062720/56649f125503460f94c24fb4/html5/thumbnails/32.jpg)
Evaluation of Breakeven Evaluation of Breakeven AnalysisAnalysisEvaluation of Breakeven Evaluation of Breakeven AnalysisAnalysis
• Effective tool in assessing the sales required for covering costs and achieving specified levels of profit. Sensitivity analysis.
• Easily understood
![Page 33: Chapter 17 Pricing Concepts. IntroductionIntroduction Price: the exchange value of a good or service some unit of value given up for something of value](https://reader035.vdocument.in/reader035/viewer/2022062720/56649f125503460f94c24fb4/html5/thumbnails/33.jpg)
Analysis of Demand, Cost, and Profit Relationships
Determining the Breakeven Point
Quantity (Units of Production)Quantity (Units of Production)
Fixed CostsFixed Costs
Total RevenueTotal Revenue
Total Total CostsCosts
BreakevenBreakevenPointPointD
olla
rsD
olla
rs
![Page 34: Chapter 17 Pricing Concepts. IntroductionIntroduction Price: the exchange value of a good or service some unit of value given up for something of value](https://reader035.vdocument.in/reader035/viewer/2022062720/56649f125503460f94c24fb4/html5/thumbnails/34.jpg)
Analysis of Demand, Cost, and Profit Relationships
Determining the Breakeven Point
Units of ProductionUnits of Production
Fixed CostsFixed Costs
Total RevenueTotal Revenue
Total Total CostsCosts
BreakevenBreakevenPointPointD
olla
rsD
olla
rs
LossesLosses
![Page 35: Chapter 17 Pricing Concepts. IntroductionIntroduction Price: the exchange value of a good or service some unit of value given up for something of value](https://reader035.vdocument.in/reader035/viewer/2022062720/56649f125503460f94c24fb4/html5/thumbnails/35.jpg)
Analysis of Demand, Cost, and Profit Relationships
Determining the Breakeven Point
Units of ProductionUnits of Production
Fixed CostsFixed Costs
Total RevenueTotal Revenue
Total Total CostsCosts
BreakevenBreakevenPointPoint
ProfitsProfits
Do
llars
Do
llars
![Page 36: Chapter 17 Pricing Concepts. IntroductionIntroduction Price: the exchange value of a good or service some unit of value given up for something of value](https://reader035.vdocument.in/reader035/viewer/2022062720/56649f125503460f94c24fb4/html5/thumbnails/36.jpg)
Breakeven AnalysisBreakeven AnalysisBreakeven AnalysisBreakeven Analysis
• Selling Price = $ 100 per unit• Variable costs = $ 50 per unit• Total Fixed Costs = $150, 000• Contribution =
Breakeven Point =Breakeven Point =______________________________________________________________Per Unit Contribution to Fixed CostsPer Unit Contribution to Fixed Costs
Fixed CostsFixed Costs
![Page 37: Chapter 17 Pricing Concepts. IntroductionIntroduction Price: the exchange value of a good or service some unit of value given up for something of value](https://reader035.vdocument.in/reader035/viewer/2022062720/56649f125503460f94c24fb4/html5/thumbnails/37.jpg)
Breakeven (continued)Breakeven (continued)Breakeven (continued)Breakeven (continued)
• Breakeven point (in terms of unit sales) = _____ units
• Breakeven point (in terms of $ sales volume) = ____________ = $300,000
![Page 38: Chapter 17 Pricing Concepts. IntroductionIntroduction Price: the exchange value of a good or service some unit of value given up for something of value](https://reader035.vdocument.in/reader035/viewer/2022062720/56649f125503460f94c24fb4/html5/thumbnails/38.jpg)
Other factors:Other factors:Pricing and the Life CyclePricing and the Life CycleOther factors:Other factors:Pricing and the Life CyclePricing and the Life CycleIntroductoryIntroductory
StageStageGrowthGrowthStageStage
DeclineDeclineStageStage
$$
HighHigh$$
StableStable$$
DecreaseDecrease
MaturityMaturityStageStage
$$DecreaseDecrease
![Page 39: Chapter 17 Pricing Concepts. IntroductionIntroduction Price: the exchange value of a good or service some unit of value given up for something of value](https://reader035.vdocument.in/reader035/viewer/2022062720/56649f125503460f94c24fb4/html5/thumbnails/39.jpg)
Pricing StrategiesPricing StrategiesPricing StrategiesPricing Strategies
• Skimming pricing strategy:
the use of a high price relative to competitive offerings.
SkimmingSkimming
![Page 40: Chapter 17 Pricing Concepts. IntroductionIntroduction Price: the exchange value of a good or service some unit of value given up for something of value](https://reader035.vdocument.in/reader035/viewer/2022062720/56649f125503460f94c24fb4/html5/thumbnails/40.jpg)
Pricing StrategiesPricing StrategiesPricing StrategiesPricing Strategies
• Penetration pricing policy:the use of relatively low price
as compared with competitive offerings
Skimming
PenetrationPenetration
Psychological