price. yes, but what does it cost? price is the value that customers give up or exchange to obtain a...
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PRICE
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Yes, But What Does It Cost?
• Price is the value that customers give up or exchange to obtain a desired product
• Payment may be in the form of money, goods, services, favors, votes or anything else that has value to the other party
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Opportunity Costs
• The value of something that is given up to obtain something else also affects the “price” of a decision
• Example: the cost of going to college is charged in tuition and fees but also includes the opportunity cost of what a student cannot earn by working instead
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The Importance of Pricing Decisions
• Price is the only P which represents revenue rather than an expense
• Pricing and the Marketing Mix– Price and Place– Price and Product– Price and Promotion
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The price of four different purchasesThe price of four different purchases
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Identify objectives & constraints
Estimate demand & revenue
Determine cost, volume and profit
Set an approximate price level
Set List or Quoted price
Make adjustments to list price
Steps in setting priceSteps in setting price
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Identifying Pricing constraints– Demand for the Product Class, Product, and
Brand– Newness of the Product: Stage in the Product
Life Cycle– Single Product versus a Product Line– Cost of Producing and Marketing the Product– Cost of Changing Prices & Time Period They
Apply– Types of Competitive Markets - Competitors’
Prices
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Pricing Objectives
• Sales or market share objectives
• Profit objectives
• Competitive effect objectives
• Customer satisfaction objectives
• Image enhancement objectives – Social Responsibility
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Estimating Demand
• Demand refers to customers’ desire for products– How much of a product do consumers want?
– How will this change as the price goes up or down?
• Identify demand for an entire product category in markets the company serves
• Predict what the company’s market share is likely to be
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The Price Elasticity of Demand
• How sensitive are customers to changes in the price of a product?
• Price elasticity of demand is a measure of the sensitivity of customers to changes in price.
• Price elasticity of demand = Percentage change in quantity demanded / Percentage change in price
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Demand Curves
• Shows the quantity of a product that customers will buy in a market during a period of time at various prices if all other factors remain the same
• Vertical axis represents the different prices a firm might charge
• Horizontal axis shows the number of units
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Demand Curves
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Influences on Price Elasticity of Demand
• Availability of substitute goods or services– If a product has a close substitute, its demand will be
elastic
• Time period– The longer the time period, the greater the likelihood
that demand will be more elastic
• Income effect– Change in income affects demand for a product even if
its price remains the same• normal goods, luxury goods, inferior goods
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Elastic and Inelastic Demand Curves
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Types of Costs - 1
• Variable costs - per-unit costs of production that will fluctuate depending on how many units or individual products a firm produces
• Fixed costs - do not vary with the number of units produced. Costs remain the same regardless of amount produced
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Types of Costs - 2
• Average fixed cost is the fixed cost per unit produced (total fixed costs / number of units produced)
• Total costs = variable costs plus fixed costs
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Break-Even Analysis• Technique used to examine the relationship
between cost and price and to determine what sales volume must be reached at a given price before the company will completely cover its total costs and past which it will begin making a profit
• All costs are covered but there isn’t a penny left over
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Break-even analysis chartBreak-even analysis chart
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Marginal Analysis
• Provides a way for marketers to look at cost and demand at the same time
• Examines the relationship of marginal cost to marginal revenue– marginal cost is the increase in total costs from
producing one additional unit of a product
– marginal revenue is the increase in total income or revenue that results from selling one additional unit of a product
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Marginal Analysis