Slide 1Part Eight Pricing DecisionsChapter 21 Pricing DecisionsObjectivesThe Nature of PriceTerms Used To Describe PriceThe Importance of Price to MarketersPrice and Nonprice CompetitionNonprice CompetitionAnalysis Of DemandDemand CurveDemand Curve, Price-Quantity Relationship and Increase in DemandDemand Curve, Relationship Between Price and Quantity for Prestige ProductsDemand FluctuationsElasticity Of DemandPrice/Demand ElasticityPrice Elasticity Of DemandDemand, Cost, and Profit RelationshipsCosts And Their RelationshipsTypical Marginal Costs And Average Total Cost RelationshipTypical Marginal Revenue And Average Revenue RelationshipMarginal Analysis Method For Determining Most Profitable PriceCombining Marginal Cost And Marginal Revenue Concepts For Optimal ProfitSlide 24Determining The Break-Even PointBreakeven PointFactors That Affect Pricing DecisionsOrganizational And Marketing ObjectivesCostsPricing Decisions Influence Other Mix VariablesChannel Member ExpectationsReference PricesContext Of Price- Buyers CharacterizedCompetitionBusiness-To-Business Price DiscountingTrade (Functional) DiscountQuantity DiscountCumulative DiscountNoncumulative DiscountsCash DiscountSeasonal DiscountAllowanceGeographic Pricing21 | 2Copyright © Houghton Mifflin Company. All rights reserved.Part EightPricing Decisions21. Pricing Concepts22. Setting PricesChapter 21Pricing Decisions21 | 4Copyright © Houghton Mifflin Company. All rights reserved.Objectives•Understand nature and importance of price•Identify characteristics of price and nonprice competition•Explore demand curves and price elasticity of demand•Examine relationships among demand, costs, and profits•Describe key factors that may influence pricing decisions•Consider issues affecting pricing of products for business markets21 | 5Copyright © Houghton Mifflin Company. All rights reserved.The Nature of PriceThe value exchanged for products in a marketing exchange21 | 6Copyright © Houghton Mifflin Company. All rights reserved.Terms Used To Describe Price•Tuition•Premium•Fine•Fee•Fare•Toll•Rent•Commission•Dues•Deposit•Tips•Interest•Taxes21 | 7Copyright © Houghton Mifflin Company. All rights reserved.The Importance of Price to MarketersProfit = Total Revenue – Total CostsProfits = (Price x Quantity Sold) – Total Costs21 | 8Copyright © Houghton Mifflin Company. All rights reserved.Price and Nonprice Competition•Price CompetitionEmphasizes price as an issue and matches or beats competitors’ priceTo compete effectively- firm should be the low-cost sellerStandardized productsFrequent price changesProvides flexibility21 | 9Copyright © Houghton Mifflin Company. All rights reserved.Nonprice CompetitionEmphasizes distinctive product:•Features•Quality•Promotion•Packaging•OtherDistinction must be effective21 | 10Copyright © Houghton Mifflin Company. All rights reserved.Analysis Of Demand•Demand Curve•Demand Fluctuations•Assessing Price Elasticity21 | 11Copyright © Houghton Mifflin Company. All rights reserved.Demand CurveA graph of the quantity expected to be sold at various prices if other factorsremain constant21 | 12Copyright © Houghton Mifflin Company. All rights reserved.Demand Curve, Price-Quantity Relationship and Increase in Demand21 | 13Copyright © Houghton Mifflin Company. All rights reserved.Demand Curve, Relationship Between Price and Quantity for Prestige Products21 | 14Copyright © Houghton Mifflin Company. All rights reserved.Demand Fluctuations•Changes in buyers’ needs•Variations in effectiveAness of other marketing mix variables•Presence of substitutes•Environment factors21 | 15Copyright © Houghton Mifflin Company. All rights reserved.Elasticity Of Demand21 | 16Copyright © Houghton Mifflin Company. All rights reserved.Price/Demand ElasticityElastic- change in price causes opposite change in total revenue•Price  = Total Revenue •Price  = Total Revenue Inelastic- change in price causes same change in total revenue•Price  = Total Revenue •Price  = Total Revenue 21 | 17Copyright © Houghton Mifflin Company. All rights reserved.Price Elasticity Of DemandPrice Elasticity of Demand=(% Change In Quantity Demanded)% Change in Price21 | 18Copyright © Houghton Mifflin Company. All rights reserved.Demand, Cost, and Profit Relationships•Marginal Analysis–Fixed costs–Average fixed cost–Variable costs–Average variable cost–Total cost–Average total cost–Marginal cost (MC) –Marginal revenue (MR)21 | 19Copyright © Houghton Mifflin Company. All rights reserved.Costs AndTheir Relationships21 | 20Copyright © Houghton Mifflin Company. All rights reserved.Typical Marginal Costs And Average Total Cost Relationship21 | 21Copyright © Houghton Mifflin Company. All rights reserved.Typical Marginal Revenue And Average Revenue Relationship21 | 22Copyright © Houghton Mifflin Company. All rights reserved.Marginal Analysis Method For Determining Most Profitable Price21 | 23Copyright © Houghton Mifflin Company. All rights reserved.Combining Marginal Cost And Marginal Revenue Concepts For Optimal Profit21 | 24Copyright © Houghton Mifflin Company. All rights reserved.Demand, Cost, and Profit Relationships•Break-Even Analysis–Break-even point – point at which the costs of producing a product equal the revenue made from selling the product21 | 25Copyright © Houghton Mifflin Company. All rights reserved.Determining TheBreak-Even Point21 | 26Copyright © Houghton Mifflin Company. All rights reserved.Breakeven PointBreakeven Point=Fixed CostsPer-Unit Contribution to Fixed Costs(Price – Variable Costs)21 | 27Copyright © Houghton Mifflin Company. All rights reserved.Factors ThatAffect Pricing Decisions21 | 28Copyright © Houghton Mifflin Company. All rights reserved.Organizational AndMarketing Objectives•Set prices consistent with organization’s goals and mission•Pricing decisions should be compatible with firm’s marketing objectives21 | 29Copyright © Houghton Mifflin Company. All rights reserved.Costs•Why price below cost?–Match competition–Generate cash flow–Increase market share•Focus on cost reduction•Costs shared with others in product line21 | 30Copyright © Houghton Mifflin Company. All rights reserved.Pricing Decisions Influence Other Mix Variables•Demand•Distribution–Intensive–Selective–Exclusive•Promotion–Premium = little