MGM 301Final Exam Study Guide Lectures: 22-29Lecture 22: (November 10)What is the purpose of “price”? What are the types of competition? Name the pricing objectives. Explain cost-based pricing and profit-based pricing.- Price- the money or other considerations (including other products and services) exchanged for the ownership or use of a product or serviceThe purpose of price is not to recover cost, but to capture the value of the product in the consumer’s mind. Price communicates value. Value = Perceived benefitsPrice- Value- the ratio of perceived benefits to price; for a given price, as perceived benefits increase, valueincreases; ex: if you’re used to paying $7 for a medium pizza, a large one at the same price would be more valuable; conversely, for a given price, value decreases when perceived benefits decreaseTypes of Competition:- Price- Based: not a good way to compete unless one company has a cost advantage: Competitors’ prices are only important if the prospective buyer both knows about those prices and can act to purchase them easily Non Price-Based: ex: Apple vs. Dell ad showing the relative advantage of the product, as opposed to focusing on the prices of the productsPricing Objectives:- Pricing objectives- involve specifying the role of price in an organization’s marketing and strategic plans- Profito Three different objectives relate to a firm’s profit, which is often measured in terms of return on investment (ROI) or return on assets (ROA)o One objective is managing for long-run profits- where companies give up immediate profit by developing quality products to penetrate competitive markets over the long term; products are priced relatively low compared to their cost to develop, but the firm expects to make greater profits later because of its high market shareo A maximizing current profit objective- is common in many firms because the targets can be set and performance measured quickly, such as for a quarter or yearo A target return objective occurs when a firm sets a profit goal that is usually determined by its board of directors- Saleso Increased sales revenue can lead to increases in market share and profito Objectives related to dollar sales revenue or unit sales have the advantage of being translated easily into meaningful targets for marketing managers responsible for a product line or brand- Market Shareo The ratio of the firm’s sales revenues or unit sales to those of the industry (competitors plus the firm itself)o Companies often pursue a market share objective when industry sales are relatively flat or declining- Unit Volumeo The quantity produced or soldo Firms that use this as a pricing objective often sell multiple products at very different prices and need to match the unit volume demanded by customers with price and production capacityo This can be counterproductive if a volume objective is achieved by drastic price cutting and drives down profit- Survivalo Specialty-toy retailers are increasingly facing survival problems because they can’t matchthe price cuts offered by big discount retailers like Wal-Mart and Target- Social Responsibilityo A firm may forgo higher profits on sales and follow a pricing objective that recognizes its obligations to customers and society in generalPricing ApproachesThere are 5 basic ways a company can decide on the price of a product or service: Cost-based Profit-based Demand-based Competition-based Value-basedCompanies usually use multiple approaches when actually computing price. The point of price is to provide value in the eyes of the consumer. Cost-Based Pricing Approach: Key concepts:o Total Cost (TC)- the total expense incurred by a firm in producing and marketing aproduct; the sum of the fixed and variable costo Fixed Cost (FC)- the sum of the expenses of the firm that are stable and do not changewith the quantity of a product that is produced and sold; ex: rent, executive salaries, andinsuranceo Variable Cost (VC)- the sum of the expenses of the firm that vary directly with thequantity of a product that is produced and sold; as the QS doubles, the VC doubles; Ex:direct labor and direct materials used in producing the product and sales commissionsthat are tied directly to the quantity soldo TC= FC + VCo Unit Variable Cost (UVC)- the variable cost expressed on per unit basis for a producto UVC= VC/Qo Marginal Cost (MC)- the change in total cost that results from producing and marketingone additional unit of a product MC= change in TC/1 unit increase in Q= slope of TC curveTYPES OF COST-BASED PRICING Break-Even Analysis- A technique that analyzes the relationship between total revenue and total cost todetermine profitability at various levels of output- The break-even point (BEP) is the quantity at which total revenue and total cost areequal; profit then comes from all units sold beyond this pointo BEP= FC/ (P-UVC)o EXAMPLE IN BOOK PG 343-344 Cost- Plus Pricingo 2 variants: P = total cost + (% of total cost) P = total cost + fixed fee Summing the total unit cost of providing a product or service and adding a specific amount to the cost to arrive at a price Generally assumes 2 forms:- Cost-plus percentage-of-cost pricing: a fixed percentage is added to the total unit cost; often used to price one- or few-of-a-kind items; ex: when an architectural firm charges a % of the construction cost of the Rock and Roll Hall of Fame and Museum in Cleveland, OH- Cost-plus fixed-fee pricing: a supplier is reimbursed for all costs, regardless ofwhat they turn out to be, but is allowed only a fixed fee as a profit that is independent of the final cost of the project; used usually when buying highlytechnical, few-of-a-kind products like hydroelectric power plants or space satellites because governments have found that general contractors are reluctant to specify a formal, fixed price for the procurement o Ex: if NASA agreed to pay Lockheed Martin $4 billion as the cost for a spacecraft and agreed to a $6.5 billion fee for providing the lunar spacecraft; even if Lockheed Martin’s cost increased to $5 billion, its fees would remain at $6.5 billion Cost-plus pricing is the most commonly used method to set prices for business products Ex: the rising cost of legal fees has prompted some law firms to adopt a cost-plus approach; rather than billing clients on an hourly basis, they agree on a fixed fee based on expected costs plus a profit for the law