MKTG 311 1st Edition Lecture 19 Outline of Last Lecture I. 6 Steps to Setting the Price for a ProductII. Step 1: Developing Pricing ObjectivesIII. Other Factors That Limit What Price is ChargedIV. Evaluating the Pricing EnvironmentV. Step 2: Estimating DemandA. Demand curvesB. Shifts in demandC. How to estimate demandD. Price elasticity of demandOutline of Current Lecture I. Elastic/Inelastic Demand CurvesII. Step 3: Determining CostsIII. Understanding Break-Even AnalysisIV. Understanding Marginal AnalysisV. Step 4: Choose a Pricing Strategy- Various ApproachesVI. Step 5: Set the list or quoted priceCurrent LectureI. Elastic/Inelastic Demand CurvesThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.Elastic Demand- There is an inverse relationship between price and quantity demanded. Price decreases Qd (a bit) (quantity demand) Increase R (revenue) increases w/ inelastic demand price decreases Qd increases R (mostly unchanged)II. Step 3: Determining Costs- Variable Costs- Per unit costs that fluctuate based on the rate of production.- Fixed Costs- Do not vary with the rate of production. Example: cost of equipment, rent, utilities.- Total Costs- Sum of fixed costs and variable costs- Average Fixed Cost- Total Fixed Costs/ Number of Units ProducedWhy important? Helps markets to spread fixed costs as they produce.III. Understanding Break-Even Analysis- Break Even Analysis: It is the point at which the firm begins to make a profit. Looks at the relationship between cost and price. At the intersection of total cost and total revenues.IV. Understanding Marginal Analysis- Marginal Analysis: Looks at the relationship between cost and demand. It is the intersection of marginal costs and marginal revenue. Point at which the firm can make the most profit.V. Step 4: Choose a Pricing Strategy- Various Approaches1. Demand-Oriented Approaches- Skimming: Firm sets an initial high price with the intention of reducing it in the future. Helps with R and D costs.- (New products) Market Penetration: Firm sets lower price to get as much market share as they can. Discourage competitors from entire market.- Prestige Pricing: Product is priced at a premium. To reflect the value and social status that consumers expect.- Price Lining: Used with companies that have several products within a product line. Example- Appliances, TV’s, etc. When items within a product line sell at different prices, known as price points. Stripped down model might cost $300, grade model $600 top end - $1,000.- Odd-even pricing: Psychological approach to pricing, where odd numbered pricing appears cheaper. Example- Gas Prices- Target Pricing: The firm determines what price the consumer would be willing to pay then engineers product at that price. Example- Toy Manufacturers- Bundle Pricing: Combines two or more products (complementary) for one low price. Example- Toothbrush and Paste; Shampoo Conditioner- Yield Management Pricing:Charge different prices to different customers to manage capacity while maximizing revenue. Examples: Hotels, Cruise lines, airlines2. Cost- Oriented Approaches: Product driven, sets the price based on the cost of producing, distributing, selling and a fair rate of return.- Cost- Plus: Marketer totals all costs for the product, then adds some amount, known as the mark-up, to the cost of the production. Example- Retailers + simple to calculate, safe – doesn’t consider target market, image, competition, product life cycle.- Experience Curve pricing: As the company continues to produce the good, they become more efficient and pass the cost savings onto the consumer. Used technology products. Example- Flat plane TVs3. Profit-Oriented Approaches: Balances a firm’s revenues and costs and then sets the price for the product. Target, Profit pricing- Focused on achieving some sort of unit dollar volume.- Target return on sale (Replace with %)- Target return on investment (Replace with %)4. Competition- Oriented Approaches- Customary: based on tradition. Example- Swatch at $39- Pricing wares at, above, or below the competition. Used w/oligopolies (few sellers). Follow the leader pricing, leader sells the price, others follow- Loss leader pricing: Company advertises an item at a very low price to build traffic and sales, consumer purchases on sale item along with others items not on sale. Example- Grocery storesVI. Step 5: Set the list or quoted priceTwo Basic Options:- One Price Policy (Fixed Price): Physical retailers use this approach- Flexible Price Policy (Dynamic Pricing): Firm sets different prices based on buying conditions and buyers themselves. Example- Car