MARK 3321 1st Edition Lecture 13 Outline of Last Lecture I Price II Importance of Price to Marketing Managers III Pricing Objectives IV Demand Determinant of Price V Factors that affect elasticity of demand VI Yield Management Systems VII The Cost Determinant of Price VIII The Break Even Point Outline of Current Lecture I Break Even Pricing II Profit Maximizing Pricing III Markup Pricing IV Other Determinants of Price V Relationship of Price to Quality VI How to set a Price on Products Services VII Price Strategy VIII Pricing Skimming IX Price Penetration X Legality of Price Strategy XI Tactics for fine tuning the base price Other pricing tactics XII Tactics for fine tuning the base price Consumer Penalties These 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 Current Lecture Profit Maximizing Pricing o Profit maximization o Marginal revenue cost o A method of setting prices that occurs when marginal revenue equals marginal cost The change in total revenue cost with a one unit change in output Understand Table 19 8 in book Markup Pricing o Markup pricing o Uses the cost of buying the product plus amounts for profit and for expenses not otherwise accounted for Markup Price Cost 1 Desired Return on Sales o Keystoning The practice of marking up prices 100 over cost or doubling the cost Desired return on sales is 50 Other determinants of Price o Stages of the product life cycle o Competition o Distribution strategy o Promotion strategy o Perceived quality The relationship of price to quality o Prestige pricing Charging a high price to help promote a high quality image CH 20 Setting the Right Price How to set a price on a product or service o Establish pricing goals o Estimate demand costs and profits o Choose a price strategy o Fine tune with pricing tactics o Results lead to the right price Price strategy o A basic long term pricing framework that establishes the initial price for a product and the intended direction for price movements over the product life cycle Choose a price strategy o Price skimming o A firm charges a high introductory price often coupled with heavy promotion Penetration pricing o A firm charges a relatively low price for a product initially as a way to reach the mass market Status quo pricing Charging a price identical to or very close to the competition s price Price strategies Skimming vs Penetration Price skimming o Situations when Price Skimming is Successful Inelastic demand Unique advantages superior Legal protection of product Technological breakthrough Blocked entry to competitors Penetration pricing o Can lead to lower costs per unit as production expands o Discourages competition from market entry o Most effective when the market is price sensitive o Penetration is more risky The Legality of Price Strategy o Unfair trade practices o Price fixing o State laws that prohibit wholesalers and retailers from selling below cost An agreement between two or more firms on the price they will charge for a product Price discrimination The Robinson Patman act of 1936 o Seller defenses o Cost o Market conditions o Competition Predatory pricing The practice of charging a very low price for a product with the intent of driving competitors out of business or out of a market Tactics for fine tuning the base price Other pricing tactics Tactics for Fine Tuning the Base Price Consumer Penalties o Businesses impose consumer penalties if An irrevocable loss of revenue is suffered Additional transaction costs are incurred