MGM 301 Final Exam Study GuideChapter 13, 14: PricingPrice—the money or other considerations (other products/services) exchanged for the ownershipor use of a product or serviceBarter—exchanging of products and services for other products and services rather than moneyFinal Price = [List Price] – [(Incentives) + (Allowances)] + [Extra Fees]Price as an Indicator of Value- Perceived benefits—quality, durability, etc.- Value—the ratio of perceived benefits to priceo Value = Perceived benefits ÷ Price As perceived benefits increase, value increases- Value pricing—the practice of simultaneously increasing product and service benefits while maintaining or decreasing priceo “The higher the price, the higher the quality”o Value could involve the judgment by a consumer of the worth and desirability of a product/service relative to substitutes that satisfy the same need “Reference Value” emerges—involves comparing the costs and benefits of substitute itemsProfit = Total Revenue – Total Cost(Unit Price X Quantity Sold) – (Fixed Cost + Variable Cost)-Price affects the quantity sold-Since the quantity sold usually affects a firm’s cost because of efficiency of production, pricealso indirectly affects costsSteps to setting price:1. Identify Pricing Objectives and Constraints- Pricing Objectives—involve specifying the role of price in an organization’s marketing strategic planso Frequently reflect corporate goalso Profit—measured in terms of return on investment (ROI) or return on assets (ROA) Managing for long-run profits—companies give up immediate profit by developing quality products to penetrate competitive markets over the long term- Products are priced low compared to cost to develop—but firm expects to make greater profits later because of its high market share Maximizing current profit—(for a quarter or year) short-run Target return—firm sets a profit goalo Sales—increase sales revenue which will lead to increases in market share & profito Market Share—ratio of the firm’s sales revenue or unit sales compared to those of theindustry (plus the firm itself) Pursue this objective when industry sales are relatively flat or decliningo Unit Volume—the quantity produced/sold; firm sells multiple products at very different prices Can be counterproductive if volume objective is achieved—by drastic price cutting that drives down profito Survivalo Social Responsibility—recognizes its obligations to customers and society—predatory pricing—purposely driving out the competition- Pricing Constraints—factors that limit the range of prices a firm may seto Relate to conditions existing in the marketplaceo Demand for the Product Class, Product, and Brand—the number of potential buyers for the products class (cars), product (sports cars), and brand (Telsa Roadster Sport) clearly affects the price a seller can charge Generally, the greater the demand for a product, the higher the price that be seto Newness of the Product: Stage in the Product Life Cycle—the newer a product and the earlier it is in its life cycle, the higher is the price that can be usually charged—because of patents & limited competition early in the PLCo Single Product versus a Product Line—with a wide range of products, the price of individual models has to be consistent with the others based on features provided, & meaningful price differentials must communicate value to the customero Cost of Producing and Marketing the Product—in the long-run, a firm’s price must cover all the costs of producing and marketing a producto Cost of Changing Prices and Time Period They Applyo Type of Competitive Market—pure competition, monopolistic competition, oligopoly, or pure monopolyStrategies AvailablePure Competition (Many sellers who follow the market price for identical, commodity products)Monopolistic Competition (Many sellers who compete on non-price factors)Oligopoly (few sellers who are sensitive to each other’s prices)Pure Monopoly (One seller whosets the price for a unique product)Extent of pricecompetitionAlmost none: market sets priceSome: compete over range of pricesSome: price leader or follower of competitorsNone: sole seller sets priceExtent of product differentiationNone: products are identicalSome: differentiate products from competitorsVarious: depends on industryNone: no other producersExtent of advertisingLittle: purpose isto inform prospects that seller’s products are availableMuch: purpose is to differentiate firm’s products from Some: purpose is to inform but avoid price competitionLittle: purpose is toincrease demand for product classcompetitors Type dramatically influences the range of price competition and, in turn, the nature of product differentiation & extent of advertisingo Competitor’s Prices—firm must be aware of what present and potential competitors are charging now and are likely to charge in the near future2. Estimate Demand and Revenue- Fundamentals of Estimating Demando The lower the price, the higher the demando The Demand Curve—a graph relating the quantity sold and price—shows the maximum number of units that will be sold at a given price Demand factors—factors that determine consumers’ willingness & ability to pay for products and services- Consumer tastes—depends on demographics, culture, & technology—because consumer tastes can change quickly, up-to-date marketing research is essential to estimate demando Influence what consumers want to buy- Price and availability of similar products—as price of substitutes falls or availability increases, the demand for a product will fallo Influence what consumers want to buy- Consumer income—as income increases, demand for product increases as wello Affects what they can buyo Movement Along versus Shift of a Demand Curve Movement along demand curve—occurs only when price changes Shift in the demand curve—occurs when consumer taste, price & availability of substitutes, or consumer income changes- Fundamentals of Estimating Revenueo Demand Curves and Revenue—as price is changed, the quantity sold changeso Total Revenue—the total money received from the sale of a product Total Revenue (TR) = Unit Price of Product (P) X Quantity of product sold (Q)o Average Revenue—the average amount of money received for selling one unit of a product, or simply the price of that unit AR = TR ÷ Q = Po Marginal Revenue—the change in