Chapter 13 Building the Price Foundation I NATURE AND IMPORTANCE OF PRICE a Price the money or other considerations including other goods and services exchanged for the ownership or use of a good or service The IMPORTANCE of PRICE Bugatti 2 1 million in 2010 b Barter the practice of exchanging goods and services for other goods and services rather than for money i Example Restaurant and window cleaning barter is the cost of food 28 35 of price of meal c Price Equation Final Price List Price Incentives Allowances Extra Fees d The price a buyer pays can take different names depending on what is purchased Figure 13 1 text page 321 i KSU Tuition Example 1 The price for tuition at KSU 3 credit hours 41 10 for each of the 30 classes For a full time in state student at 15 credit hours 6165 1650 1000 PLUS ANYMiscellaneous Fees Legal Services Fee 7 College of Business U G Program Fee 50 Admissions Service Fee 40 Matriculation Fee 150 Transient Application 10 Reinstatement Application 25 Returned Check 30 Late Registration 100 Late Installment Payment 30 SO The price for tuition at KSU is Tuition Published Tution Scholarship Discount Special Fees II PRICE AS AN INDICATOR OF VALUE a Value is the ratio of perceived benefits to price VALUE Perceived benefits price And so PRICE needs to be equal to the perceived value of the attributes being offered b Value pricing service benefits while maintaining or decreasing price the practice of simultaneously increasing product and i Examples McDonalds Supersize extra value meal ii What if costs rise With ingredients costs expected to remain high McDonalds may raise prices on its popular dollar menu Charge for condiments iii Value Pricing is not necessarily Inexpensive III PRICE IN THE MARKETING MIX a Profit Equation Profit Total Revenue Total Cost Unit price x Quantity sold Fixed cost Variable Cost IV Six Steps in Setting Price a STEP 1 IDENTIFY PRICING OBJECTIVES AND CONSTRAINTS i IDENTIFYING PRICING OBJECTIVES Pricing Objectives specify the role of price in an organization s marketing and strategic plans 1 Profit Objectives a Managing for Long Run Profits b Managing for Current Profit c Target Return ROI 2 Pricing Objectives a Sales Dollars b Market Share Dollars or Units c Unit Volume d Survival e Social Responsibility ii Pricing Constraints factors that limit the range of prices a firm may set 1 Constraints caused by DEMAND for the a Product Class Cars b Product sports cars c and Brand Buyatti 2 Constraints caused by Newness of the Product Stage in the Product Life Cycle 3 Single Product vs Product Line 4 Cost of Producing and Marketing a Product 5 Cost of Changing Prices and Time Period They Apply 6 Constraints caused by the type of competitive market a Pure Competition b Monopolistic Competition c Oligopoly d Pure Monopoly e Competitors Prices b STEP 2 ESTIMATE DEMAND AND REVENUE i FUNDAMENTALS OF ESTIMATING DEMAND 1 The Demand Curve which shows the maximum number of units that will be sold at a given price a graph relating the quantity sold and price a Influenced by i Consumer tastes ii Price and availability of Similar Products iii Consumer Income 2 Demand Factors and ability to pay for goods and services Factors that determine consumers willingness 3 Example page 330 text FIGURE 13 4A Demand curve for Newsweek showing the effect on annual sales by a change in price caused by a movement along the demand curve FIGURE 13 4B Demand curve for Newsweek showing the effect on annual sales by a change in price caused by a shift of the demand curve ii FUNDAMENTALS OF ESTIMATING REVENUE 1 Total Revenue TR the total money received from the sale of a product 2 Average Revenue for selling one unit of product aka price of that unit AR the average amount of money received 3 Marginal Revenue results from producing and marketing one additional unit MR the change in total revenue TR that a So Total Revenue TR is the total money received from the sales of a product Logically if i TR Total revenue ii P Price and iii Q Quantity sold Then iv Total Revenue P x Q and v Average Revenue TR P Q 4 AND if Marginal Revenue MR is the CHANGE in the total revenue that results from producing and selling on ADDITIONAL unit of a product 5 MR Revenue curve Change in TR 1 unit increase in Q the SLOPE of the Total 6 See FIGURE 13 6 in textbook HOWEVER For those who REALLY care The Marginal Revenue formula shown in the text in Figure 13 5 is wrong o Try making the numbers work with this formula they won t The formula IS correct when the changes in quantity sold are small essentially a change of 1 unit o For larger changes like 1 5 million this formula shows the average of the change more or less To get the value for the changes in large quantities they use one formula is Or o Marginal Revenue Price Quantity sold times the change in Price divided by the change in Quantity o MR P Q x Change in P Change in Q 7 Price Elasticity of Demand demanded relative to a percentage change in price the percentage change in quantity Price Elasticity of Demand E Percent Change in Quantity Demanded Percent Change in Price a Elastic Demand GREATER than a 1 change in sale so E 1 occurs when a 1 change in price results in a i A slight decrease in price results in a big increase in sales b Inelastic Demand a LESS than a 1 change in sale so E 1 occurs when a 1 change in price results in i A slight decrease in price results in less than a 1 increase in sales SO sales revenues decrease ii Note The Reverse is also true When Demand is inelastic a price increase results in a relatively small drop in sales c Unitary Demand the SAME as the percentage change in quantity occurs when the percentage change in price is d The Price Elasticity of Demand is Influenced by i Product Substitutes no close substitute more ii Necessities Inelastic iii Large cash outlays 1 Example fashion elastic Gas inelastic iv The Price Elasticity of Demand is not fixed Example from Figure 13 6 c Step 3 DETERMINE COST VOLUME AND PROFIT RELATIONSHIPS i Controlling COSTS The basic concepts 1 Total Cost TC is the total expense incurred by a firm in producing and marketing a product a Total cost is the sum of fixed cost and variable cost or TC FC VC 2 Fixed Cost FC is the sum of the expenses of the firm that are stable and do not change with the quantity of a product that is produced and sold a Fixed costs include things like i Salaries of executives ii Rent on a building iii Insurance iv These do not change as we sell more products 3 Variable