PRICE

Yes, But What Does It Cost?

• Price is the value that customers give up or exchange to obtain a desired product

• Payment may be in the form of money, goods, services, favors, votes or anything else that has value to the other party

Opportunity Costs

• The value of something that is given up to obtain something else also affects the “price” of a decision

• Example: the cost of going to college is charged in tuition and fees but also includes the opportunity cost of what a student cannot earn by working instead

The Importance of Pricing Decisions

• Price is the only P which represents revenue rather than an expense

• Pricing and the Marketing Mix– Price and Place– Price and Product– Price and Promotion

The price of four different purchasesThe price of four different purchases

Identify objectives & constraints

Estimate demand & revenue

Determine cost, volume and profit

Set an approximate price level

Set List or Quoted price

Make adjustments to list price

Steps in setting priceSteps in setting price

Identifying Pricing constraints– Demand for the Product Class, Product, and

Brand– Newness of the Product: Stage in the Product

Life Cycle– Single Product versus a Product Line– Cost of Producing and Marketing the Product– Cost of Changing Prices & Time Period They

Apply– Types of Competitive Markets - Competitors’

Prices

Pricing Objectives

• Sales or market share objectives

• Profit objectives

• Competitive effect objectives

• Customer satisfaction objectives

• Image enhancement objectives – Social Responsibility

Estimating Demand

• Demand refers to customers’ desire for products– How much of a product do consumers want?

– How will this change as the price goes up or down?

• Identify demand for an entire product category in markets the company serves

• Predict what the company’s market share is likely to be

The Price Elasticity of Demand

• How sensitive are customers to changes in the price of a product?

• Price elasticity of demand is a measure of the sensitivity of customers to changes in price.

• Price elasticity of demand = Percentage change in quantity demanded / Percentage change in price

Demand Curves

• Shows the quantity of a product that customers will buy in a market during a period of time at various prices if all other factors remain the same

• Vertical axis represents the different prices a firm might charge

• Horizontal axis shows the number of units

Demand Curves

Influences on Price Elasticity of Demand

• Availability of substitute goods or services– If a product has a close substitute, its demand will be

elastic

• Time period– The longer the time period, the greater the likelihood

that demand will be more elastic

• Income effect– Change in income affects demand for a product even if

its price remains the same• normal goods, luxury goods, inferior goods

Elastic and Inelastic Demand Curves

Types of Costs - 1

• Variable costs - per-unit costs of production that will fluctuate depending on how many units or individual products a firm produces

• Fixed costs - do not vary with the number of units produced. Costs remain the same regardless of amount produced

Types of Costs - 2

• Average fixed cost is the fixed cost per unit produced (total fixed costs / number of units produced)

• Total costs = variable costs plus fixed costs

Break-Even Analysis• Technique used to examine the relationship

between cost and price and to determine what sales volume must be reached at a given price before the company will completely cover its total costs and past which it will begin making a profit

• All costs are covered but there isn’t a penny left over

Break-even analysis chartBreak-even analysis chart

Marginal Analysis

• Provides a way for marketers to look at cost and demand at the same time

• Examines the relationship of marginal cost to marginal revenue– marginal cost is the increase in total costs from

producing one additional unit of a product

– marginal revenue is the increase in total income or revenue that results from selling one additional unit of a product

Marginal Analysis