McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc All Rights Rese LEARNING OBJECTIVES (LO) AFTER READING CHAPTER 13, YOU SHOULD BE ABLE TO: LO1 LO2 LO3 Identify the elements that make up a price Recognize the objectives a firm has in setting prices and the constraints that restrict the range of prices a firm can charge Explain what a demand curve is and the role of revenues in pricing decisions 13-2 LEARNING OBJECTIVES (LO) AFTER READING CHAPTER 13, YOU SHOULD BE ABLE TO: LO4 Describe what price elasticity of demand means to a manager facing a pricing decision LO5 Explain the role of costs in pricing decisions LO6 Describe how various combinations of price, fixed cost, and unit variable cost affect a firm’s breakeven point 13-3 LO1 NATURE AND IMPORTANCE OF PRICE WHAT IS A PRICE? Price Barter Price Equation Final Price = list Price – (Incentives + Allowances) + Extra Fees 13-6 FIGURE 13-2 The “price” a buyer pays can take different names depending on what is purchased 13-7 LO1 NATURE AND IMPORTANCE OF PRICE PRICE AS AN INDICATOR OF VALUE Value Value = Perceived Benefits Price $ = $ Value-Pricing 13-8 LO1 NATURE AND IMPORTANCE OF PRICE PRICE IN THE MARKETING MIX Profit Equation Profit = Total Revenue – Total Costs = (Unit Price x Quantity Sold) – (Fixed Cost + Variable Cost) Six Steps in Setting Price 13-9 FIGURE 13-3 The six steps in setting price The first three steps are covered in Chapter 13 and the last three steps in Chapter 14 13-10 STEP 1: IDENTIFY PRICING OBJECTIVES LO2 AND CONSTRAINTS IDENTIFYING PRICING OBJECTIVES Pricing Objectives • Profit Managing for Long-Run Profits Managing for Current Profit Target Return (ROI) • “The World is Flattening” 13-11 STEP 1: IDENTIFY PRICING OBJECTIVES LO2 AND CONSTRAINTS IDENTIFYING PRICING OBJECTIVES Pricing Objectives • Sales ($) • Survival • Market Share ($ or #) • Social Responsibility • Unit Volume (#) 13-13 Demand Curve A demand curve is a graph relating the quantity sold and price, which shows the maximum number of units that will be sold at a given price 13-45 Demand Factors Demand factors are those that determine consumers’ willingness and ability to pay for goods and services 13-46 Total Revenue (TR) Total revenue (TR) is the total money received from the sale of a product 13-47 Average Revenue (AR) Average revenue (AR) is the average amount of money received for selling one unit of a product, or simply the price of that unit 13-48 Marginal Revenue (MR) Marginal revenue (MR) is the change in total revenue that results from producing and marketing one additional unit 13-49 Price Elasticity of Demand The price elasticity of demand is the percentage change in quantity demanded relative to a percentage change in price 13-50 Total Cost (TC) Total cost (TC) is the total expense incurred by a firm in producing and marketing a product Total cost is the sum of fixed cost and variable cost 13-51 Fixed Cost (FC) Fixed cost (FC) is the sum of the expenses of the firm that are stable and not change with the quantity of a product that is produced and sold 13-52 Variable Cost (VC) Variable cost (VC) is the sum of the expenses of the firm that vary directly with the quantity of a product that is produced and sold 13-53 Unit Variable Cost (UVC) Unit variable cost (UVC) is variable cost expressed on a per unit basis 13-54 Marginal Cost (UVC) Marginal cost (UVC) is the change in total cost that results from producing and marketing one additional unit of a product 13-55 Marginal Analysis Marginal analysis a continuing, concise trade-off of incremental costs against incremental revenues 13-56 Break-Even Analysis Break-even analysis is a technique that analyzes the relationship between total revenue and total cost to determine profitability at various levels of output 13-57 Break-Even Point (BEP) A break-even point (BEP) is the quantity at which total revenue and total cost are equal 13-58 Break-Even Chart A break-even chart is a graphic presentation of the break-even analysis that shows when total revenue and total cost intersect to identify profit or loss for a given quantity sold 13-59 ... ABLE TO: LO1 LO2 LO3 Identify the elements that make up a price Recognize the objectives a firm has in setting prices and the constraints that restrict the range of prices a firm can charge Explain... AND IMPORTANCE OF PRICE WHAT IS A PRICE? Price Barter Price Equation Final Price = list Price – (Incentives + Allowances) + Extra Fees 13-6 FIGURE 13-2 The price a buyer pays can take different... NATURE AND IMPORTANCE OF PRICE PRICE AS AN INDICATOR OF VALUE Value Value = Perceived Benefits Price $ = $ Value-Pricing 13-8 LO1 NATURE AND IMPORTANCE OF PRICE PRICE IN THE MARKETING MIX Profit