Chapter 13

Marketing: Building the Price Foundation

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AFTER READING THIS CHAPTER
YOU SHOULD BE ABLE TO:
  • •Identify the elements that make up a price.
•
  • •Recognize the constraints on a firm's pricing latitude and the objectives a firm has in setting prices.
  • •Explain what a demand curve is and how it affects a firm’s total and marginal revenue.
•
  • •Recognize what price elasticity of demand means to a manager facing a pricing decision.
 
  • •Explain the role of  costs in pricing decisions.
•
  • •Calculate a break-even point for various combinations of price, fixed costs,
    and unit variable cost.
 

 

 

BUILDING THE
PRICE FOUNDATION
WHERE DOT-COMS STILL THRIVE:  HELPING YOU GET A $100 A NIGHT HOTEL ROOM OVER-LOOKING NEW YORK’S CENTRAL PARK!
  • •Why Travel Dot-Coms Haven’t Tanked
  • •Travel Dot-Com Prices:  A Win-Win for Both Buyers and Sellers!
 

 

 

FIGURE 13-1  Quick-take quiz on price:  Answers that are part numbers, part good judgment

NATURE AND
IMPORTANCE OF PRICE
  • •What is a Price?
  • §Barter
 

 

 

Barter
The practice or exchanging goods and services for other goods and services rather than for money.

 

 

FIGURE 13-2  The price of four different purchases

NATURE AND
IMPORTANCE OF PRICE
  • •Price as an Indicator of Value
  • •Price in the Marketing Mix
 

 

 

 

Value
Specifically, value can be defined as the ratio of perceived benefits to price:  (Value = Perceived benefits/Price).
 

 

 

Value-Pricing
The practice of simultaneously increasing service and product benefits and maintaining or increasing price.

 

 

Profit Equation
Profit = total revenue – Total cost, or
Profit = (Unit Price x Quantity Sold) –    Total Cost
 

 

 

FIGURE 13-3  Steps in setting price

STEP 1:  IDENTIFY PRICING CONSTRAINTS AND OBJECTIVES
  • •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 and Time Period They Apply
  • •Types of Competitive Markets
  • §Pure monopoly
  • §Oligopoly
  • §Monopolistic competition
  • §Pure competition
  • •Competitors’ Prices
 

 

 

Pricing Constraints
Factors that limit the latitude of price a firm may set.
 

 

 

FIGURE 13-4  Pricing, product, and advertising strategies available to firms in four types of . . . markets

STEP 1:  IDENTIFY PRICING CONSTRAINTS AND OBJECTIVES
  • •Profit
 

 

 

Pricing Objectives
Expectations that specify the role of price in an organization’s marketing and strategic plans.

 

 

FIGURE 13-5  Where each dollar of your movie
ticket goes

STEP 1:  IDENTIFY PRICING CONSTRAINTS AND OBJECTIVES
  • •Identifying Pricing Objectives
    (cont)
  • •Sales
  • •Market Share
  • •Unit Volume
  • •Survival
  • •Social Responsibility
 

 

 

Concept Check
1.  What factors impact the list price to determine the final price?
 
A:  Subtract discounts and allowances and add extra fees.
 
2.  How does the type of competitive market a firm is in affect its latitude in setting price?
 
A:  Different competitive markets have differences in price competition and, in turn, the nature of product differentiation and extent of advertising.
 

 

 

STEP 2:  ESTIMATE DEMAND AND SERVICE
 
  • •Fundamentals of Estimating Demand
  • •Movement Along versus Shift of
    a Demand Curve
 

 

 

Demand Curve
The summation of points representing the maximum number of products consumers will buy at a given price.
 

 

 

Demand Factors
Factors that determine consumers’ willingness and ability to pay for goods and services.
 

 

 

 

FIGURE 13-6  Illustrative demand curves for Newsweek magazine

 

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