kerinmarketing130

STEP 2: ESTIMATE DEMAND AND SERVICE

•Fundamentals of Estimating Revenue

§Total revenue
§Average revenue
§Marginal revenue

•Demand Curves and Revenue

The total money received from the sale of a product.

The average amount of money received for selling one unit of a product.

Marginal Revenue

The change in total revenue obtained by selling one additional unit.

FIGURE 13-7 Fundamental revenue concepts

FIGURE 13-8 How a downward-sloping demand curve affects total, average, and marginal revenue

STEP 2: ESTIMATE DEMAND AND SERVICE

•Fundamentals of Estimating Revenue
(cont)

•Price Elasticity of Demand

•Price Elasticity for Brands and Product Classes

Price Elasticity of Demand

The percentage change in quantity demanded relative to a percentage change in price.

1. What is the difference between a movement along and a shift of a demand curve?

A: A movement along the demand curve occurs when the price is lowered and quantity demanded increases, assuming that other demand factors remain unchanged. If some of these factors change, however, a shift of the demand curve results.

2. What does it mean if a product has a price elasticity of demand that is greater than 1?

A: Elasticities greater than 1 indicate the product is price elastic.

STEP 3: DETERMINE COST, VOLUME, AND PROFIT RELATIONSHIPS

•The Importance of Controlling Costs

§Total cost
§Fixed cost
§Variable cost
§Marginal cost

The total expense incurred by a firm in producing and marketing a product. Total cost is the sum of fixed cost and variable cost. In physical distribution decisions, the sum of all applicable costs for logistical activities.

The sum of expenses of the firm that are stable and do not change with the quantity of product that is produced and sold.

The sum of the expenses of the firm that vary directly with the quantity of product that is produced and sold.

The change in total cost that results from producing and marketing one additional unit.

FIGURE 13-9 Fundamental cost concepts

STEP 3: DETERMINE COST, VOLUME, AND PROFIT RELATIONSHIPS

•Marginal Analysis and Profit Maximization

Marginal Analysis

A continuing, concise trade-off of incremental costs against incremental revenues.

FIGURE 13-10
Profit maximization pricing

STEP 3: DETERMINE COST, VOLUME, AND PROFIT RELATIONSHIPS

•Break-Even Analysis

§Break-even point
§Break-even chart

•Calculating a Break-Even Point

Break-Even Analysis

A technique that analyzes the relationship between total revenue and total cost to determine profitability at various levels of output.

Break-Even Point

Quantity at which total revenue and total cost are equal and beyond which profit occurs.

Break-Even Chart

A graphic presentation of the break-even analysis.

FIGURE 13-11 Calculating a break-even point

FIGURE 13-12 Break-even analysis chart

STEP 3: DETERMINE COST, VOLUME, AND PROFIT RELATIONSHIPS

•Break-Even Analysis (cont)
•Applications of Break-Even Analysis

FIGURE 13-13a The cost trade-off: fixed versus variable costs

FIGURE 13-13b The cost trade-off: fixed versus variable costs

1. What is the difference between fixed costs and variable costs?

A: Fixed costs are stable and do not change with the quantity of the product that is produced and sold. Variable costs vary directly with the quantity of the product that is produced and sold.

2. What is a break-even point?

A: The break-even point is the quantity at which total revenue and total cost are equal and beyond which profit occurs.

Chapter 13 - Summary

Price is the money or other considerations exchanged for the ownership or use of a product or service. Although price typically involves money, the amount exchanged is often different from the list or quoted price because of allowances and extra fees.
Consumers use price as an indicator of value when it is paired with the perceived benefits of a good or service. Sometimes price influences consumer perceptions of quality itself and at other times consumers make value assessments by comparing the costs and benefits of substitute items.
Pricing constraints such as demand, product newness, costs, competitors, other products sold by the firm, and the type of competitive market restrict a firm's pricing latitude.
Pricing objectives, which specify the role of price in a firm's marketing strategy, may include pricing for profit, sales revenue, market share, unit sales, survival, or some socially responsible price level.
A demand curve shows the maximum number of products consumers will buy at a given price and for a given set of (a) consumer tastes, (b) price and availability of other products, and (c) consumer income. When any of these change, there is a shift of the demand curve.
Important revenue concepts include total revenue, average revenue, and marginal revenue.
Price elasticity of demand measures the sensitivity of units sold to a change in price. When demand is elastic, a reduction in price is more than offset by an increase in units sold, so that total revenue increases.
It is necessary to consider cost behavior when making pricing decisions. Important cost concepts include total cost, variable cost, fixed cost, and marginal cost.
Break-even analysis shows the relationship between total revenue and total cost at various quantities of output for given conditions of price, fixed cost, and variable cost. The break-even point is where total revenue and total cost are equal.

Chapter 13 ( conti..)

Marketing: Building the Price Foundation