Building the Price Foundation

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Chapter 13

• Building the Price Foundation

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We have to balance our ideal with what the
market will pay. If we are 40 higher than the
competition, then wed better have something
special or drop our prices. Judy Johnson.
Owner Huckleberry Mountain Co.
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The Nature of Price

• Price is the money or other considerations
  exchanged for the ownership or use of goods and
  services.
• Price has a psychological impact on consumers.
• Marketers use it symbolically to attract a target
  market

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Price is important because

• It is a key element in measuring overall
  performance.
• Price often determines the quantity sold
• Profits are measured by
• Profit (price X quantity) total costs.
• The price equation
• Price List price Incentives Extra Fees

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What are some things that control the price we
can charge?
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Pricing Objectives

• Survival
• Profit
• Return on investment
• Market share
• Cash flow
• Status quo
• Product quality

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Price strategy constraints

• Demand
• Product life cycle
• Product mix or number of products
• Costs
• Type of markets
• Competitors

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Estimating the demand

• Remember your old friend the demand curve?

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In addition to price, what are the other factors
of demand?

• Consumer tastes
• Price availability of other products
• Consumer income
• What happens when some of this stuff changes?

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Estimating Revenues

• We know that TR P X Q
• We also know that AR TR/Q or
• AR P
• But we really want to know marginal revenues!
• MR ?TR/?Q
• Marginal revenue is the increase in total
  revenue from the sale of one additional unit

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Price elasticity of demand

• E ? D / ?P
• Elastic demand a small change in P results in a
  large change in D
• Inelastic demand a small change in P results in
  a very small (if any) change in D
• Unitary demand the change in P is equal to
  the change in D

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Estimating costs

• Terms you should know
• Total cost
• Fixed cost
• Variable cost
• Marginal cost
• TC FC VC and
• MC ?TC / ?Q

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Break even analysis

• The break even point is the quantity needed to be
  sold in order for all costs to be covered. After
  the break even point is profit!
• BEP FC / P - UVC

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Questions?