Chapter foundations of Chapter M A R K E T I N G Understanding Pricing 13.

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Understanding Pricing

13

Chapter

Objectives1. Discuss the concept of pricing objectives and their use.

2. Explain basic economic pricing principles and the concept of price elasticity.

3. Identify the practical problems involved in applying economics price theory concepts to actual pricing decisions.

4. Outline the major approaches to price setting.

5. Apply break-even analysis and discuss its use in pricing decisions.

6. Explain negotiated prices and competitive bidding.

7. Explain the concept of transfer pricing.

8. Discuss pricing in the public sector.

Understanding Pricing 13

13-1

Chapter

Price

• The value that a buyer exchanges for a good or service.


13-2

Chapter

Utility

• The want-satisfying power of a product or service.


13-3

Chapter

Types of Market Structure

1. Pure Competition

2. Monopolistic Competition

3. Oligopoly

4. Monopoly


13-4

Chapter

Pure Competition and Monopolistic Competition (1 of 2)

Pure Competition

• A market structure in which there is such a large number of buyers and sellers that no one of them has a significant influence on price.


13-5a

Chapter

Pure Competition and Monopolistic Competition (2 of 2)

Monopolistic Competition

• A market structure with a large number of buyers and sellers where heterogeneity in good and/or service and usually geographical differentiation allow the marketer some control over price.


13-5b

Chapter

Oligopoly, Oligopsony, and MonopolyOligopoly• A market structure in which there are

relatively few sellers.

Oligopsony• A market in which there are only a few

buyers.

Monopoly• A market structure with only one seller of a

product with no close substitutes.


13-6

Chapter

Revenue, Cost, and Supply Curves

Average Cost• Obtained by dividing total cost by the

quantity associated with this cost.

Average Variable Cost• The total variable cost divided by the related

quantity.

Marginal Cost• The change in total cost that results from

producing an additional unit of output.


13-7

Chapter

Cost Curves

Understanding Pricing 13Figure 13.1

13-8

Chapter

Supply Curve

• The marginal cost curve above its intersection with average variable cost.


13-9

Chapter

Elasticity

• A measure of the responsiveness of purchasers and suppliers to changes in price.


13-10

Chapter

Concept of Demand Elasticity

1. Elastic = Demand relatively sensitive to

price

2. Inelastic = Demand relative insensitive to

price


13-11

Chapter

Industry or market elasticityRefers to changes in total demand resulting from general changes in price across the industry.

Company elasticityRefers to the sensitivity to changes in price that a particular company or brand faces.

Segment elasticityRefers to the sensitivity to changes in price that a particular market segment exhibits.


13-12

Chapter

Cost-Oriented Price Setting

Cost-Plus Pricing

• Pricing technique using base cost figure per unit to which is added a markup to cover on assigned costs and to provide a profit.


13-13

Chapter

Break-even Analysis

• A means of determining the number of goods or services that must be sold at a given price in order to generate sufficient revenue to cover total costs.


13-14

ChapterUnderstanding Pricing 13

Figure 13.2

13-15

Break-even Analysis

Chapter

Break-even Equation (1 of 2)


13-16a

Total Fixed CostsPer-Unit – Average

Selling Price Variable Cost

Total Fixed CostsPer-Unit Contribution

to Fixed Cost

Break-even Point = (in units)

=

Chapter

Break-even Equation (2 of 2)


13-16b

Total Fixed CostsVariable Cost per Unit

Selling Price

Break-even Point = (in units)

1 -

Chapter

The Dynamic Break-even Concept

Dynamic Break-even Analysis

• Combines the traditional break-even analysis model with an evaluation of consumer demand.


13-17

Chapter

Markup

• The amount a producer or channel members adds to cost in order to determine selling price.


13-18

Chapter

Markups

Amount added to

Cost (the Markup)

Selling Price

Amount added to

Cost (the Markup)

Cost


13-19

Markup Percentage on Selling Price =

Markup Percentage on Cost =

Chapter

Markdowns

Markdown

“Sale” (New) Price


13-20

Markdown Percentage =

Chapter

Stock Turnover

• The number of times the average inventory is sold annually.


13-21

Chapter

Stock Turnovers

Sales

Average Inventory

at Retail

or

Cost of Goods Sold

Average Inventory

at Cost


13-22

Stock Turnover =

Stock Turnover =

Chapter

Negotiated Prices and Competitive BiddingCompetitive Bidding• A process by which buyers request potential

suppliers to make price quotations on a proposed purchase or contract.

Specifications• A specific description of a needed item or job

that the buyer wishes to acquire.


13-23

Chapter

Negotiated Contract

• The terms of the contract are set through talks between the buyer and the seller.


13-24

Chapter

Escalator Clause

• Allows the seller to adjust the final price based on changes in the costs of the product’s ingredients between the placement of the order and the completion of construction or delivery of the product.


13-25

Chapter

International Pricing

• Setting prices to be charged to buyers in other countries taking into consideration exchange risk, price escalation through multiplication of channels, and transportation.

Exchange Risk

• The risk of negotiating a price in another nation’s currency and finding upon delivery of the product that the currency’s value has dropped in relation to your country’s currency.

Price Escalation

• The increase in final price in a foreign market over a domestic price because of having to pay for the services of additional channel members to get the product to that market.


13-26

Chapter

The Transfer Pricing Problem

Transfer Price

• The price for sending goods from one company profit centre to another.


13-27

Chapter

Profit Centre

• Any part of the organization to which revenue and controllable costs can be assigned, such as a department.


13-28

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Chapter foundations of Chapter M A R K E T I N G Understanding Pricing 13.

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