CHAPTER
BUILDING
THE PRICE
FOUNDATION
© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
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.
© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
AFTER READING THIS CHAPTER
YOU SHOULD BE ABLE TO:
• 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.
© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
AFTER READING THIS CHAPTER
YOU SHOULD BE ABLE TO:
• Explain the role of costs in pricing
decisions.
• Calculate a break-even point for various
combinations of price, fixed costs,
and unit variable cost.
© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
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!
© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
NATURE AND
IMPORTANCE OF PRICE
• What is a Price?
 Barter
© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
NATURE AND
IMPORTANCE OF PRICE
• Price as an Indicator of Value
 Value-pricing
• Price in the Marketing Mix
 Profit Equation
© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
STEP 1: IDENTIFY PRICING
CONSTRAINTS AND OBJECTIVES
• Identifying Pricing Constraints
• 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
© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
STEP 1: IDENTIFY PRICING
CONSTRAINTS AND OBJECTIVES
• Identifying Pricing Constraints (cont)
• Cost of Changing Prices and Time Period
They Apply
• Types of Competitive Markets
 Pure monopoly
 Oligopoly
 Monopolistic competition
 Pure competition
© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
STEP 1: IDENTIFY PRICING
CONSTRAINTS AND OBJECTIVES
• Identifying Pricing Constraints (cont)
• Competitors’ Prices
© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
STEP 1: IDENTIFY PRICING
CONSTRAINTS AND OBJECTIVES
• Identifying Pricing Objectives
• Profit
© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
STEP 1: IDENTIFY PRICING
CONSTRAINTS AND OBJECTIVES
• Identifying Pricing Objectives
(cont)
•
•
•
•
•
Sales
Market Share
Unit Volume
Survival
Social Responsibility
© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
Concept Check
1. What factors impact the list price to
determine the final price?
A: Subtract discounts and allowances
and add extra fees.
© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
Concept Check
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.
© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
STEP 2: ESTIMATE
DEMAND AND SERVICE
• Fundamentals of Estimating Demand
• The Demand Curve
© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
STEP 2: ESTIMATE
DEMAND AND SERVICE
• The Demand Curve (cont)
 Demand factors
• Movement Along versus Shift of
a Demand Curve
© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
STEP 2: ESTIMATE
DEMAND AND SERVICE
• Fundamentals of Estimating Revenue
 Total revenue
 Average revenue
 Marginal revenue
© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
STEP 2: ESTIMATE
DEMAND AND SERVICE
• Fundamentals of Estimating Revenue
(cont)
• Demand Curves and Revenue
© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
STEP 2: ESTIMATE
DEMAND AND SERVICE
• Fundamentals of Estimating Revenue
(cont)
• Price Elasticity of Demand
• Price Elasticity for Brands and Product
Classes
© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
Concept Check
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.
© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
Concept Check
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.
© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
STEP 3: DETERMINE COST, VOLUME,
AND PROFIT RELATIONSHIPS
• The Importance of Controlling Costs
 Total cost
 Fixed cost
 Variable cost
 Marginal cost
© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
STEP 3: DETERMINE COST, VOLUME,
AND PROFIT RELATIONSHIPS
• Marginal Analysis and Profit
Maximization
© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
STEP 3: DETERMINE COST, VOLUME,
AND PROFIT RELATIONSHIPS
• Break-Even Analysis
 Break-even point
 Break-even chart
• Calculating a Break-Even Point
© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
STEP 3: DETERMINE COST, VOLUME,
AND PROFIT RELATIONSHIPS
• Break-Even Analysis (cont)
• Applications of Break-Even Analysis
© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
Concept Check
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.
© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
Concept Check
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.
© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin