CHAPTER
BUILDING
THE PRICE
FOUNDATION
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
Slide 13-2
WHERE DOT-COMS STILL THRIVE:
HELPING YOU GET A $100-A-NIGHT
HOTEL ROOM OVERLOOKING
NEW YORK’S CENTRAL PARK
• Why Travel Dot-Coms
Haven’t Tanked
 Saving Time
 Saving Money
• Travel Dot-Com
Prices: A Win-Win
for Both Buyers
and Sellers
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Slide 13-5
NATURE AND IMPORTANCE
OF PRICE
• The Many Names of Price
• What Is a Price?
 Price
 Barter
 Price Equation
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Slide 13-7
FIGURE 13-2 The price of three different
purchases
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Bugatti Veyron
What is its price equation?
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ETHICS AND SOCIAL
RESPONSIBILITY ALERT
Student Credit Cards—
What Is the Real Price?
Lower My
Bills
Nellie
Mae
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
Slide 13-10
NATURE AND IMPORTANCE
OF PRICE
• Price as an Indicator of Value
 Value
 Value Pricing
• Price in the Marketing Mix
 Profit Equation
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Slide 13-11
FIGURE 13-3 Steps in setting price
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
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STEP 1: IDENTIFY PRICING
OBJECTIVES AND CONSTRAINTS
• Identifying Pricing Objectives
 Profit
• Maximizing for Long-Run Profits
• Maximizing Current Profit
• Target Return
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Slide 13-13
FIGURE 13-4 Where each dollar of your
movie ticket goes
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
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STEP 1: IDENTIFY PRICING
OBJECTIVES AND CONSTRAINTS
• Identifying Pricing Objectives
 Sales
 Market Share
 Unit Volume
 Survival
 Social Responsibility
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STEP 1: IDENTIFY PRICING
OBJECTIVES AND CONSTRAINTS
• 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
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STEP 1: IDENTIFY PRICING
OBJECTIVES AND CONSTRAINTS
• Identifying Pricing Constraints
 Cost of Producing and Marketing the Product
 Cost of Changing Prices and Time Period
They Apply
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STEP 1: IDENTIFY PRICING
OBJECTIVES AND CONSTRAINTS
• Identifying Pricing Constraints
 Type of Competitive Markets
• Pure Monopoly
• Oligopoly
• Monopolistic Competition
• Pure Competition
 Competitors’ Prices
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FIGURE 13-5 Pricing, product, and
advertising strategies available to firms in
four types of competitive markets
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Concept Check
1. What factors impact the list price to
determine the final price?
A: discounts, allowances, rebates, and
extra fees or surcharges
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Slide 13-23
Concept Check
2. What is the difference between
pricing objectives and pricing
constraints?
A: Pricing objectives involve specifying the
role of price in an organization’s
marketing and strategic plans whereas
pricing constraints are factors that limit
the range of prices a firm may set.
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Slide 13-24
Concept Check
3. How does the type of competitive
market a firm is in affect its range in
setting price?
A: Different competitive markets have
differences in price competition and,
in turn, the nature of product
differentiation and extent of
advertising.
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STEP 2: ESTIMATE DEMAND
AND REVENUE
• Fundamentals of Estimating Demand
 The Demand Curve
• Consumer Tastes
• Price and Availability of Similar Products
• Consumer Income
• Demand Factors
 Movement Along versus Shift of a
Demand Curve
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Slide 13-26
Newsweek
How do you estimate demand and set a price?
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FIGURE 13-6 Illustrative demand curves for
Newsweek
Demand curve under
initial conditions
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Shift in the demand
curve with more
favorable conditions
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FIGURE 13-6A Illustrative demand curve for
Newsweek (initial conditions)
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FIGURE 13-6B Illustrative demand curve for
Newsweek (shift in demand)
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STEP 2: ESTIMATE DEMAND
AND REVENUE
• Fundamentals of Estimating Revenue
 Total Revenue (TR)
 Average Revenue (AR)
 Marginal Revenue (MR)
 Demand Curves and Revenue
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FIGURE 13-7 Fundamental revenue concepts
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FIGURE 13-8 How a downward-sloping
demand curve affects total, average, and
marginal revenue
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STEP 2: ESTIMATE DEMAND
AND REVENUE
• Fundamentals of Estimating Revenue
 Price Elasticity of Demand
• Elastic Demand
• Inelastic Demand
• Unitary Demand
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Clothing vs. Gasoline
Which is more sensitive to prices changes?
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STEP 3: DETERMINE COST, VOLUME,
AND PROFIT RELATIONSHIPS
• Importance of Controlling Costs
 Total Cost (TC)
 Fixed Cost (FC)
 Variable Cost (VC)
 Unit Variable Cost (UVC)
 Marginal Cost (MC)
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FIGURE 13-9 Fundamental cost concepts
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MARKETING NEWSNET
Pricing Lessons from the Dot-Coms—
Understanding Revenues and Expenses
• Brick-and-Mortar Dot-Com Failures
• Travel Dot-Com Successes (So Far)
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STEP 3: DETERMINE COST, VOLUME,
AND PROFIT RELATIONSHIPS
• Marginal Analysis and Profit
Maximization
• Break-Even Analysis
 Break-Even Point (BEP)
 Calculating a Break-Even Point
 Break-Even Chart
 Applications of Break-Even Analysis
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Slide 13-43
FIGURE 13-10 Profit maximization pricing
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FIGURE 13-11 Calculating a break-even
point for a picture frame store
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FIGURE 13-12 Break-even analysis chart for
a picture frame store
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FIGURE 13-13 The cost trade-off: fixed
versus variable costs
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Price (P)
Price (P) is the money or other
considerations (including other goods and
services) exchanged for the ownership or
use of a good or service.
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Barter
Barter is the practice of exchanging
goods and services for other goods and
services rather than for money.
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Value
Value is the ratio of perceived benefits
to price; or Value = (Perceived benefits
divided by Price).
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Value-Pricing
Value-pricing is the practice of
simultaneously increasing product and
service benefits while maintaining or
decreasing price.
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Profit Equation
A firm’s profit equation is as follows:
Profit = Total revenue − Total cost; or
Profit = (Unit price × Quantity sold)
− Total cost.
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Pricing Objectives
Pricing objectives involve specifying
the role of price in an organization’s
marketing and strategic plans.
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Slide 13-71
Pricing Constraints
Pricing constraints involve factors that
limit the range of prices a firm may set.
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Demand Curve
A demand curve is a graph relating the
quantity sold and price, which shows the
maximum number of units that will be
sold at a given price.
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Demand Factors
Demand factors are factors that
determine consumers’ willingness and
ability to pay for goods and services.
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Total Revenue (TR)
Total revenue (TR) is the total money
received from the sale of a product.
Total revenue (TR) = unit price (P)
× the quantity sold (Q) or TR = P × Q.
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Average Revenue (AR)
Average revenue (AR) is the average
amount of money received for selling
one unit of a product, or simply the
price of that unit.
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Marginal Revenue (MR)
Marginal revenue (MR) is the change in
total revenue that results from producing
and marketing one additional unit.
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Price Elasticity of Demand
Price elasticity of demand is the
percentage change in quantity demanded
relative to a percentage change in price.
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Total Cost (TC)
Total cost (TC) is the total expense
incurred by a firm in producing and
marketing a product. Total cost (TC)
equals the sum of fixed cost (FC) and
variable cost (VC) or TC = FC + VC.
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Fixed Cost (FC)
Fixed cost (FC) is the sum of the
expenses of the firm that are stable
and do not change with the quantity
of a product that is produced and sold.
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Variable Cost (VC)
Variable cost (VC) is the sum of the
expenses of the firm that vary directly
with the quantity of a product that is
produced and sold.
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Unit Variable Cost (UVC)
Unit variable cost (UVC) is variable cost
expressed on a per unit basis.
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Marginal Cost (MC)
Marginal cost (MC) is the change in
total cost that results from producing
and marketing one additional unit of a
product.
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Marginal Analysis
Marginal analysis is a continuing,
concise trade-off of incremental costs
against incremental revenues.
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Break-Even Analysis
Break-even analysis is a technique that
analyzes the relationship between total
revenue and total cost to determine
profitability at various levels of output.
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Break-Even Point (BEP)
Break-even point (BEP) is the quantity
at which total revenue and total cost are
equal or BEP = (FC ÷ (P−UVC)).
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Break-Even Chart
Break-even chart is a graphic
presentation of the break-even analysis
that shows when total revenue and total
cost intersect to identify profit or loss
for a given quantity sold.
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