BUILDING
THE PRICE
FOUNDATION
© 2002 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
NATURE AND
IMPORTANCE OF PRICE
• What is a Price?
 Barter
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The price of four different purchases
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Lamborghini
What will this car cost?
© 2002 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
© 2002 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
Steps in setting price
© 2002 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
© 2002 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
Collectable
or
Trashable?
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Collectable or Trashable?
© 2002 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
STEP 1: IDENTIFY PRICING
CONSTRAINTS AND OBJECTIVES
• Identifying Pricing Constraints
• Cost of Changing Prices and Time Period
They Apply
• Types of Competitive Markets
 Pure monopoly
 Oligopoly
 Monopolistic competition
 Pure competition
© 2002 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
Pricing, product, and advertising strategies available to
firms in four types of competitive markets
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STEP 1: IDENTIFY PRICING
CONSTRAINTS AND OBJECTIVES
• Identifying Pricing Constraints
• Competitors’ Prices
© 2002 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
STEP 1: IDENTIFY PRICING
CONSTRAINTS AND OBJECTIVES
• Identifying Pricing Objectives
• Profit
© 2002 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
Where each
dollar of your
movie
ticket goes
© 2002 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
STEP 1: IDENTIFY PRICING
CONSTRAINTS AND OBJECTIVES
Identifying Pricing Objectives
• Sales
• Market Share
• Unit Volume
• Survival
• Social Responsibility
© 2002 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
STEP 2: ESTIMATE
DEMAND AND SERVICE
• Fundamentals of Estimating Demand
• The Demand Curve
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Illustrative demand curves for Newsweek magazine
© 2002 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
STEP 2: ESTIMATE
DEMAND AND SERVICE
• The Demand Curve
 Demand factors
• Movement Along versus Shift of
a Demand Curve
© 2002 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
STEP 2: ESTIMATE
DEMAND AND SERVICE
• Fundamentals of Estimating Revenue
 Total revenue
 Average revenue
 Marginal revenue
© 2002 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
Fundamental revenue concepts
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How a downward-sloping demand curve affects total,
average, and marginal revenue
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STEP 2: ESTIMATE
DEMAND AND SERVICE
• Fundamentals of Estimating Revenue
• Price Elasticity of Demand
 Price Elasticity for Brands and Product Classes
© 2002 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
© 2002 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
Fundamental cost concepts
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STEP 3: DETERMINE COST, VOLUME,
AND PROFIT RELATIONSHIPS
• Marginal Analysis and Profit
Maximization
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Profit maximization pricing
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STEP 3: DETERMINE COST, VOLUME,
AND PROFIT RELATIONSHIPS
• Break-Even Analysis
 Break-even point
 Break-even chart
• Calculating a Break-Even Point
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Calculating a break-even point
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Break-even analysis chart
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