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Chapter Fourteen

Chapter Fourteen. Creating and Pricing Products that Satisfy Customers. Pricing Products. How Firms Set Their Prices Supply The quantity of a product that producers are willing to sell at each of various prices Quantity supplied by producers increases as the price increases Demand

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Chapter Fourteen

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  1. Chapter Fourteen Creating and Pricing Products that Satisfy Customers

  2. Pricing Products • How Firms Set Their Prices • Supply • The quantity of a product that producers are willing to sell at each of various prices • Quantity supplied by producers increases as the price increases • Demand • The quantity of a product that buyers are willing to purchase at each of various prices • Quantity demanded increases as the price decreases • Equilibrium • Where the supply and demand curves intersect and quantity and price for buyers and sellers are equal

  3. Supply and Demand Curves Assumption is that all competing products are indistinguishable

  4. Elastic Demand • Consumers buy more or lessof a product when the price changes InelasticDemand • An increase or decrease in price will not significantly affect demand Elasticity of Demand Consumers’ sensitivity to changes in price.

  5. Availability of Substitutes Price relative to purchasing power Product durability Factors that Affect Elasticity of Demand

  6. Pricing Products in the Real Economy 1) Producers gain control over price by differentiating products • Differentiation - The process of developing and promoting differences between one’s product and all similar products 2) Producers also gain control over price through advertising. The idea is to increase demand so you can raise prices. 3) Producers can also reduce prices to obtain a competitive edge. Lower the price to increase purchase volume and thus achieve more profit

  7. Profit-Oriented Pricing Objectives- Sales-Oriented Pricing Objectives- Status Quo Pricing Objectives- Pricing Objectives

  8. Profit-Oriented Pricing Objectives Profit-Oriented Pricing Objectives Profit Maximization SatisfactoryProfits Target Return on Investment

  9. Sales-Oriented Pricing Objectives Market Share Sales Maximization Sales-Oriented Pricing Objectives A company’s sales as a percentage of total sales for that industry

  10. Sales Maximization • Short-term objective to maximize sales • Ignores profits, competition, and the marketing environment • May be used to sell off excess inventory

  11. Status Quo Pricing Objectives Maintain existing prices Meet competition’s prices Status Quo Pricing Objectives

  12. Pricing Strategies • New-Product Strategies • Price Skimming • Charging the highest possible price for a product during the introduction stage of its life cycle • Penetration Pricing • Setting a low price for a new product to quickly build market share and discourage competitors

  13. Breakeven analysis • Fixed cost • A cost incurred no matter how many units are sold-rent • Variable cost • A cost that depends on the number of units produced-raw materials • Total cost • The sum of the fixed costs and the variable costs • Breakeven quantity • The number of units that must be sold for total revenue (total sales) to equal total cost

  14. Pricing Methods • Cost-Based Pricing • the total cost of producing one unit product then adds an amount to cover overhead and profit. • i.e.-$10(costs)+$2(markup)=$12/shirt =selling price • Markup is calculated as a percentage of total costs. • i.e.-20% markup yields a $12/shirt price • Easy to apply and commonly used by retailers and wholesalers, but it ignores demand and pricing inputs from other business functions

  15. Pricing Methods • Demand-Based Pricing • Based on the level of customer demand for the product • Product prices are high when demand is high and low when demand is weak • Competition-Based Pricing • Meet competitors’ prices in markets. Used when products are very similar like produce

  16. Some Pricing “Buzzwords” • Captive pricing • Pricing the basic product low, but pricing related items at a higher profit level – like printers and ink • Price leaders (loss leaders) • Selected products priced below the usual markup, near cost, or below cost • Price lining • Setting a limited number of prices for selected groups or lines of merchandise

  17. More Pricing “Buzzwords” • Comparison discounting • Setting a price at a specific level and comparing it with a higher price-like a Marshall’s price tag • Periodic discounting • Temporary reduction of prices on a patterned or systematic basis

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