Pricing Basics - Chapter 19 Instructor Notes PDF
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Summary
This document provides an overview of pricing basics, including the sacrifice and reward effects, perceived value, revenue, profit and various cost types. The differences between variable and fixed costs, economies of scale, and pricing considerations like short-term pricing and contribution margin are also explained. Different pricing objectives are highlighted, including profit-oriented and sales-oriented approaches.
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Chapter 19 Instructor Notes Pricing Basics Price: The amount exchanged for a good/service. o Sacrifice Effect: What buyers pay. o Reward Effect: What buyers receive in return. o Perceived Value: Balance of sa...
Chapter 19 Instructor Notes Pricing Basics Price: The amount exchanged for a good/service. o Sacrifice Effect: What buyers pay. o Reward Effect: What buyers receive in return. o Perceived Value: Balance of sacrifice and reward, monetary or not, tied to satisfaction. Price is part of the marketing mix! Product, place, PRICE, promotion. Revenue & Profit: o Revenue: Price × Units Sold. o Profit: Revenue - Costs. Types of Costs: o Variable Costs: Change with output, such as materials. o Fixed Costs: Remain constant regardless of output, such as salaries. o Economies of Scale: Total cost per unit decreases as production increases. Pricing Considerations: o Costs are the minimum price a company can charge. o Short-Term Pricing: May sell below total cost but above variable costs during tough times. o Contribution Margin: Price Variable Cost, contributes to covering fixed costs. Pricing Objectives 1. Profit-Oriented: o Profit Maximization: Balances high/low prices to maximize profit. o Break-Even Pricing: Revenue = Costs; no profit/loss. o ROI Pricing: Aims for specific return on investment. o Markup Pricing: Adds a percentage of cost as profit, common for retailers. 2. Sales-Oriented: o Focuses on maximizing sales/market share. o Benefits: Market leadership, economies of scale, cost competitiveness. 3. Status Quo Pricing: o Matches competitors' pricing. o Simple but doesn't consider sales or profit goals. Demand and Elasticity Demand Curve: Higher prices generally reduce demand (downward slope). Supply Curve: Higher prices increase supply (upward slope). Equilibrium Price: Demand = supply. Elasticity of Demand: o Price Elasticity: Demand changes significantly with price changes, such as discounts. o Inelasticity: Demand barely changes with price changes, such as necessities. o Factors Reducing Elasticity: Few substitutes, low price relative to income, hard-to-judge quality, prestige pricing.
