Outline - Steps in setting price 1 Identify Pricing...

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Steps in setting price 1) Identify Pricing objectives and constraints a. Identify pricing objectives (role of price) i. Profit 1. Maximizing long run profit – give up immediate profit for more market share 2. Maximizing current return – common because quick and easy 3. Target return – firm sets a profit goal ii. Sales 1. Almost always set 2. If firm is able to remain in business, objective is to increase sales revenue 3. Leads to increases in market share and profit iii. Market share 1. MS = Sales Revenue/Industry 2. Used when industry is flat or declining 3. Larger market share gives you more exposure and leverage with suppliers 4. Gives you higher profit and sales iv. Volume 1. Quantity produced or sold 2. Used if many products are sold at different prices v. Survival 1. For bad times in cycle 2. Survival sometimes more important than profits, sales, and market share vi. Social responsibility 1. Forgo higher profit to improve customers and society 2. Charities, public institutions, medical drugs b. Identify pricing constraints (factors that limit range) i. Demand for product 1. Number of potential buyers 2. Greater the demand, the higher the price can be set. 3. Price must be within a window ii. Stage in product life cycle 1. Willing to pay more in introduction 2. Due to patents and limited competition iii. Single product vs. product line 1. Must be priced consistent with others based on features provided 2. Meaningful price differentials must communicate value to customers iv. Cost of producing 1. Fixed and variable costs 2. In the long run, price must be above ATC v. Cost of changing prices
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1. Actually costs money to change price 2. Most firms change the price once per year vi. Type of competitive market 1. No constraint on monopoly because price can be set however they want 2. No constraint on perfect competition because price is set and immutable 3. Constraint on oligopoly is based on the leaders of the industry 4. Constraint on monopolistic competition is based on non-price factors vii. Competitor’s prices 1. Must know or anticipate what price competitors are and will charge 2. Prices must be competitive with prices from other firms viii. Legal and ethical issues 2) Estimate demand and revenue a. Demand i. Demand curve 1. Consumer tastes 2. Price and availability of substitutes 3. Consumer income ii. Movement along vs. shift of a demand curve b. Revenue i. Total revenue (TR = PxQ) is total money received from sales ii. Average revenue (AR = TR/Q = P) is average amount received per product sold iii. Marginal revenue (MR = ∆TR/∆Q) is change in total revenue that results from producing and marketing one additional unit c. Elasticity i. Percent change in quantity demanded/Percent change in price ii. Elastic is when E>1 should lower the price to increase revenue iii. Elastic is when E<1 should raise the price to increase revenue iv. Unit elastic when E=1 profit is at its maximum v. Determined by number of substitutes, how necessary the
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Outline - Steps in setting price 1 Identify Pricing...

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