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Unformatted text preview: Chapter 11 Price the Product Price: The assignment of value, or the amount the consumer must exchange to receive the offering Includes money, goods, services, favors, votes, or anything else that has value to the other party Steps in Price Planning Step 1: Develop Pricing Objectives Pricing objectives take many forms: Sales or market share objectives Profit objectives Competitive effect objectives Customer satisfaction objectives Image enhancement objectives Step 2: Estimate Demand Demand: Customers desire for a product How much of a product are customers willing to buy as its price goes up or down? Law of demand: For most products, as price goes up, quantity demanded goes down For prestige products, a price increase may actually result in an increase in quantity demanded Shifts in Demand: Typical demand curves assume that only price changes, but in reality, other factors can shift demand upward or downward Changes in marketing strategy (improved product, new advertising) Non-marketing activities (product recalls, development of new technologies, etc.) Estimating Demand Total demand: Number of buyers * average amount of each buyers purchase Firms demand: Total demand * the firms estimated share of the market Demand estimates should be adjusted if competition, the economy, or other factors change Price Elasticity of Demand: The percentage change in unit sales that results from a percentage change in price When changes in price have large effects on the amount demanded, demand is elastic When changes in price have little or no effect on the amount demanded, demand is inelastic Elastic Demand Revenues decrease as price increases and vice versa Non-necessities (pizza) generate elastic demand Availability of close substitute products facilitates elastic demand Inelastic Demand As price increases, revenues increase The demand for necessities such as food and electricity is generally inelastic Cross-elasticity of Demand: Changes in the prices of other products affect a products demand If products are substitutes, an increase in the price of one will increase demand for the other (bananas vs. strawberries) If one product is essential for use of second, an increase in the price of one decreases demand for another (Example: increasing price of gas lowers demand for tires) Step 3: Determine Costs Variable costs: Costs of production that are tied to and vary depending on the number of units produced Average variable costs may change as the number of products produced changes Fixed costs: Costs of production that dont change with the number of units produced Rent, cost of owning/maintaining factory, utilities, equipment, fixed salaries of a firms executives Average fixed cost per unit will decrease as the number of units produced increases Total costs: Total of fixed costs and variable costs for a set number of units produced...
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- Fall '10