ch. 19 and 20 Pricing student version

ch. 19 and 20 Pricing student version - Ch. 19 & 20...

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© 2010 Robert H. Smith School of Business University of Maryland Professor Whitney Fall 2010
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© 2010 Robert H. Smith School of Business University of Maryland What is Price? Sacrifice Effect of Price What is sacrificed to get a good or service Money, Time Information Effect of Price Infer quality information based on price Higher quality = higher price Convey status Value Based upon Perceived Satisfaction Reasonable Price = Perceived Reasonable Value If price is too high, sales may be lost because not reasonable. Exchange based on expectation of satisfaction Ch. 19 How does this impact Apple’s pricing?
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© 2010 Robert H. Smith School of Business University of Maryland The Importance of Pricing Decisions Price X Sales Unit = Revenue Revenue – Costs = Profit Profit drives growth, salary increases, and corporate investment Prices too low may mean revenue isn’t as high as it could be, if the lower prices don’t increase sales proportionately.
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© 2010 Robert H. Smith School of Business University of Maryland Profit-Oriented Pricing Objectives Profit-Oriented Pricing Objectives Profit Maximization Profit Maximization Satisfactory Profits Satisfactory Profits Target Return on Investment Target Return on Investment
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© 2010 Robert H. Smith School of Business University of Maryland Return on Investment ROI = Net Profit after taxes Total assets Assume assets are $5 million, net profits are $400,000 and Target ROI was 10% ROI = $400,000 / $5,000,000 = 8% Pricing didn’t meet their goal. Net profit after taxes divided by total assets.
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© 2010 Robert H. Smith School of Business University of Maryland Sales-Oriented Pricing Objectives Market Share Market Share Sales Maximization Sales Maximization Sales-Oriented Pricing Objectives
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© 2010 Robert H. Smith School of Business University of Maryland Status Quo Pricing Objectives Maintain existing prices Maintain existing prices Meet competition’s prices Meet competition’s prices Status Quo Pricing Objectives
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© 2010 Robert H. Smith School of Business University of Maryland The Demand Curve
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© 2010 Robert H. Smith School of Business University of Maryland The Supply Curve
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© 2010 Robert H. Smith School of Business University of Maryland 10 Price Equilibrium
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© 2010 Robert H. Smith School of Business University of Maryland Elasticity of Demand Elasticity ( E ) = Percentage change in quantity demanded of good A Percentage change in price of good A If E is greater than 1, demand is elastic. If E is less than 1, demand is inelastic. If E is equal to 1, demand is unitary. LO 3 Price of A was $5.00 and changed to $6 Demand for A at $5 was 5,000,000 units Demand for A at $6 was 4,500,000 units What is the Elasticity?
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© 2010 Robert H. Smith School of Business University of Maryland Elasticity of Demand Q Q 1 Q Q 2 Quantity Quantity P P 1 Price P P 2 Q Q 1 Q Q 2 Quantity Quantity P P 1 P P 2 Elastic Inelastic Typically an inverse relationship. Higher price results in lower demand.
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© 2010 Robert H. Smith School of Business
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ch. 19 and 20 Pricing student version - Ch. 19 & 20...

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