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Step 1
identify pricing objectives
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pricing objectives
specifying the role of price in an organization's marketing and strategic plans
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profit (three objectives)
- 1. managing long run profits
- 2. maximizing current profit
- 3. generate profits in global market place
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Pricing Objectives (6)
Profit, sales, market share, unit volume, survival, social responsibility
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Pricing Constraints (7)
demand for product, newness of product, single product vs product line, cost of producing/marketing product, costs of changing prices/time period, competitive market, competitor's price
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Pure Competition
market sets price, products are identical, little purpose is to inform prospects that seller's products are available
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Monopolistic Competition
many sellers who compete on nonprice factors, some compete over range of prices, some differentiate products from competitors, much purpose is to differentiate firms products from competitors
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Oligopoly
few sellers who are sensitive to each other's prices, some price leader or follower of competitors, various product differentiation, avoid price competition,
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Pure Monopoly
one seller who sets the price for a unique product, no price competition, no other products (no need for differentiation)
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Step 2
estimate demand and revenue
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the demand curve and its constraints
graph relating the quantity sold and price, which shows the maximum number of units that will be sold at a given price. consumer tastes, price and availability of similar products, consumer income
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an increase in demand
shifts it to the right
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Elasticity of demand
percentage change in quantity demanded relative to a percentage change in price (Q2-Q1)/(Q2+Q1/2) / (P2-P1)/(P2+P1/2)
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elastic demand
1% decrease in price products more than a 1% increase in quantity demanded- increasing sales revenues
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Inelastic Demand
1% decrease in price produces less than a 1% increase in quantity demanded, decreasing sales revenues
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more substitutes a product or service has, the more likely it is to be
elastic
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necessities are
inelastic (open heart surgery)
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items that require a large cash outlay compared with a person's disposable income are
elastic (cars, yachts where books are inelastic)
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step 3
determine cost, volume and profit relationships
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marginal analysis
continuing, concise trade-off of incremental costs against incremental revenues
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people will continue to do something as long as
incremental return exceeds incremental costs
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break-even analysis
analyzes the relationship between total revenue and total cost to determine profitability at various levels of output. Fixed Cost/unit price-unit variable cost;
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for profit maximization you want
MR = MC
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