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Chapter 8: Pricing Decision (Other Determinants of Price (Stages of the …
Chapter 8: Pricing Decision
Pricing Objective
Profit-Oriented
Profit
Maximization
Satisfactory
Profits
Target Return on
Investment (ROI)
ROI = Net profit after taxes/
Total assets
Sales-Oriented
Market
Share
Sales
Maximization
Status Quo
Maintain
Existing Price
The Demand Determinant
of Price
Demand Curve
The higher the price, the
fewer goods or services
consumers will demand,
and vice versa
Supply Curve
At higher prices,
manufacturers will obtain
more resources and
produce more product to
sell
Price equilibrium
The price at which demand and supply
are equal.
Elasticity of Demand
Elastic
Demand
Inelastic
Demand
Unitary
Elasticity
Elasticity (E) =
% change in quantity demanded of good A /
% change in price of good A
Other factor
Availability of
substitutes
Price relative to
purchasing power
Product durability
A product’s
other uses
Rate of inflation
Cost Determinant
of Price
Variable
Cost
Fixed Cost
Method
Markup pricing
Retail price = Cost / 1 – Markup%
Markup% = Retail price - Cost
/ Retail price
Keystoning
Profit
Maximization
Pricing
Profit Maximization occurs
when MR = MC
Break-Even
Pricing
Fixed cost
contribution = Price – average variable cost
Break-even
volume =
Fixed costs /
Fixed cost contribution
Break-even
dollar value = Price x Break-even volume
Profit goal
volume =
Fixed costs + Profit goal /
Fixed cost contribution
Profit goal
dollar value = Price x Profit goal volume
Other Determinants of Price
Stages of the
Product Life Cycle
Introductory
Stage
Growth
Stage
Maturity
Stage
Decline
Stage
Competition
Prestige Pricing
Charging a high price to help promote a high
quality image
Value-Based Pricing
Distribution Strategy
Manufacturers
Wholesalers/Retailers
Yield Management Systems
A technique for adjusting prices that
uses complex mathematical software to profitably fill unused capacity.
Promotion Strategy
Guarantee price matching
Money back guarantee
E-Commerce
E-commerce connects buyers and sellers using computer
networks such as the Internet
How to Set a Price on a
Product or Service
Establish pricing goals
Profit-Oriented
Sales-Oriented
Status Quo
Estimate demand, costs, and profits
Choose a price strategy
Price Skimming
A firm charges a high introductory price, often
coupled with heavy promotion.
Penetration Pricing
A firm charges a relatively low price for a
product initially as a way to reach the mass market.
Status Quo Pricing
Charging a price identical to or very close to
the competition’s price.
Fine tune with pricing tactics