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Lecture 10

ADMS 2200 Lecture Notes - Lecture 10: Tag Heuer, Pricing Strategies, Profit MaximizationPremium


Department
Administrative Studies
Course Code
ADMS 2200
Professor
Kim Snow
Lecture
10

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Lecture 10 - Pricing Concepts and Strategies (Chapter 10)
Pricing Objectives and the Marketing Mix
Profitability Objectives
o Consumers must be convinced they are receiving good value for their
money
o Intense competition results from competition for leadership position
o Basic formulas for profit and revenue
Profits = Revenue Expenses
Total Revenue = Price x Quantity Sold
o Marginal Analysis Method of analyzing the relationship among costs,
sales price, and increased sales volume
o Profit Maximization Point at which the additional revenue gained by
increasing the price of a product equals the increase in total costs
o Target-return Objectives Short-run or Long-run pricing objectives of
achieving a specified return on either sales or investment.
Volume Objectives
o Belief that increased sales volume is more important in the long run than
immediate profits
o Can maximize sales through pricing and non-price factors such as services
and quality
o Market-share objectives The goal of controlling a specified minimum
share of the market for a firm’s good and services.
o The PIMS Studies (Profit Impact of Market Studies project) Discovered a
strong positive relationship between market share and product quality
and a firm’s return on investment.
Firms with market share more than 40 percent have average
return on investment of 32 percent (firms with large shares
accumulate greater operating experience and lower overall costs
relative to competitors with smaller market shares)
Meeting Competition Objectives
o Firms sometimes set prices to match established industry price leaders
o Shifts marketing mix to focus on non-price variables
o Value Pricing Pricing strategy emphasizing benefits derived from a
product in comparison to the price and quality levels of competing
offerings
Works best for relatively low-priced goods and services
Challenge is convincing customers that low-priced brands offer
quality comparable to that of a higher-priced product.
Prestige Objectives
o Establishing a relatively high price to develop and maintain an image of
quality and exclusiveness that appeals to status-conscious consumers.
o Example: Tag Heuer watches.

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Pricing Objectives of Not-for-profit Organizations
o Pricing strategy helps them achieve specific goals:
Profit maximization
Cost recovery
Market incentives
Market suppression
Methods for Determining Price
Prices are traditionally determined in two basic ways:
o Supply and demand
o Cost-oriented analyses
Customary Prices Traditional prices that customers expect to pay for certain
goods and services
Price Determination in Economic Theory
Demand The amounts of a firm’s product that consumers will purchase at
different prices during a specified time.
Supply The amounts of a good or service that will be offered for sale at
different prices during a specified time.
Pure Competition A market structure with so many buyers and sellers that no
single participant can significantly influence price.
Monopolistic Competition Diverse parties exchange heterogeneous, relatively
well-differentiated products, giving marketers some control over prices
Oligopoly Relatively few sellers, each has large influence on price
Monopoly Only one seller of a product exists and for which there are no close
substitutes.

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Cost and Revenue Curves
A product’s total cost is composed of total variable costs and total fixed costs
Variable Costs Change with the level of production (Raw materials and labour
costs)
Fixed Costs Remain stable at any production level within a certain range (Lease
payments and insurance costs)
Average Total Cost Costs calculated by dividing the sum of the variable and
fixed costs by the number of units produced.
Marginal Cost Change in total cost that results from producing an additional
unit of outputs.
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