Sunday, November 2, 2014

Blog 7: The Science of Price



           As I was reading chapter 13 of my Marketing textbook I was intrigued at the art of pricing a product.  Price is such an important part of a product in my mind because it essentially can be the make or break factor for a customer.  The following blog explains the idea behind this important factor by outlining the chapter within my marketing textbook.
            First we will start out with the basics.  Price is the overall amount of money or considerations an individual must exchange to own the product.  The final price an individual must pay to own a product is computed in the following equation:
Final Price= (List Price)- (Incentives and Allowances)+(Extra Fees)
            In my mind, I always thought value was a mere word and that it fluctuated with each buyer, meaning different objects had different values to certain individuals.  In reality value is based off of the benefits to price ratio, which certain marketers use to create value pricing which is increasing value in products or services but maintaining or decreasing them in price.  Value can be computed with the following formula:
Value=Perceived Benefits/Price
            In order for a firm to set a price on a product they must consider many things such as profit and other associated factors.  When a company sets a price they go through a six-step process known as price in the marketing mix.  The steps are as follows:
1.     Identify pricing objectives and constraints
2.     Estimate demand and revenue
3.     Determine cost, volume, and profit relationships
4.     Select an approximate price level
A company’s objectives can vary depending on each firm.  Some objectives include profit, sales, market share, or social responsibilities.  All companies experience constraints such as demand, cost of production, and newness of the product.

A simple way to estimate demand for a product is through demand curves which relate the quantity of goods sold and the price at which said goods were sold for.  However economists also state that consumer tastes, availability, and consumer income can have a big impact on demand.  In order to estimate revenues companies utilize a revenue curve which is based off of total revenues which are found using the formula TR=PxQ or Unit price X quantity sold. 

Determining costs is a critical measure for any decisions based upon price.  The main costs that should be studied are total cost (TC), Fixed Cost (FC), Unit variable cost (UVC) and marginal cost (MC).
·       Total cost is the total expense a firm incurs whiling producing an item and is found by doing the following calculation: TC= FC+VC
·       Fixed Costs are expenses that do not change throughout the production of a product whereas variable costs are costs that can change.
·       Unit variable cost is variable cost except calculate don a per unit basis: UVC= VC/Q
·       Marginal cost is the change in total cost that results from producing one additional unit of a product or MC= Change in TC/1 unit increase in Q.

One calculation that I was recently introduced to was the break-even point formula.  We had to do this in our market simulations in order to determine the quantity in which to sell at where our total revenues equal total costs meaning the least we can sell without losing money.  This is found by doing the formula BEPQuantity= FC/P-UVC.
            Once all of these steps are completed we can at last determine a price for the product.  The reason this process is so extensive is that price truly is a major factor of marketing and can ultimately determine a products success rate, which will then reflect the success rate of a company.  In order for a company’s product to be successful for both consumers and the business it must be set at the right price.

The information above is an outline of Ch.13 in Marketing by Roger A. Kerin, Steven W. Hartley and William Rudelius, the 11th Edition

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