Chapter 10
Types of costs
Fixed costs Variable costs Total costs
Cost-based pricing
adds a standard markup to the cost of the product markup price= unit cost (1-desired rate of return)
Fixed costs
are the costs that do not vary with production or sales level Rent Heat Interest Executive salaries
Variable costs
are the costs that vary with the level of production Packaging Raw materials
Total costs
are the sum of the fixed and variable costs for any given level of production
Value-added pricing
attaches value-added features and services to differentiate offers, support higher prices, and build pricing power
Price elasticity of demand
illustrates the response of demand to a change in price
Everyday low pricing (EDLP)
involves charging a constant everyday low price with few or no temporary price discounts
High-low pricing
involves charging higher prices on an everyday basis but running frequent promotion to lower prices temporarily on selected items
Cost-based pricing
involves setting prices based on the costs for producing, distributing, and selling the product plus a fair rate of return for its effort and risk
Pure competition
is a market with few many buyers and sellers trading uniform commodities where no single buyer or seller has much effect on market price
Oligopolistic competition
is a market with few sellers because it is difficult for sellers to enter who are highly sensitive to each other's pricing and marketing strategies
Monopolistic competition
is a market with many buyers and sellers who trade over a range of prices rather than a single market price with differentiated offers.
Pure monopoly
is a market with only one seller. In a regulated monopoly, the government permits a price that will yield a fair return. In a non-regulated monopoly, companies are free to set a market price.
Pricing power
is the ability to escape price competition and to justify higher prices and margins without losing market share
Price
is the amount of money charged for a product or service. It is the sum of all the values that consumers give up in order to gain the benefits of having or using a product or service.
Target profit pricing
is the price at which the firm will break even or make the profit it's seeking
Break-even pricing
is the price at which total costs are equal to total revenue and there is no profit
Average cost
is the total cost divided by the level of output
Experience or learning curve
is when the average cost falls as production increases because fixed costs are spread over more units
Elastic demand
occurs when demand changes greatly for a small change in price
Inelastic demand
occurs when demand hardly changes when there is a change in price
Good-value pricing
offers the right combination of quality and good service to fair price
Other external factors
-Economic conditions -Resellers' response to price -Government -Social concerns
External factors
-Market demand -Competitor's strategies -prices
Internal factors
-Marketing strategies -Objectives -Marketing mix
Types of markets
-Pure competition -Monopolistic competition -Oligopolistic competition -Pure monopoly
Pricing objectives include:
-Survival -Profit maximization -Market share leadership -Customer retention -relationship building -Attracting new customers -Opposing competitive threats -Increasing product excitement
Factors affecting price elasticity of demand
-Unique product -Quality -Prestige -Substitute products -Cost relative to income
Organizational considerations include:
-Who should set the price -Who can influence the prices
price elasticity of demand
= % change in quantity demand/ % change in price
break-even volume
fixed cost/(price-variable cost)
The demand curve
shows the number of units the market will buy in a given period at different prices Normally, demand and price are inversely related Higher price = lower demand For prestige (luxury) goods, higher price can equal higher demand when consumers perceive higher prices as higher quality
Target costing
starts with an ideal selling price based on consumer value considerations and then targets costs that will ensure that the price is met
Non-price
strategies differentiate the marketing offer to make it worth a higher price
Value-based pricing
uses the buyers' perceptions of value, not the seller's cost, as the key to pricing. Price is considered before the marketing program is set