Marketing Chapter 18

breakeven point

(Total fixed costs) / (rev/unit - vc/unit)

markup

a dollar amount added to the cost of products to get the selling price should cover the cost of production and the cost of anticipated selling and administrative expenses and include an amount for profit

channel strategy

How flexible- do different customers receive different pricing? • Robinson Patman • Who pays transportation? • Discounts and allowances? • What tasks do I want the channel to perform? • Price changes over lifecycle • Impact on price to consumer

customers are sometimes less price sensitive if there are...

*switching costs*: costs that a customer faces when buying a product that is different from what has been purchased or used in the past switching from an android to an apple: means getting new chargers, trying to get Microsoft products on apple can be pricy, switching ways to get music.

price sensitivity

-the impact of substitutes on price sensitivity is greatest when it is easy for customers to compare prices -people tend to be less price sensitive when someone else pays the bill or shares the cost

ignoring demand is the major weakness of average-cost pricing

-unless the demand curve is considered, a marketing managers might set a price that does not even cover costs -average costs is simple in theory but fails in practice -don't ignore competitors cost

selling

higher

pricing policies are legal if they meet one of the following

Cost differences Meeting competition Products are tangibly different

where the product starts and ends

Raw goods→ manufacturer → wholesaler → retailer → consumer

gross margin

a standard markup is often set close to a firms gross margin net sales - COGS = gross margin

average cost pricing

adding a reasonable markup to the average cost of a product -can be dangerous because it does not make allowance for cost variations as output changes -there are a variety of costs

why does the retailer get the highest markup?

because they are most prone to theft, natural disasters, items to become obsolete

too much price cutting....

erodes profits

marginal analysis

focuses the changes in total revenue and total cost from selling one more unit to find the most profitable P and Q -shows how costs, rev, and profit change at different prices

cost

lower

bid pricing

means offering a specific price for each possible job, rather than setting a price that applies for all customers companies that offer cleaning services: each job is priced differently depending on the size of the space to clean or how hard that space is to clean

psychological pricing

means setting prices that have special appeal to target customers

value in use pricing

means setting prices that will capture some of what customer will save by substituting the firm's product for the one currently being used How much will the customer save? ex: a producer of a computer controlled machines used to assemble cars knows that the machine does not just replace a standard machine. It also reduces labor costs and quality control costs Ex: purchasing a new dishwasher that requires less soap to be used and that is faster

leader price

means setting some very low prices, real bargins, to get customers into retail stores the idea is not only to sell to large quantities of the leader items but also to get customers into the store to buy other products LEGAL

Demand oreiented methods

prestige value in use auctions sequential reductions reference leader and bait psychological odd even price lining demand backward

price lining

setting a few price levels for a product line and then marketing all items at these prices -advantage: simplicity -sales increase -they can offer bigger variety for each price class -easier to get customer to make decision with in one price class Pay Less shoe store using this -Shoes are priced at $20, $30, or $40

prestige pricing

setting a rather high price to suggest high quality or high status Ex: Canada Goose

demand backward pricing

setting an acceptable final customer price and working backward to what a producer can charge

product bundle pricing

setting one price for a set of products its cheaper to buy them together than separate pizza combos when ordering Dominos movie theatre concession stand

full line pricing

setting prices for whole line of products All of bath and body work's winter candles in the winter candles line are the same price

complementary pricing

setting prices on several products as a group ex: one product being priced very low, so the profits from another product will increase ex: When Gillette introduced the M3Power battery powered wet shaving system, the shaver, two blade cartridges, and a Duracell battery had a relativly low suggested retail price of $14.99 However the blade refill cartridges, which must be replaced frequently, come in a package of four at a hefty price of $10.99

odd-even pricing

setting prices that end in certain numbers -prodcuts below $50 often end in the #5 or 9 -prices for higher priced products are often $1 or $2 below the next even dollar figure

bait pricing

setting some very low prices to attract customers but trying to sell more expensive models or brands once the customter is in the store -criticized for being unethical, but it is legal offer a steal but then use *sales people* to convince the customer to buy the "better" more expensive item BAIT AND *SWITCH* IS ILLEGAL

total variable costs

sum of changing expenses that are closely related to output

stockrate

the number of firms the average inventory is sold in a year a low stock rate may be bad for products -increased inventory carrying cost ties up working capital -high=good because you are getting your inventory sold fast

reference price

the price they expect to pay for many of the products they purchase ex: a person who really enjoys reading might have a higher reference price for a popular paperback book than another person who is only an occasional reader if a firms value is lower than a customer's reference price, a customer may view that product as better Ex: My reference price for a banana is 20 cents

markup chain

the sequence of markups firms use at different levels in a channel determines the price structure in the whole channel -high markups don't always mean big profits -lower markups can speed turnover and the stockturn rate Strategy: Low mark-up = high stock turn

total cost

the sum of TFC and TVC

total fixed costs

the sum of those costs that are fixed in total no matter how much is produced -rent, depreciation, managers salaries, taxes, insurance

markup percent

unless otherwise stated, this means the % of selling price that is added to the cost to get that *selling price* • Two methods to calculate: • Based on *selling price*: is the percentage of selling price that is added to the cost to get the selling price percent of selling price unless otherwise noted*HIGHER* • Based on *Cost*: is the percentage of cost that is added to the cost to get the selling price. *LOWER*