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