Chapter 10 - Pricing

Short Run Average Cost (SRAC) vs. Long Run Average Cost (LRAC)

Compared on a "Cost per unit" and "Quantity produced per day" graph. Shows what quantity per day would be cost efficient.

Total Costs

The sum of the fixed and variable costs for any given level of production.

OTHER INTERNAL AND EXTERNAL CONSIDERATIONS AFFECTING PRICE DECISIONS

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Demand Curve

A curve that shows the number of units the market will buy in a given time period, at different prices that might be changed.

Price Elasticity

A measure of the sensitivity of demand to changes in price. Price elasticity of demand= % change in quality demanded/% change in price

Cost-Plus Pricing (markup pricing)

Adding a standard markup to the cost of the product. Markup Price= unit cost/(1-desired return on sales)

Value-Added Pricing

Attaching value-added features and services to differentiate a company's offers and charging high prices. Ex. Muvico adds extra features, charges more per ticket, to differentiate between competition.

Fixed Cost (overhead)

Costs that do not vary with production or sales level.

Variable Costs

Costs that vary directly with the level of production.

MAJOR PRICING STRATEGIES

Customer value-based pricing, cost-based pricing, and competitive-based pricing Product Cost <-> Comp/External <-> Value Perception

Pure Competition

Market consists of many buyers and sellers trading in a uniform commodity. Ex. wheat, copper, financial securities.

Monopolistic Competition

Market consists of many buyers and sellers who trade over a range of prices rather than a single market price.

Oligopolistic Competition

Market consists of only a few large sellers. Ex. Wireless phone service

Pure Monopoly

Market dominated by one seller. Government- US Postal Service Private Regulated- Power Companies Private Unregulated- Diamonds

Price Ceiling

No demand above this price.

Price Floor

No profits below this price.

Good-Value Pricing

Offering just the right combination of quality and good service at a fair price. Ex. Dollar menus, "basic" versions of products, smaller car models with less features

Target Costing

Pricing that starts with an ideal selling price, then target costs that will ensure that the price is met.

Customer Value-Based Pricing

Setting price based on buyers' perception of value rather than on the seller's cost. Assess customer needs and value perception - Set target price to match customer perceived value - Determine costs that can be incurred - Design product to deliver desired value at target price

Break-Even Pricing (Target Return Pricing)

Setting price to break even on the cost of making and marketing a product, or setting price to make a target return.

Competition-Based Pricing

Setting prices based on competitors' strategies, prices, costs, and market offerings.

Cost-Based Pricing

Setting prices based on the costs of producing, distributing, and selling the product plus a fair rate of return for effort and risk. Design a good product - Determine product costs - Set price based on cost - Convince buyers of product's value

Price

The amount of money charged for a product or service, or the sum of the values that customers exchange for the benefit of having or using the product or service.

Experience Curve (learning curve)

The drop in the average per-unit production cost that comes with accumulated production experience. "Cost per unit" vs "Accumulated Production" graph.