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Marketing: Chapter 18
Price Setting in the Business World
Terms in this set (34)
A dollar amount added to the cost of products to get the selling price. (Ex. CVS buys shampoo for $2.40 and sells it for $3.60, their markup is $1.20).
Mean the percentage of selling price that is added to the cost to get the selling price.(Ex. CVS shampoo ex. 33.33%).
The sequence of markups firms use at different levels in a channel - determines the price structure in the whole channel. The markup is figured on the selling price at each level in the channel.
The number of times the average inventory is sold in a year.
Means adding a reasonable markup to the average cost of a product.
Total Fixed Cost
The sum of those costs that are fixed in total - no matter how much is produced.
Total Variable Cost
The sum of those changing expenses that are closely related to output - expenses for parts, wages, packaging materials, outgoing freight, and sales commissions.
The sum of total fixed and total variable costs.
Average Cost (per unit)
Total cost divided by the output quantity.
Average Fixed Cost
Fixed Cost divided by output quantity.
Average Variable Cost
Variable Cost divided by output quantity.
Target Return Pricing
Adding a target return to the cost of a product - has become popular in recent years.Within this approach, the price setter seeks to earn (1) a percentage return on the investment (say 10% per year) or (2) a specific total dollar return.
Break Even Analysis
Evaluates whether the firm will be able to cover all of its costs with a particular price.
Break Even Point (BEP)
The quantity where the firm;s total costs will just equal to its total revenue. BEP = (Fixed Cost / Fixed cost contribution per unit).
Fixed Cost (FC) Contribution Per Unit
The assumed selling price per unit minus the variable cost per unit.
The change in total revenue that results from the sale of one more unit of a product.
The change in total cost that results from producing one more unit.
Rule for Maximizing Profit
The highest profit is earned at the price where marginal cost is just less than or equal to marginal revenue.
The extra profit on the last unit. When a firm is looking for the best price to charge, it should lower the price - to increase the quantity it will sell - as long as the last unit it will sell will still yield additional profit.
Usually sets price for all to follow, perhaps to maximize profits or get a target return on investment.
Value in Use Pricing
Setting prices that will capture some of what customers will save by substituting the firm's product for the one currently being used.
The price consumers expect to pay.
Setting some very low prices - real bargains - to get customers into retail stores. the idea is not only to sell large quantities of the leader items but also to get customers into the store to buy other products.
Setting some very low prices to attract customers but trying to sell more expensive models or brands once the customer is in the store.
Setting prices that have special appeal to target customers.
Setting prices that end in certain numbers. Fore example, product selling below $50 often end in 5 or 9 , $24.95 or .49. For higher priced items they are often $1 or $2 less than the selling price, ex. $99 vs $100. this is because sellers think that buyers will react better to the lower price.
Setting a few price levels for a product line and then marking all items at these prices.This approach assumes that customers have a certain reference price in mind that they expect to pay for a product. (Ex. Neckties can be priced between $20 and $50 but they won't be sold at $20, $21, $22 ... instead they will be priced at $20, $30, $40 and $50).
Setting an acceptable final consumer price and working backward to what a producer can charge.
Setting a rather high price to suggest high quality or high status. Some buyers want high quality so they look for high price and if they see a low price they will think the quality is cheap.
Setting prices for a whole line of products. In one case, the products in the line are all aimed at the same target market and so the prices are logically related. In the other case, the products are aimed at completely different target markets and so the products in a line vary.
Complementary Product Pricing
Setting prices on several products as a group. This may lead to one product being priced very low but the profits from another product will increase, thus increasing groups profits. (Ex. $14.99 Razor and $10.99 4 pack refills).
Product Bundle Pricing
Setting one price for a set of products. Ex. A bank offering a single price for safety deposit box, travelers checks and a savings account.
Means offering a specific price for each possible job rather than setting a price that applies for all customers.
A price set based on bargaining between the buyer and the seller.
This set is often in folders with...
Marketing: Chapter 15
Marketing; Chapter 16
Marketing: Chapter 17
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