After completing this unit, you should be able to: Understand how most wholesalers and retailers set their prices using markups, understand why turnover is so important in pricing, understand the advantages and disadvantages of average-cost pricing, know how to use break-even analysis to evaluate possible prices, know the many ways that price setters use demand estimates in their pricing.
Trang 1
Price Setting
in the
Business World
Trang 2Chapter 18 Objectives
1 Understand how most wholesalers
and retailers set their prices—
using markups.
2 Understand why turnover is so
important in pricing.
3 Understand the advantages and
disadvantages of averagecost
pricing.
4 Know how to use breakeven
analysis to evaluate possible
prices.
5 Understand the advantages of
marginal analysis and how to use it for price setting.
6 Understand the various factors
that influence customer price sensitivity.
7 Know the many ways that price
setters use demand estimates in their pricing.
8 Understand the important new
terms.
Trang 3Markup chain
in channels
Key Factors That Influence Price Setting
Pricing objectives
Discounts and allowances
Legal environment Price flexibility
Geographic pricing terms
Demand
Cost
Price of other products in the line
Competition
Price settin g
Trang 430.00
50.00
Cost = 24.00 = 80%
Markup = 6.00 = 20%
Cost = 21.60 = 90%
Markup = 20.00 = 40%
Exhibit 182
Markups
Trang 5Six Types of Costs
Total Cost
Average Fixed Cost
Total Variable
Cost
Average Variable Cost
Total Fixed
Cost
Average Cost
Trang 6Total revenue = Price x Quantity
$30,000 = $3.00 x 10,000
$40,000 = $2.00 x 20,000
$57,000 = $1.90 x 30,000
$66,000 = $1.65 x 40,000
$75,000 = $1.50 x 50,000
$72,000 = $1.20 x 60,000
Quantity (000)
$3.00
2.00 1.90
1.65 1.50 1.20
Prices Along the Demand Curve
Trang 7Estimated quantity to
be sold
Average fixed cost
per unit
Quantity demanded
at selling price
Cost-oriented selling
price per unit Average total cost per unit
Variable cost per unit
Profit per unit
?
Summary of Relationships
Affecting Price
Trang 8Break-even Analysis
Units of Production
Break-Even Point
Profit Area
Total Fixed Costs
Total Variable Costs
Total Cost Curve Total Revenue Curve
Loss Area
More
0
Higher
Trang 9Marginal Analysis
Quantity
Total revenue
Total cost
Best profit for quantity
at best price
= $106
= 6
= $79
800 700 600 500 400 300 200 100 0 -100 -200 -300 -400
Note: curves here are approximate (you can’t sell part of a unit!)
Trang 10Evaluating a Customer’s Price Sensitivity
Are there substitute ways of meeting a
need?
Is it easy to compare prices?
Who pays the bill?
How great is the total expenditure?
How significant is the end benefit?
Is there already a sunk investment
related to the purchase?
Trang 11Demand-Oriented Pricing
Value-in-Use
Demand-Backward Reference
Types of Demand-Oriented
Pricing
Trang 12Full-Line Pricing
Product-Bundling
Pricing?
Product-Bundling
Pricing?
Complementary
Pricing?
Complementary
Pricing?
Market- or Firm Oriented?
Market- or Firm Oriented?
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Trang 13Bid pricing means offering a specific price for each possible job. Determining costs is a complicated
process.
Negotiated pricing involves setting a price as the result
of a bargaining process between the buyer and
seller.
Bid and Negotiated Pricing
Trang 14Break-Even Analysis Break-Even Point (BEP) Fixed-Cost (FC)
Contribution per Unit Marginal Analysis
Marginal Revenue Marginal Cost
Rule for Maximizing Profit
Marginal Profit Price Leader Value in Use Pricing Reference Price
Leader Pricing Bait Pricing
Markup
Markup (percent)
Markup Chain
Stockturn Rate
Average-Cost Pricing
Total Fixed Cost
Total Variable Cost
Total Cost
Average Cost
Average Fixed Cost
Average Variable Cost
Experience Curve
Pricing
Target Return Pricing
Long-Run Target
Return Pricing
Psychological Pricing
Odd-Even Pricing Price Lining
Demand-Backward Pricing
Prestige Pricing Full-Line Pricing Complementary Product Pricing Product-Bundle Pricing
Bid Pricing Negotiated Price
Key Terms