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| Two major methods to set prices |
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Set price using markups
Set price based on average cost |
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Calculation of price with a 44% markup
Retailer buys a shirt for $25.00
44% markup = 25/(1-.44) = selling price of $45.00 |
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| adding a reasonable markup to the average cost of a product |
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| (per unit) dividing total cost by related quantity |
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| costs that vary depending on output |
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| is the sum of total variable cost and fixed cost |
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| per unit divide total variable cost by total quantity sold/produced. |
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| dollar amount added to the cost of the products to get the selling price |
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| is obtained by dividing total variable cost by the related quantity. |
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• pricing is using average cost based on future cost savings due to volume
• Over time as an industry gains experience producing an item, its costs decrease.
• Risk is that cost savings may never occur
• Ignores competitors’ costs |
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| the number of units where revenue equals costs. |
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| Calculate Break-Even Point |
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Total Fixed Costs/ (price – variable costs)= BEP
Total fixed costs/contribution margin per unit= BEP
Example: Selling price $1.20, variable cost is$. 80 Total fixed costs is $30,000
BEP=$30,000/($1.20 -.80) = 75,000 units |
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| Understand the concept of marginal analysis to set prices |
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Marginal analysis focuses on the changes in total revenue and total costs from selling one additional unit
Marginal analysis shows how profit changes at different prices
Profit is the largest when marginal revenue equals marginal cost |
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| Which means setting prices that will capture some of what customers will save by substituting the firm's product for the one currently being used. For example, a producer of computer-controlled machines used to assemble cars knows that the machine doesn’t just replace a standard machine. |
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| Where buyers and sellers can come together and complete a transaction. |
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| The price they expect to pay- for many of the products they purchase. For example 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. |
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| 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 story to buy other products. |
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| Is setting some very low prices to attract customers but trying to sell more expensive models or brands on the customer is in the store. For example, a furniture store may advertise a color TV for $199. But once bargain hunters come to the store, salespeople point out the disadvantages of the low-priced TV. |
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| Means setting prices that have special appeal to target customers. People think there are whole ranges of prices that potential customers see the same. |
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| is setting prices that end in certain numbers. For example, products selling below $50 often end in the number 5 or the number 9-such as 49 cents or $24.95. Prices for higher-priced products are often $1 or $2 below the next even dollar figure-such as $99 rather than $100. |
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| is 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. |
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| is setting an acceptable final consumer price and working backward to what a producer can change. It is commonly used by producers of consumer products, especially shopping products such as women’s clothing and appliances. |
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