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demand sets
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selling price ceiling
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cost sets
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selling price floor
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chapter 10 is about
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pricing: understanding and capturing customer value
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price
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The amount of money exchanged for a good or service OR sum of all values that customers exchange for the benefits of having or using the product or service
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what is the one element in marketing mix that produces revenue
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price - flexible and can be changed quickly
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value based pricing
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setting price based on buyers' perceptions of value rather than on the seller's cost
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what does cost based pricing do
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sets the floor for price - product driven
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customer value based pricing
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customer demand sets the ceiling on the price, as they must perceive value
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good value pricing
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offering just the right combination of quality and good service at a fair price
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everyday low pricing (EDLP)
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involves charging a constant everyday low price with few or no temporary price discounts
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high-low pricing
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involves charging higher prices on an everyday basis but running frequent promotions to lower prices temporarily on selected items
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contribution margin
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price minus variable cost
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value added pricing
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involves adding more customer valued features and services to differentiate what the company offers and justifies their higher prices
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cost based pricing
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sets prices based on the costs for producing, distributing, and selling the product plus a fair rate of return for effort and risk
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fixed costs
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Costs that do not vary with production or sales level. ex: rent, heat, interest, executive salaries
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total fixed costs (TFC)
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all the fixed costs added together
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variable costs
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vary directly with the level of production. ex: raw materials or packaging
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why is it important to figure out your break even point?
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you know where you make zero dollars, from that you can go up in pricing to make the amount of profit you want
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total costs
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the sum of the fixed and variable costs for any given level of production
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experience curve
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the decline in unit costs of production as cumulative output increases
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downward sloping experience curve means...
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company's unit production cost falls, but falls faster if company makes and sells more during a given time period
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cost plus pricing
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adding a standard markup to the cost of the product - simplest pricing method
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benefits of cost plus pricing
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sellers are certain about costs, price competition is minimized, buyers feel it is fair
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disadvantages to cost plus pricing
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Ignores demand and competitor prices
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break even pricing
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setting price to break even on the costs of making and marketing a product, or setting price to make a target return
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formula for finding break even price
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total fixed costs/ (price - variable cost)
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target return pricing
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occurs when firms employ pricing strategies designed to produce a specific return on their investment, usually expressed as a percentage of sales.
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what type of pricing utilizes a break even chart?
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target return pricing - because it shows total cost and revenue expected at different sales volume levels
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competition based pricing
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setting prices based on competitors' strategies, prices, costs, and market offerings
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orienting point for your price
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what the competition is pricing at - customers will compare against it
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factors that affect price decisions
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overall marketing strategy, target market and positioning, market and demand, economy and other external factors
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target costing
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starts with an ideal selling price based on consumer value considerations and then targets costs that will ensure that the price is met
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market and demand
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Before setting prices, the marketer must understand the relationship between price and demand for its products
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pure competition
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A market structure with many competitors selling virtually identical products. Barriers to entry are quite low. - more elastic
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pure monopoly
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the only supplier of a unique product with no close substitutes - fairly inelastic
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demand curve
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shows number of units the market will buy in a given period at different prices
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higher price =
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lower demand
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price elasticity
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a measure of the sensitivity of demand to changes in price
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inelastic demand
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when demand hardly changes with a small change in price
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elastic demand
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when demand changes greatly with a small change in price
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economy and other external factors affecting price
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economic conditions, reseller's response to price, government, and social concerns
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