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Price vs Value
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price: amount of money needed to acquire a product or service (cost of the buyer)
value: ratio of perceived benefits to price (perceived benefit/price)
value: ratio of perceived benefits to price (perceived benefit/price)
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Optimal Price Range
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Below value customer perceives in product yet above cost of goods sold
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Profit Equation
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Profit = Total revenue − Total cost; or Profit = (Unit price × Quantity sold) − (Fixed cost + Variable cost).
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Fixed costs
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Costs that do not vary with the quantity of output produced
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Variable costs
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costs that vary with the quantity of output produced
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Percent Margin
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(price - unit variable cost) / price
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Unit Contribution
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unit contribution = unit price - unit variable cost
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Total Contribution
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(Price - Average Variable Cost) x Volume
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Break Even Point
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the point at which the costs of producing a product equal the revenue made from selling the product
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Break even equation
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fixed cost / (unit price - unit variable cost)
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Hotel vs rundown grocery store
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We expect the price of goods to be different even for the same products at these two locations. Perceived fairness affects price consumers will accept.
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Factors affecting profit
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nature of the product: discretionary vs necessity and luxury vs. utilitarian
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Steps in setting price
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1. Select the pricing objective
2. Determine demand
3. Estimate company costs
4. Know competitors' prices
5. Select pricing method
2. Determine demand
3. Estimate company costs
4. Know competitors' prices
5. Select pricing method
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Price skimming
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Charging the highest possible price that buyers who most desire the product will pay. May involve lowering price over time to take lower and lower tier of consumer surplus
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Price pentration
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low prices at first to capture high market share
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Elastic demand curve
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when a given percentage price change leads to a larger percentage change in quantity demanded
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inelastic demand curve
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when a given percentage price change leads to a smaller percentage change in quantity demanded
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Golden goose pricing
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Starts with understanding consumers like value pricing, but then businesses become greedy and price a product to high which invites competitors and ruins the market share
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cost-plus pricing
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summing the total unit cost of providing a product or service and adding a specific amount to the cost to arrive at a price
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value-based pricing
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fair price considering competition and what customers are willing to pay. Price high enough to recover value but low enough not to attract new competitors
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Competitive pricing
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occurs when producers sell products at lower prices to lure customers away from rival producers, while still making a profit
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prestige pricing
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charging a high price to help promote a high-quality image
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promotional pricing
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temporarily pricing products below the list price, and sometimes even below cost, to increase short-run sales
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