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Price
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The amount of money charged for a product or service, or the sum of all the values that customers exchange for the benefits of having or using the product or service
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Value-based pricing (Customer value-based pricing)
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uses the buyer's perceptions of value rather than the seller's cost
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Value based pricing is
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customer driven
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cost-based pricing is
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product driven
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Cost based pricing steps
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Design a good product
Determine product costs
Set price based on cost
Convince buyers of the product's value
Determine product costs
Set price based on cost
Convince buyers of the product's value
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Value-based pricing steps
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Assess customer needs and value perceptions
Set target price to match customer perceived value
Determine the costs that can be incurred
Design product to deliver desired value at target price
Set target price to match customer perceived value
Determine the costs that can be incurred
Design product to deliver desired value at target price
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Good-value pricing (Customer-based value)
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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) (Customer-based value)
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Changing a constant everyday low price with few or no temporary price discounts
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High-low pricing (Customer-based value)
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charging higher prices on an everyday basis but running frequent promotions to lower prices temporarily on selected items
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Value-added pricing (Customer-based value)
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attaches value-added features and services to differentiate the company's offers and thus 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
Ex.: rent, heat, interest, executive salaries
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Variable costs
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vary directly with the level of production
Ex.: raw materials, packaging
Ex.: raw materials, packaging
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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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Cost-plus pricing (Cost-base)
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adds a standard markup to the cost of the product
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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
Price competition is minimized
Buyers feel it is fair
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Disadvantages of cost-plus pricing
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ignores demand and competitor prices
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Break-even pricing (target return pricing) (Cost-based)
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setting price to break even on costs or to make a target return
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Competition-based pricing
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setting prices based on competitors' strategies, costs, prices, and market offerings
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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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Pure competition
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Many different buyers and sellers, impossible for any one participant to alter the price in the market
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Monopolistic competition
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Numerous competitors in the market, but each competitor is so differentiated from the others that some can charge greater prices than a perfectly competitive firm.
Example: music market
Example: music market
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Oligopolistic competition
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Handful of producers that make up the majority of the production in the market
Can collude with each other to set prices
Can collude with each other to set prices
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Pure Monopoly
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One producer of a good and no substitutes
Can charge whatever price they want
Can charge whatever price they want
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Unit cost formula
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Variable cost per unit + (fixed costs/unit sales)
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Markup price formula
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unit cost/(1-desired return on sales)
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ROI price formula
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unit cost + (ROI x Investment)/unit sales
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Contribution/unit formula
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price - variable costs
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Contribution margin
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(price-variable costs)/price
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Break-even volume in units
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fixed costs/(price-variable costs)
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Breakeven volume in sales
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fixed costs/CM
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Unit volume in sales
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fixed costs/((1-profit goal x price)-variable costs)
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