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Opportunity Costs
The value of something that is given up to
obtain something else also affects the
price of a decision
Example: the cost of going to college is
charged in tuition and fees but also includes
the opportunity cost of what a student
cannot earn by working instead
Pricing Objectives
Estimating Demand
Demand refers to customers desire for products
How much of a product do consumers want?
How will this change as the price goes up or down?
Demand Curves
Shows the quantity of a product that
customers will buy in a market during a
period of time at various prices if all other
factors remain the same
Vertical axis represents the different prices a
firm might charge
Horizontal axis shows the number of units
Demand Curves
Time period
The longer the time period, the greater the likelihood that
demand will be more elastic
Income effect
Change in income affects demand for a product even if
its price remains the same
normal goods, luxury goods, inferior goods
Types of Costs - 1
Variable costs - per-unit costs of
production that will fluctuate depending on
how many units or individual products a
firm produces
Fixed costs - do not vary with the number
of units produced. Costs remain the same
regardless of amount produced
Types of Costs - 2
Average fixed cost is the fixed cost per unit
produced (total fixed costs / number of units
produced)
Total costs = variable costs plus fixed costs
Break-Even Analysis
Technique used to examine the relationship
between cost and price and to determine
what sales volume must be reached at a
given price before the company will
completely cover its total costs and past
which it will begin making a profit
All costs are covered but there isnt a penny
left over
Marginal Analysis
Provides a way for marketers to look at cost
and demand at the same time
Examines the relationship of marginal cost
to marginal revenue
marginal cost is the increase in total costs from
producing one additional unit of a product
marginal revenue is the increase in total income or
revenue that results from selling one additional unit of a
product
Marginal Analysis
Disadvantages
Fail to consider several
factors
target market
demand
competition
product life cycle
products image
Difficult to accurately
estimate costs
Cost-Plus Pricing
Most common cost-based approach
Marketer figures all costs for the product
and then adds desired profit per unit
Straight markup pricing is the most
frequently used type of cost-plus pricing
price is calculated by adding a pre-determined
percentage to the cost
on Cost
Price paid = $30
Markup = 40%
Price = total cost + (total
cost * markup percentage)
Price = $30 + ($30 *.40) =
$42
on Selling Price
Pricing Tactics
Pricing for Individual Products
two-part pricing (e.g., country clubs)
payment pricing (e.g., easy payments for new
cars)
Geographic pricing
F.O.B. pricing
Zone pricing
Uniform delivered pricing
Freight absorption pricing
Trade Discounts
Pricing structure built around list price
List price, also called suggested retail price, is
the price that the manufacturer sets as the
appropriate price for the end consumer
Manufacturers offer discounts because channel
members perform selling, credit, storage and
transportation services
Auctions
sites offer chance to bid on items
sites offer reverse-price auctions
Price Discrimination
Means that marketers classify customers
based on some characteristic that indicates
what they are willing or able to pay
Acceptable when price differences are in
response to
changes in cost of product
changes in competitive activity
changes in marketplace
Price-Quality Inferences
If consumers are unable to judge the quality
of a product through examination or prior
experience, they usually will assume that
the higher-priced product is the higherquality product
Price Lining
Price Discrimination
Means selling the same product to different
wholesalers and retailers at different prices
if practices lessen competition
Price Fixing
Occurs when two or more companies
conspire to keep prices at a certain
level
Horizontal price fixing occurs when competitors
making the same product jointly determine what
price they each will charge
Vertical price fixing occurs when manufacturers
attempt to force the retailer to charge the
suggested retail price
Predatory Pricing
Means that a company sets a very low price
for the purpose of driving competitors out
of business
Dumping (US)
Selling in foreign market at or below cost
Selling in a foreign market more than 5%
below price in home market