Download Advertising - University of Houston–Victoria

Pricing I
Chapters 20, 21
Schedule
 MarketPlace Live Report #1: Wednesday, Oct. 26
 MarketPlace Q2 decisions: Tues, Oct 25 by 7 p.m.
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Pricing
Advertising
Distribution
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Pricing Basics
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Price based on:
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Seller’s Cost
Size of Markup, Target Return
Product Quality
Value
Symbolism
Reputation and Image of Seller
Image
Quantity Purchased
Etc.
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In order to compete on price you must really
compete on cost, efficiency.
• e.g., Wal-Mart
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Choose not to compete!!!
• That is, compete on other dimensions
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Merchandise quality and/or selection
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Customer service, convenience
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Store atmosphere, image
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Calculating Price
•
Cost Based Method
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Price
=
cost + markup
Price = cost + % (cost)
•
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Example: Cost = $50
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Markup % = 40%
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Price = 50 + .40(50) = $70
so, price is a function of cost ???
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But, Circular Reasoning !!!
• Production costs decline as you produce more
units (i.e., the experience curve).
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The more you sell, the more you produce.
As more units are produced, the less it costs
to produce each unit.
• As production cost per unit decline, selling price
can be lowered.
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circular reasoning !!!
• Economic theory states that sales volume is a
function of price.
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As price is lowered, the more you sell.
As sales volume increases so does production,
and per unit cost decreases.
• Thus, cost is a function of sales volume. And,
sales volume is a function of price. So, is cost a
function of price???
• Or, is price a function of cost???
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Demand/Profit Oriented Approach:
• Different prices:
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result in different sales volumes
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which results in different costs
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which together results in different profits
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and different breakeven levels
Example
Price
Demand
VC per unit
Fixed O.H.
Net Profit
B/E (in units)
$20
$24
$28
1,000,000
900,000
750,000
$8.00
$10.00
$12.50
$10,000,000
$10,000,000
$10,000,000
$2,000,000
$2,600,000
$1,625,000
714,000
645,000
833,000