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20 Setting the Right Price

20 Setting the Right Price. Professor Close. Introduction to Price Setting (1). Setting price: Cost-Based Pricing: most firms Markup: Amount added to cost (High Markup  High Profits) What is marked up most? (slow sellers; Ford vs. Mercedes) Usually % of sales PRICE* (keystone)

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20 Setting the Right Price

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  1. 20Setting the Right Price Professor Close

  2. Introduction to Price Setting (1) • Setting price: • Cost-Based Pricing: most firms • Markup: Amount added to cost • (High Markup  High Profits) • What is marked up most? (slow sellers; Ford vs. Mercedes) • Usually % of sales PRICE* (keystone) • Often standard for industry • Easy – supermarkets (1%) • (similar operating expenses)

  3. Introduction to Price Setting (2) • Methods: • Average Cost • mean cost (+) markup • example: • 50,000 cans • Fixed Costs: $30,000 (salaries, mortgage, utilities) • Variable costs: 40 cents/can (costs change w/produce) • Total Cost: $30,000 + (.40 x 50,000) = $50,000 • Avg Cost: $50,000 / 50,000 = $1 • Price: add markup to avg cost – 25 cents • Revenues: $1.25 x 50,000 = $62,500 • Profit: Revenue – Total Cost = $62,500 – 50,000 = $12,500

  4. Introduction to Price Setting (3) • Problem with average cost: may not sell projected # • For example: sell 20,000 cans for $1.25 • Revenues: 20,000 x 1.25 = $25,000 • Costs: $30,000 + (1 x 20,000) = $50,000 • Loss: $25,000

  5. Introduction to Price Setting (4) • Markup Strategy (general: faster turn needs less markup) • High: emphasize earnings on each item (luxury; jewelry) • Low: emphasize turnover and decreasing inventory costs (bread; milk)

  6. Introduction to Price Setting (5) • Demand-Based Pricing: • Basis: Customer Price sensitivity • Substitute awareness (gasoline: hometown vs. trip) • Total expenditure (higher markup on low-priced items) • Difficulty in comparison (medical services) • Benefits vs. price: benefit , sensitivity  (education)

  7. Introduction to Price Setting (6) • Demand-Based Pricing (cont…) • Situation (eating out on a date vs. eating out otherwise) • Responsibility for payment (airline tickets) • Sunk costs (computers: Apple vs. IBM); rational?

  8. Introduction to Price Setting (7) • Demand-Based Pricing (cont…) • Demand-based methods • Leader pricing • Low prices draw customers, also buy others • May just buy leaders (Food Lion) • Bait pricing • Add low priced items, switch to higher price/lesser brand • Illegal in interstate commerce • Odd-even pricing – psychological ($19.95) • Loss prevention – open register • Depends on thought (up/down) • Traditionally on lower-priced items (now more often…)

  9. Summary • Read: • Target Return Pricing (pg. 524) • Any questions??

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