Transcript 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.



Pricing
Advertising
Distribution

Pricing Basics

Price based on:









Seller’s Cost
Size of Markup, Target Return
Product Quality
Value
Symbolism
Reputation and Image of Seller
Image
Quantity Purchased
Etc.

In order to compete on price you must really
compete on cost, efficiency.
• e.g., Wal-Mart

Choose not to compete!!!
• That is, compete on other dimensions

Merchandise quality and/or selection

Customer service, convenience

Store atmosphere, image

Calculating Price
•
Cost Based Method

Price
=
cost + markup
Price = cost + % (cost)
•
•
Example: Cost = $50

Markup % = 40%

Price = 50 + .40(50) = $70
so, price is a function of cost ???

But, Circular Reasoning !!!
• Production costs decline as you produce more
units (i.e., the experience curve).


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.

circular reasoning !!!
• Economic theory states that sales volume is a
function of price.


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???

Demand/Profit Oriented Approach:
• Different prices:

result in different sales volumes

which results in different costs

which together results in different profits

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