Transcript Pricing Methods

Pricing Methods
• Cost-based pricing
– The seller determines the total cost of producing one
unit of the product then adds an amount to cover
additional costs and profit (markup)
– Markup may be calculated as a percentage of total
costs
– Flaws
• Difficulty of determining an effective markup percentage;
price may be too high, resulting in lost sales, or price
may be too low, resulting in lost profit
• Separates pricing from other business functions that
impact marketing decisions
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Pricing Methods
• Breakeven analysis
– Breakeven quantity
• The number of units that must be sold for total revenue (from
all units sold) to equal the total cost (of all units sold)
– Total revenue
• The total amount received from sales of a product
– Fixed cost
• A cost incurred no matter how many units are produced or
sold
– Variable cost
• A cost that depends on the number of units produced
– Total cost
• The sum of the fixed costs and the variable costs attributed to
a product
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Breakeven Analysis
• What is the lowest level of production and sales at which a
company can break even on a particular product?
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Pricing Methods (cont’d)
• Demand-based pricing
– Based on the level of customer demand for the product
– Product prices are high when demand is high and low
when demand is weak
– Price differentiation
• Setting different prices in segmented markets based on
segment characteristics (e.g., time of purchase, type of
customer, or distribution channel)
• Competition-based pricing
– Based on meeting the challenge of competitors’ prices
in markets where products are quite similar or price is
an important customer consideration
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