CHAPTER 5

Price
LEARNING OUTCOMES
5.1 Overview of price and its importance to marketing
managers
5.2 Pricing objectives
5.3 The cost determinant of price
5.3.1 Markup, Profit maximization and Break-even
pricing
5.4 Other determinants of price
5.5 Setting the right price
LO 1 : Overview of price and its importance
to marketing managers
What is Price?
Price is that which is given up in an exchange to acquire a good or service.
Price plays two roles in the evaluation of product alternatives:
The Sacrifice Effect of Price
Price is, again, “that which is given up,” which means what is sacrificed to get
a good or service. It may also be time lost while waiting to acquire the good
or service. Standing in long lines at the airport first to check in and then to
get through the security checkpoint procedures is a cost.
The Information Effect of Price
Based on research, is that we infer quality information from price. That is,
higher quality equals higher price.
LO 1 : Overview of price and its importance
to marketing managers
The Importance of Price to Marketing Managers
Prices are the key to revenues, which in turn are the key to profits for
an organization.
Revenue is the price charged to customers multiplied by the number of
units sold. Revenue is what pays for every activity of the company:
production, finance, sales, distribution, and so on. What’s left over (if
anything) is profit.
Managers usually strive to charge a price that will earn a fair profit. To
earn a profit, managers must choose a price that is not too high or too
low, a price that equals the perceived value to target consumers.
LO 2 : Pricing objectives
LO 3 : The cost determinant of price
Markup Pricing
Is the most popular method used by wholesalers and retailers to establish a
selling price, does not directly analyze the costs of production. Instead,
markup pricing uses the cost of buying the product from the producer, plus
amounts for profit and for expenses not otherwise accounted for. The total
determines the selling price.
For example, an item costs the retailer RM1.80 and is sold for RM2.20 carries
a markup of RM0.40 cents, which is a markup of 22 percent of the cost.
Markups are often based on experience. For example, many small retailers
mark up merchandise 100 percent over cost. (In other words, they double
the cost.) This tactic is called keystoning.
LO 3 : The cost determinant of price
Profit Maximization Pricing
Profit maximization occurs when marginal revenue equals marginal
cost.
Marginal cost is the change in total costs associated with a one-unit
change in output.
Marginal revenue is the extra revenue associated with selling an extra
unit of output. As long as the revenue of the last unit produced and
sold is greater than the cost of the last unit produced and sold, the firm
should continue manufacturing and selling the product.
Point of profit
maximization
LO 3 : The cost determinant of price
Break-Even Pricing
Break-even analysis determines what sales volume must be reached
before the company breaks even (total costs equal total revenue) and
no profits are earned.
The advantage of break-even analysis is that it provides a quick
estimate of how much the firm must sell to break even and how much
profit can be earned if a higher sales volume is obtained. If a firm is
operating close to the break-even point, it may want to see what can
be done to reduce costs or increase sales.
LO 4 : Other determinants of price
LO 5 : Setting
the
right
price
 LO 5 : Setting the right price
Price Strategy
1. Price skimming is a pricing policy whereby a firm charges a high
introductory price, often coupled with heavy promotion.
2. Penetration pricing is a pricing policy whereby a firm charges a
relatively low price for a product initially as a way to reach the mass
market.
3. Status Quo Pricing is the price strategy also known as meeting the
competition or going rate pricing. It means charging a price
identical to or very close to the competition’s price.