Marketing Chapter 17

Front 1

• Markup

Back 1

—a dollar amount added to the cost of products to get the selling price
o Ex: buy for $1.50, sell for $2.50 = marking up the item $1
o But usually stated as a percentage rather than dollar amounts
o Usually increase in size through the channel: Producer → Wholesaler → Retailer

Front 2

• Markup (percent)—

Back 2

—means percentage of selling price that is added to the cost to get the selling price
o Ex: $1.50 → $2.50 = selling price is 60% markup
o Based on selling price, convenient rule

Front 3

• Markup chain

Back 3

—the sequence of markups firms use at different levels in a channel—determines the price structure in the whole channel
o Figured on the selling price at each level of the channel

Front 4

o Stockturn rate

Back 4

—the number of times the average inventory is sold in a year
• Low rate may be bad for business → increases inventory carrying cost and ties up working capital

Front 5

where the markup chain starts =

(equation)

Back 5

[Selling price = Average production cost per unit * 3]

= where the markup chain starts

Front 6

• Average-cost pricing

Back 6

—means adding a reasonable markup to the average cost of a product
o Problem: it doesn’t consider cost variations at different levels of output
o Problem: ignores competitors’ costs and prices

Front 7

• Three kinds of total costs:

Back 7

total fixed cost
total variable cost
total cost

Front 8

total fixed cost

Back 8

—the sum of those costs that are fixed in total—no matter how much is produced
• Rent, depreciation, managers’ salaries, property taxes, and insurance
• These costs stay the same even if production stops temporarily

Front 9

total variable cost

Back 9

—the sum of those changing expenses that are closely related to output
• Expenses for parts, wages, packaging materials, outgoing freight, and sales commissions
• At zero output it’s equal to zero; as output increases so does this cost

Front 10

total cost

Back 10

—the sum of total fixed and total variable costs
• Changes depend on changes in total variable costs since total fixed costs stay the same

Front 11

Three kinds of average costs

Back 11

average cost (per unit)
average fixed cost (per unit)
average variable cost (per unit)

Front 12

1. Average cost (per unit)—

Back 12

—is obtained by dividing total cost by the related quantity (the total quantity that causes the total cost).

Front 13

3. Average variable cost (per unit)—

Back 13

—obtained by dividing the total VC by the related quantity

Front 14

2. Average fixed cost (per unit)—

Back 14

—obtained by dividing total FC by the related quantity

Front 15

• Relationship among Quantity, Cost, and Price using Cost Oriented Pricing:

Back 15

o Estimated quantity to be sold → average FC per unit (VC per unit) → Average total cost per unit (Profit per unit) → Cost-oriented selling price per unit → Quantity demanded at selling price → ‘?’ → Back to start

Front 16

• Break-even analysis

Back 16

—evaluates whether the firm will be able to break even—cover all its costs—with a particular price
o Must be able to do this in the LR to stay in business

Front 17

• Break even point (BEP)

Back 17

—the quantity where the firm’s total cost will just equal its total revenue: TC = TR
o Chart based on a particular selling price can help find the BEP
o = Total fixed cost/fixed cost contribution per unit

Front 18

• Fixed-cost (FC) contribution per unit

Back 18

—the assumed selling price per unit minus the variable cost per unit

Front 19

• Marginal analysis

Back 19

—focuses on the changes in total revenue and total cost from selling one more unit to find the most profitable price and quantity

Front 20

• Value in use pricing

Back 20

—which means setting prices that will capture some of what customers will save by substituting the firm’s product for the one currently being used

Front 21

• Reference price

Back 21

—the price they expect to pay

Front 22

• Leader pricing

Back 22

—means setting some very low prices—real bargains—to get customers into retail stores
o Idea is not only to sell large quantities of the leader items but also to get customers into the store to buy other products
o Can back fire if customers ONLY buy the low priced leaders
• Therefore, select leader items that aren’t directly competitive with major lines

Front 23

• Bait pricing

Back 23

—setting some very low prices to attract customers but trying to sell more expensive models or brands once the customer is in the store
o Offer a steal, but sell under protest
o Ex: furniture stores, car dealerships
o Extremely aggressive and sometimes dishonest advertising for this has given this method a bad reputation

Front 24

• Psychological pricing

Back 24

—setting prices that have special appeal to target customers
o Some prices just seem right
o Kind of a zigzag decreasing line on graph of Price by Quantity

Front 25

• Odd-even pricing

Back 25

—setting prices that end in certain numbers
o Odd = lower priced items
o Even = higher priced items
o Marketers think consumers react better to these prices—maybe seeing them as “substantially” lower than the next highest even price

Front 26

• Price lining

Back 26

—setting a few price levels for a product line and then marking all items at these prices
o Process assumes that customers have a certain reference price in mind that they expect to pay for a product
• Ex: ties are usually between $20-$50 and sold at four levels: $20, $30, $40, and $50 → won’t see a tie for $21
o Advantage = simplicity

Front 27

• Demand backward pricing

Back 27

—setting an acceptable final consumer price and working backwards to what a producer can charge
o Usually used in consumer products
o Candy companies do this and alter the size of the bar at the expected price

Front 28

• Prestige pricing

Back 28

—is setting a rather high price to suggest high quality or high status
o Some target customers want the best and they will buy at a higher price

Front 29

• Full-line pricing

Back 29

—setting prices for a whole line of products
o Market or firm oriented
o Costs are complicated

Front 30

• Complementary product pricing

Back 30

—setting prices on several products as a group
o Selling some parts cheap and one part wicked expensive, and you need ALL part
o Ex: blades are much more expensive than a razor handle

Front 31

• Product-bundle pricing

Back 31

—setting one price for a set of products
o Usually cheaper than buying all the items separately
• Charge higher price for separate items and cause customers to pay more when they don’t want the extras

Front 32

• Bid pricing

Back 32

—means offering a specific price for each possible job rather than setting a price that applies for all customers
o A new price for every job
o Hard to estimate all the costs that will apply
o Usually based on purchase specifications provided by the customer

Front 33

• Negotiated prices

Back 33

—a price based on bargaining between the buyer and seller
o Common when marketing mix is adjusted for each customer
o Demand-oriented approach