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MKT304 – CH17 – Price Setting

Two basic approaches to price setting
a.) cost-oriented and

b.) demand-oriented price setting.

(Most firms in the business world set their prices using Cost-Oriented price setting).

Stockturn Rate
# of times avg inv is sold per yr
Marginal Analysis
the process of evaluating the change in total revenue and total cost from selling one more unit (i.e. that one more marginal unit) to find the most profitable price and quantity.

Best is when biggest diff between cost and rev

In practice, the focus is ongetting an estimate of how profit might vary across a range of relevant prices.

break-even analysis
whether the firm will be able to cover all its costs at a particular price level.
compute a break-even point?
determine is the fixed-cost (FC) contribution per unit: the assumed selling price per unit minus the variable cost per unit. To find the BEP in units, divide the total fixed costs (TFC) by the contribution per unit.
Prestige Pricing
setting relatively high prices to suggest high-quality or high-status.
Bid pricing
offering a specific new price for every job rather than setting a price for all customers
Psychological pricing
attempts to discover the price range a customer prefers for a given product. Price cuts within the range don’t affect demand very much.
80/20 rule
suggests that 80 percent of the business comes from 20 percent of the customers.
Average-cost pricing
adding a reasonable markup to the average cost of a product.
Problem with Average Cost Pricing
it doesn’t consider cost variations at different levels of production/output.
firm-oriented pricing
the firm makes a line of products where each product serves an entirely different target market. So there doesn’t have to be any relation between the various prices.

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