Lecture Basic Marketing: A global managerial approach - Chapter 18: Price setting in the business world

When you finish this chapter, you will: Understand how most wholesalers and retailers set their prices using markups, understand why turnover is so important in pricing, understand the advantages and disadvantages of average-cost pricing, know how to use break-even analysis to evaluate possible prices, know the many ways that price setters use demand estimates in their pricing. | Chapter 18: Price Setting in the Business World 18-2 Key Factors That Influence Price Setting Markup chain in channels Pricing objectives Discounts and allowances Legal environment Price flexibility Geographic pricing terms Demand Cost Price of other products in the line Competition Price setting Exhibit 18-1 Notes Many firms set a price by just adding a standard markup to the average cost of the products they sell. But this is changing. More managers are realizing that they should set prices by evaluating the effect of a price decision not only on profit margin for a given item but also on demand and therefore on sales volume, costs, and total profit. In Wal-Mart’s very competitive markets, this approach often leads to low prices that increase profits and at the same time reduce customers’ costs. For other firms in different market situations, careful price setting leads to a premium price for a marketing mix that offers customers unique benefits and value. But these firms commonly focus on setting prices that earn attractive profits--as part of an overall marketing strategy that satisfies customers’ needs. Producer Wholesaler Retailer Cost = = 80% Markup = = 20% Cost = = 90% Markup = = 10% Cost = = 60% Markup = = 40% 18-3 Markup Chain and Channel Pricing Exhibit 18-2 Summary Overview A markup is a dollar amount added to the cost of products to get the selling price, usually expressed as a percentage of the selling price. This can be tricky in that a 50 cents addition to a $ item leading to a $ price is a 33 1/3 markup (50 cents is a third of $) even though it's 50% of the price paid by the middleman. Markups are necessary to cover the costs of distribution and allow middlemen to make a profit. Key Concepts Related to Markups Standard Percentage. Many middlemen use a standard percentage applied to all the products they handle. This greatly simplifies the pricing process for the middlemen and allows . | Chapter 18: Price Setting in the Business World 18-2 Key Factors That Influence Price Setting Markup chain in channels Pricing objectives Discounts and allowances Legal environment Price flexibility Geographic pricing terms Demand Cost Price of other products in the line Competition Price setting Exhibit 18-1 Notes Many firms set a price by just adding a standard markup to the average cost of the products they sell. But this is changing. More managers are realizing that they should set prices by evaluating the effect of a price decision not only on profit margin for a given item but also on demand and therefore on sales volume, costs, and total profit. In Wal-Mart’s very competitive markets, this approach often leads to low prices that increase profits and at the same time reduce customers’ costs. For other firms in different market situations, careful price setting leads to a premium price for a marketing mix that offers customers unique benefits and value. But these firms commonly

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