Presentation on theme: "20 Setting the Right Price Professor Close. Introduction to Price Setting (1) Setting price: –Cost-Based Pricing: most firms Markup: Amount added to cost."— Presentation transcript:
Introduction to Price Setting (1) Setting price: –Cost-Based Pricing: most firms Markup: Amount added to cost –(High Markup High Profits) –What is marked up most? (slow sellers; Ford vs. Mercedes) Usually % of sales PRICE* (keystone) Often standard for industry –Easy – supermarkets (1%) –(similar operating expenses)
Introduction to Price Setting (3) Problem with average cost: may not sell projected # For example: sell 20,000 cans for $1.25 Revenues: 20,000 x 1.25 = $25,000 Costs: $30,000 + (1 x 20,000) = $50,000 Loss: $25,000
Introduction to Price Setting (4) Markup Strategy (general: faster turn needs less markup) High: emphasize earnings on each item (luxury; jewelry) Low: emphasize turnover and decreasing inventory costs (bread; milk)
Introduction to Price Setting (5) Demand-Based Pricing: –Basis: Customer Price sensitivity Substitute awareness (gasoline: hometown vs. trip) Total expenditure (higher markup on low-priced items) Difficulty in comparison (medical services) Benefits vs. price: benefit, sensitivity (education)
Introduction to Price Setting (6) Demand-Based Pricing (cont…) Situation (eating out on a date vs. eating out otherwise) Responsibility for payment (airline tickets) Sunk costs (computers: Apple vs. IBM); rational?
Introduction to Price Setting (7) Demand-Based Pricing (cont…) –Demand-based methods Leader pricing –Low prices draw customers, also buy others –May just buy leaders (Food Lion) Bait pricing –Add low priced items, switch to higher price/lesser brand –Illegal in interstate commerce Odd-even pricing – psychological ($19.95) –Loss prevention – open register –Depends on thought (up/down) –Traditionally on lower-priced items (now more often…)
Summary Read: –Target Return Pricing (pg. 524) Any questions??