Basic Marketing: A Global−Managerial Approach Chapter 18 ppt

Perreault−McCarthy: Basic Marketing: A Global−Managerial Approach, 14/e 18. Price Setting in the Business World Text © The McGraw−Hill Companies, 2002 When You Finish This Chapter, You Should 1. Understand how most wholesalers and retailers set their prices—using markups. 2. Understand why turnover is so impor- tant in pricing. 3. Understand the advantages and dis- advantages of average-cost pricing. 4. Know how to use break-even analysis to evaluate possible prices. 5. Understand the advantages of mar- ginal analysis and how to use it for price setting. 6. Understand the various factors that influence customer price sensitivity. 7. Know the many ways that price set- ters use demand estimates in their pricing. 8. Understand the important new terms (shown in red). Chapter Eighteen Price Setting in the Business World In the spring of 2001, Kmart’s prices on products like toothpaste, light bulbs, laundry soap, and beauty products were 10 to 15 percent higher than at Wal-Mart. Shoppers buy these items fre- quently and know what they pay. To provide equal value, marketing managers for Kmart decided that they needed to cut prices on 4,000 products. And to highlight their price cutting they revived Kmart’s hourly Blue Light Specials, a sur- prise sale on an item that usually lasts about 15 minutes. It didn’t take long for Wal-Mart to announce that it would be putting even more emphasis on price rollbacks. By taking a longer-term look at how Wal-Mart has grown so fast in the past, you’ll get a pretty good idea how this wrestling match is going to turn out. To put the big picture in perspec- tive, Wal-Mart’s current sales are about five times Kmart’s. By the year 2005, Wal-Mart sales should exceed $330 billion— double what they were in 1999 and 13 times what they were in 1990. Back then, Wal-Mart earned about twice as much profit as Kmart even though they had about the same sales revenue. place price promotion produ c Perreault−McCarthy: Basic Marketing: A Global−Managerial Approach, 14/e 18. Price Setting in the Business World Text © The McGraw−Hill Companies, 2002 What explains the big differ- ence in growth and profits when the two chains are in many ways similar? Part of the answer is that Wal-Mart has more sales volume in each store. Wal-Mart’s sales revenue per square foot is more than twice that at Kmart. Wal-Mart’s lower prices on similar products increases demand in its stores. But it also reduces its fixed operat- ing costs as a percentage of sales. That means it can add a smaller markup, still cover its operating expenses, and make a larger profit. And as lower prices pull in more and more customers, its percent of overhead costs to sales con- tinues to drop—from about 20.2 percent in 1980 to about 16 percent now. In the past few years, Wal- Mart has also improved profits by cutting unnecessary inven- tory by over $2 billion, thereby saving $150 million in carrying cost and reducing mark- downs. Wal-Mart also has lower costs for the goods it sells. Its buyers are tough in negotiating the best prices from suppliers—to be able to offer Wal-Mart customers the brands they want at low prices. But Wal-Mart also works closely with producers to reduce costs in the chan- nel. For example, Wal-Mart was one of the first major retailers to insist that all orders be placed by com- puter; that helps to reduce stock-outs on store shelves and lost sales at the checkout counter. Wal-Mart also works with vendors to create private- label brands, such as Sam’s Choice Cola. Its low price— about 15 percent below what consumers expect to pay for well-known colas—doesn’t leave a big profit margin. Yet when customers come in to buy it they also pick up other, more profitable, products. place price promotion product www.mhhe.com/fourps 513 www.mhhe.com/fourps c t Perreault−McCarthy: Basic Marketing: A Global−Managerial Approach, 14/e 18. Price Setting in the Business World Text © The McGraw−Hill Companies, 2002 514 Chapter 18 Even with its lower costs, Wal-Mart isn’t content to take the convenient route to price setting by just adding a stan- dard percentage markup on different items. The company was one of the first retailers to give managers in every depart- ment in every store frequent, detailed information about what is selling and what isn’t. They drop items that are col- lecting dust and roll back prices on the ones with the fastest turnover and highest margins. That not only increases stockturn but also puts the effort behind products with the most potential. For example, every department manager in every Wal-Mart store has a list of special VPIs (volume producing items). They give VPIs special atten- tion and display space—to get a bigger sales and profit boost. For instance, Wal-Mart’s analy- sis of checkout-scanner sales data revealed that parents often pick up more than one kid’s video at a time. So now they are certain that special displays feature several videos and that the rest of the selec- tion is close by. Wal-Mart was the first major retailer to move to online sell- ing (www.walmart.com). Its online sales still account for only a small percent of its total sales, so there’s lots of room to grow there too. Further, Wal-Mart is aggressively tak- ing its low-price approach to other countries—ranging from Mexico to China. To return to where we started, Kmart is now copying many of Wal-Mart’s innova- tions. However, Wal-Mart has such advantages on sales vol- ume, unit costs, and margins that it will be difficult for Kmart to win in any price war— unless Wal-Mart somehow stumbles because of its enormous size. 1 Price Setting Is a Key Strategy Decision In the last chapter, we discussed the idea that pricing objectives and policies should guide pricing decisions. We accepted the idea of a list price and went on to discuss variations from list and how they combine to impact customer value. Now we’ll see how the basic list price is set in the first place—based on information about costs, demand, and profit margins. See Exhibit 18-1. 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 mar- gin 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. There are many ways to set list prices. But for simplicity they can be reduced to two basic approaches: cost-oriented and demand-oriented price setting. We will discuss cost-oriented approaches first because they are most common. Also, understanding the problems of relying only on a cost-oriented approach shows why a marketing manager must also consider demand to make good Price decisions. Let’s begin by looking at how most retailers and wholesalers set cost-oriented prices. Perreault−McCarthy: Basic Marketing: A Global−Managerial Approach, 14/e 18. Price Setting in the Business World Text © The McGraw−Hill Companies, 2002 Price Setting in the Business World 515 Some Firms Just Use Markups Some firms, including most retailers and wholesalers, set prices by using a markup—a dollar amount added to the cost of products to get the selling price. For example, suppose that a CVS drugstore buys a bottle of Pert Plus shampoo for $2. To make a profit, the drugstore obviously must sell the shampoo for more than $2. If it adds $1 to cover operating expenses and provide a profit, we say that the store is marking up the item $1. Markups, however, usually are stated as percentages rather than dollar amounts. And this is where confusion sometimes arises. Is a markup of $1 on a cost of $2 a markup of 50 percent? Or should the markup be figured as a percentage of the sell- ing price—$3.00—and therefore be 33 1 ⁄ 3 percent? A clear definition is necessary. Unless otherwise stated, markup (percent) means percentage of selling price that is added to the cost to get the selling price. So the $1 markup on the $3.00 selling price is a markup of 33 1 ⁄ 3 percent. Markups are related to selling price for convenience. There’s nothing wrong with the idea of markup on cost. However, to avoid confusion, it’s important to state clearly which markup percent you’re using. Managers often want to change a markup on cost to one based on selling price, or vice versa. The calculations used to do this are simple. (See the section on markup conversion in Appendix B on marketing arithmetic. The appendixes follow Chapter 22.) 2 Many middlemen select a standard markup percent and then apply it to all their products. This makes pricing easier. When you think of the large number of items the average retailer and wholesaler carry—and the small sales volume of any one Demand (Chapter 18) Pricing objectives (Chapter 17) Price of other products in the line (Chapter 18) Price flexibility (Chapter 17) Discounts and allowances (Chapter 17) Legal environment (Chapter 17) Cost (Chapter 18) Competition (Chapter 18) Geographic pricing terms (Chapter 17) Markup chain in channels (Chapter 18) Price setting Exhibit 18-1 Key Factors That Influence Price Setting Markups guide pricing by middlemen Markup percent is based on selling price — a convenient rule Many use a standard markup percent Perreault−McCarthy: Basic Marketing: A Global−Managerial Approach, 14/e 18. Price Setting in the Business World Text © The McGraw−Hill Companies, 2002 516 Chapter 18 item—this approach may make sense. Spending the time to find the best price to charge on every item in stock (day to day or week to week) might not pay. Moreover, different companies in the same line of business often use the same markup percent. There is a reason for this: Their operating expenses are usually sim- ilar. So a standard markup is acceptable as long as it’s large enough to cover the firm’s operating expenses and provide a reasonable profit. How does a manager decide on a standard markup in the first place? A standard markup is often set close to the firm’s gross margin. Managers regularly see gross mar- gins on their operating (profit and loss) statements. The gross margin is the amount left—after subtracting the cost of sales (cost of goods sold) from net sales—to cover the expenses of selling products and operating the business. (See Appendix B on marketing arithmetic if you are unfamiliar with these ideas.) Our CVS manager knows that there won’t be any profit if the gross margin is not large enough. For this reason, CVS might accept a markup percent on Pert Plus shampoo that is close to the store’s usual gross margin percent. Smart producers pay attention to the gross margins and standard markups of mid- dlemen in their channel. They usually allow trade (functional) discounts similar to the standard markups these middlemen expect. Different firms in a channel often use different markups. A markup chain—the sequence of markups firms use at differ- ent levels in a channel—determines the price structure in the whole channel. The markup is figured on the selling price at each level of the channel. For example, Black & Decker’s selling price for an electric drill becomes the cost the Ace Hardware wholesaler pays. The wholesaler’s selling price becomes the hardware retailer’s cost. And this cost plus a retail markup becomes the retail selling price. Each markup should cover the costs of running the business and leave a profit. Specialized products that rely on selective distribution and sell in smaller volume usually offer retailers higher markups, in part to offset the retailer’s higher carrying costs and marketing expenses. Markups are related to gross margins Markup chain may be used in channel pricing Perreault−McCarthy: Basic Marketing: A Global−Managerial Approach, 14/e 18. Price Setting in the Business World Text © The McGraw−Hill Companies, 2002 Price Setting in the Business World 517 Exhibit 18-2 illustrates the markup chain for an electric drill at each level of the channel system. The production (factory) cost of the drill is $21.60. In this case, the producer takes a 10 percent markup and sells the product for $24. The markup is 10 percent of $24 or $2.40. The producer’s selling price now becomes the wholesaler’s cost—$24. If the wholesaler is used to taking a 20 percent markup on selling price, the markup is $6—and the wholesaler’s selling price becomes $30. The $30 now becomes the cost for the hardware retailer. And a retailer who is used to a 40 percent markup adds $20, and the retail selling price becomes $50. Some people, including many conventional retailers, think high markups mean big profits. Often this isn’t true. A high markup may result in a price that’s too high—a price at which few customers will buy. You can’t earn much if you don’t sell much, no matter how high your markup. But many retailers and wholesalers seem more concerned with the size of their markup on a single item than with their total profit. And their high markups may lead to low profits or even losses. Some retailers and wholesalers, however, try to speed turnover to increase profit— even if this means reducing their markups. They realize that a business runs up costs over time. If they can sell a much greater amount in the same time period, they may be able to take a lower markup and still earn higher profits at the end of the period. An important idea here is the stockturn rate—the number of times the average inventory is sold in a year. Various methods of figuring stockturn rates can be used (see the section “Computing the Stockturn Rate” in Appendix B). A low stockturn rate may be bad for profits. At the very least, a low stockturn increases inventory carrying cost and ties up working capital. If a firm with a stockturn of 1 (once per year) sells products that cost it $100,000, it has that much tied up in inventory all the time. But a stock- turn of 5 requires only $20,000 worth of inventory ($100,000 cost Ϭ 5 turnovers a year). If annual inventory carrying cost is about 20 percent of the inventory value, that reduces costs by $16,000 a year. That’s a big difference on $100,000 in sales! Whether a stockturn rate is high or low depends on the industry and the prod- uct involved. A NAPA auto parts wholesaler may expect an annual rate of 1—while a Safeway supermarket might expect 20 to 30 stockturns for soaps and detergents and 70 to 80 stockturns for fresh fruits and vegetables. $24 Selling price ؍ $30.00 ؉ $20.00 ؍ $50.00 ؍ 100% dollars Retailer Cost ؍ $30.00 ؍ 60% Markup ؍ $20.00 ؍ 40% Wholesaler Cost ؍ $24.00 ؍ 80% Markup ؍ $6.00 ؍ 20% Producer Cost ؍ $21.60 ؍ 90% Markup ؍ $2.40 ؍ 10% $30 $50 Selling price ؍ $24.00 ؉ $6.00 ؍ $30.00 ؍ 100% Selling price ؍ $21.60 ؉ $2.40 ؍ $24.00 ؍ 100% $50 Consumer price $21.60 Exhibit 18-2 Example of a Markup Chain and Channel Pricing High markups don’t always mean big profits Lower markups can speed turnover and the stockturn rate Perreault−McCarthy: Basic Marketing: A Global−Managerial Approach, 14/e 18. Price Setting in the Business World Text © The McGraw−Hill Companies, 2002 518 Chapter 18 Although some middlemen use the same standard markup percent on all their products, this policy ignores the importance of fast turnover. Mass-merchandisers know this. They put low markups on fast-selling items and higher markups on items that sell less frequently. For example, Wal-Mart may put a small markup on fast- selling health and beauty aids (like toothpaste or shampoo) but higher markups on appliances and clothing. Similarly, supermarket operators put low markups on fast- selling items like milk, eggs, and detergents. The markup on these items may be less than half the average markup for all grocery items, but this doesn’t mean they’re unprofitable. The store earns the small profit per unit more often. Some markups eventually become standard in a trade. Most channel members tend to follow a similar process—adding a certain percentage to the previous price. But who sets price in the first place? The firm that brands a product is usually the one that sets its basic list price. It may be a large retailer, a large wholesaler, or most often, the producer. Some producers just start with a cost per unit figure and add a markup—perhaps a standard markup—to obtain their selling price. Or they may use some rule- of-thumb formula such as: Selling price ϭ Average production cost per unit ϫ 3 A producer who uses this approach might develop rules and markups related to its own costs and objectives. Yet even the first step—selecting the appropriate cost per unit to build on—isn’t easy. Let’s discuss several approaches to see how cost- oriented price setting really works. Average-Cost Pricing Is Common and Can Be Dangerous This trade ad, targeted at retailers, emphasizes faster stockturn which, together with markups, impacts the retailer’s profitability. Mass-merchandisers run in fast company Where does the markup chain start? Average-cost pricing means adding a reasonable markup to the average cost of a product. A manager usually finds the average cost per unit by studying past records. Dividing the total cost for the last year by all the units produced and sold Perreault−McCarthy: Basic Marketing: A Global−Managerial Approach, 14/e 18. Price Setting in the Business World Text © The McGraw−Hill Companies, 2002 Price Setting in the Business World 519 in that period gives an estimate of the average cost per unit for the next year. If the cost was $32,000 for all labor and materials and $30,000 for fixed overhead expenses—such as selling expenses, rent, and manager salaries—then the total cost is $62,000. If the company produced 40,000 items in that time period, the aver- age cost is $62,000 divided by 40,000 units, or $1.55 per unit. To get the price, the producer decides how much profit per unit to add to the average cost per unit. If the company considers 45 cents a reasonable profit for each unit, it sets the new price at $2.00. Exhibit 18-3A shows that this approach produces the desired profit—if the company sells 40,000 units. It’s always a useful input to pricing decisions to understand how costs operate at different levels of output. Further, average-cost pricing is simple. But it can also be dangerous. It’s easy to lose money with average-cost pricing. To see why, let’s fol- low this example further. First, remember that the average cost of $2.00 per unit was based on output of 40,000 units. But if the firm is only able to produce and sell 20,000 units in the next year, it may be in trouble. Twenty thousand units sold at $2.00 each ($1.55 cost plus 45 cents for expected profit) yield a total revenue of only $40,000. The overhead is still fixed at $30,000, and the variable material and labor cost drops by half to $16,000—for a total cost of $46,000. This means a loss of $6,000, or 30 cents a unit. The method that was supposed to allow a profit of 45 cents a unit actually causes a loss of 30 cents a unit! See Exhibit 18-3B. The basic problem with the average-cost approach is that it doesn’t consider cost variations at different levels of output. In a typical situation, costs are high with low output, and then economies of scale set in—the average cost per unit drops as the quantity produced increases. This is why mass production and mass distribution often make sense. It’s also why it’s important to develop a better under- standing of the different types of costs a marketing manager should consider when setting a price. Exhibit 18-3 Results of Average-Cost Pricing A. Calculation of Planned Profit if 40,000 B. Calculation of Actual Profit if Only 20,000 Items Are Sold Items Are Sold Calculation of Costs: Calculation of Costs: Fixed overhead expenses $30,000 Fixed overhead expenses $30,000 Labor and materials ($.80 a unit) 32,000 Labor and materials ($.80 a unit) 16,000 Total costs $62,000 Total costs $46,000 “Planned” profit 18,000 Total costs and planned profit $80,000 Calculation of Profit (or Loss): Calculation of Profit (or Loss): Actual unit sales ϫ price ($2.00*) $80,000 Actual unit sales ϫ price ($2.00*) $40,000 Minus: total costs 62,000 Minus: total costs 46,000 Profit (loss) $18,000 Profit (loss) ($6,000) Result: Result: Planned profit of $18,000 is earned if 40,000 items are Planned profit of $18,000 is not earned. Instead, $6,000 sold at $2.00 each. loss results if 20,000 items are sold at $2.00 each. *Calculation of “reasonable” price: Expected total costs and planned profit = $80,000 = $2.00 Planned number of items to be sold 40,000 It does not make allowances for cost variations as output changes Perreault−McCarthy: Basic Marketing: A Global−Managerial Approach, 14/e 18. Price Setting in the Business World Text © The McGraw−Hill Companies, 2002 520 Chapter 18 520 Average-cost pricing may lead to losses because there are a variety of costs—and each changes in a different way as output changes. Any pricing method that uses cost must consider these changes. To understand why, we need to define six types of costs. 1. Total fixed cost is the sum of those costs that are fixed in total—no matter how much is produced. Among these fixed costs are rent, depreciation, man- agers’ salaries, property taxes, and insurance. Such costs stay the same even if production stops temporarily. 2. Total variable cost, on the other hand, is the sum of those changing expenses that are closely related to output—expenses for parts, wages, packaging materi- als, outgoing freight, and sales commissions. At zero output, total variable cost is zero. As output increases, so do variable costs. If Levi’s doubles its output of jeans in a year, its total cost for denim cloth also (roughly) doubles. 3. Total cost is the sum of total fixed and total variable costs. Changes in total cost depend on variations in total variable cost—since total fixed cost stays the same. The pricing manager usually is more interested in cost per unit than total cost because prices are usually quoted per unit. 1. Average cost (per unit) is obtained by dividing total cost by the related quantity (that is, the total quantity that causes the total cost). Marketing Manager Must Consider Various Kinds of Costs 520 Chapter 20 Are Women Consumers Being Taken to the Cleaners? Women have complained for years that they pay more than men for clothes alterations, dry cleaning, shirt laundering, haircuts, shoes, and a host of other products. For example, a laundry might charge $2.25 to launder a woman’s white cotton shirt and charge only $1.25 for an identical shirt delivered by a man. A survey by a state agency in California found that of 25 randomly chosen dry cleaners, 64 percent charged more to launder women’s cotton shirts than men’s; 28 percent charged more to dry clean women’s suits. And 40 percent of 25 hair salons sur- veyed charged more for basic women’s haircuts. Soon after the survey, California passed a law ban- ning such gender-based differences in prices—and New York and Massachusetts followed suit. An infor- mal study by KRON-TV confirmed that pricing differences continued to be common in California. Publicity about the $1,000 fine for violations may change that. On the other hand, there’s nothing in any law to say that Mennen antiperspirant for men, priced at $2.89 for 2.25 ounces, can’t be a better deal than Mennen’s Lady Speed Stick, which is $2.69 for one- third fewer ounces. Such differences are common with health and beauty aids. Some consumers feel that such differences in pricing are unethical. Critics argue that firms are dis- criminating against women by arbitrarily charging them higher prices. Not everyone shares this view. A spokesperson for an association of launderers and cleaners says that “the automated equipment we use fits a certain range of standardized shirts. A lot of women’s blouses have different kinds of trim . . . and lots of braid work, and it all has to be hand-finished. If it involves hand-finishing, we charge more.” Some cleaners charge more for doing women’s blouses because the average cost is higher than the average cost for men’s shirts. Some just charge more because women buy anyway. There are no federal laws to regulate the prices that dry cleaners, hair salons, or tailors charge. Still, most experts argue that such laws, including the state rules, are unnecessary. After all, customers who don’t like a particular cleaner’s rates are free to visit a competitor who may charge less. Many firms face the problem of how to set prices when the average costs are different to serve different customers. For example, poor, inner-city consumers often pay higher prices for food. But inner-city retail- ers also face higher average costs for facilities, shoplifting, and insurance. Some firms don’t like to charge different consumers different prices, but they also don’t want to charge everyone a higher average price—to cover the expense of serving high-cost customers. 3 www.mhhe.com/fourps There are three kinds of total cost There are three kinds of average cost Perreault−McCarthy: Basic Marketing: A Global−Managerial Approach, 14/e 18. Price Setting in the Business World Text © The McGraw−Hill Companies, 2002 Price Setting in the Business World 521 2. Average fixed cost (per unit) is obtained by dividing total fixed cost by the related quantity. 3. Average variable cost (per unit) is obtained by dividing total variable cost by the related quantity. A good way to get a feel for these different types of costs is to extend our average- cost pricing example (Exhibit 18-3A). Exhibit 18-4 shows the six types of cost and how they vary at different levels of output. The line for 40,000 units is highlighted because that was the expected level of sales in our average-cost pricing example. For simplicity, we assume that average variable cost is the same for each unit. Notice, however, that total variable cost increases when quantity increases. Average fixed costs are lower when a larger quantity is produced. An example shows cost relations Exhibit 18-4 Cost Structure of a Firm Total Average Total Fixed Average Fixed Variable Variable Average Quantity Costs Costs Costs Costs Total Cost Cost (Q) (TFC) (AFC) (AVC) (TVC) (TC) (AC) ⎧ ⎩ ⎧ ⎩ ⎧ ⎩ ⎧ ⎩ ⎧ ⎩ ⎧ ⎩ 0 $30,000 ———$ 30,000 — 10,000 30,000 $3.00 $0.80 $ 8,000 38,000 $3.80 20,000 30,000 1.50 0.80 16,000 46,000 2.30 30,000 30,000 1.00 0.80 24,000 54,000 1.80 40,000 30,000 0.75 0.80 32,000 62,000 1.55 50,000 30,000 0.60 0.80 40,000 70,000 1.40 60,000 30,000 0.50 0.80 48,000 78,000 1.30 70,000 30,000 0.43 0.80 56,000 86,000 1.23 80,000 30,000 0.38 0.80 64,000 94,000 1.18 90,000 30,000 0.33 0.80 72,000 102,000 1.13 100,000 30,000 0.30 0.80 80,000 110,000 1.10 0.30 (AFC) 1.10 (AC) 110,000 (TC) (Q) 100,000 30,000 (TFC) 100,000 (Q) 30,000 (TFC) (Q) 100,000 110,000 (TC) Ϫ80,000 (TVC) 0.80 (AVC) ϫ0.80 (AVC) ϩ80,000 (TVC) 30,000 (TFC) 80,000 (TVC) 110,000 (TC) [...]... noted in Chapter 17, in this situation the marketing manager does have a pricing decision to make, and the firm can carve out a market niche for itself with the price and marketing mix it offers.7 Perreault−McCarthy: Basic Marketing: A Global−Managerial Approach, 14/e 528 18 Price Setting in the Business World © The McGraw−Hill Companies, 2002 Text Chapter 18 Exhibit 18- 9 Revenue, Cost, and Profit at Different... estimate is better than none In this section we’ve shown that marginal analysis is a flexible and useful tool for marketing managers Some managers don’t take advantage of it because they think they can’t determine the exact shape of the demand curve But that view misses the point of marginal analysis Marginal analysis encourages managers to think very carefully about what they do know about costs and... operate on a 20 percent markup? 2 A producer distributed its riding lawn mowers through wholesalers and retailers The retail selling price was $800, and the manufacturing cost to the Perreault−McCarthy: Basic Marketing: A Global−Managerial Approach, 14/e 542 18 Price Setting in the Business World © The McGraw−Hill Companies, 2002 Text Chapter 18 company was $312 The retail markup was 35 percent and...Perreault−McCarthy: Basic Marketing: A Global−Managerial Approach, 14/e © The McGraw−Hill Companies, 2002 Text Chapter 18 Exhibit 18- 5 Typical Shape of Cost (per unit) Curves When Average Variable Cost per Unit Is Constant $4.00 3.00 Cost per unit 522 18 Price Setting in the Business World 2.00 1.40 1 .18 1.00 Average cost Average variable cost Average fixed cost 0 20 40 60 80 Quantity (000)... then what is the related quantity that will be sold? Before the marketing manager sets the actual price, all these if-then combinations can be evaluated for profitability using marginal analysis Marginal revenue can be negative This firm faces a demand curve that slopes down That means that the marketer can expect to increase sales volume by lowering the price Yet selling a larger quantity at a lower... unit Average total cost per unit Profit per unit Perreault−McCarthy: Basic Marketing: A Global−Managerial Approach, 14/e 524 18 Price Setting in the Business World Text © The McGraw−Hill Companies, 2002 Chapter 18 more common in rapidly growing markets because cumulative production volume (experience) grows faster If costs drop as expected, this approach works But it has the same risks as regular average-cost... the quantity that will earn the target profit Break-even analysis shows the effect of cutting costs Break-even analysis makes it clear why managers must constantly look for effective new ways to get jobs done at lower costs For example, if a manager can reduce the firm’s total fixed costs—perhaps by using computer systems to cut out excess Perreault−McCarthy: Basic Marketing: A Global−Managerial Approach, ... cost must be increasing, or decreasing, at a lesser rate than marginal revenue Perreault−McCarthy: Basic Marketing: A Global−Managerial Approach, 14/e 530 18 Price Setting in the Business World © The McGraw−Hill Companies, 2002 Text Chapter 18 Exhibit 18- 10 Graphic Determination of the Price Giving the Greatest Total Profit for a Firm 800 Total cost 700 600 500 Total revenue Dollars 400 300 Best profit... models available on the PlantWeb Internet site to calculate project savings for their plants Perreault−McCarthy: Basic Marketing: A Global−Managerial Approach, 14/e 18 Price Setting in the Business World Text © The McGraw−Hill Companies, 2002 Price Setting in the Business World 533 These factors apply in many different purchase situations, so it makes sense for a marketing manager to consider each of... lining has advantages other than just matching prices to what consumers expect to pay The main advantage is simplicity—for both salespeople and customers It is less confusing than having many prices Some customers may consider items in only one price class Their big decision, then, is which item(s) to choose at that price Perreault−McCarthy: Basic Marketing: A Global−Managerial Approach, 14/e 18 Price . costs and marketing expenses. Markups are related to gross margins Markup chain may be used in channel pricing Perreault−McCarthy: Basic Marketing: A Global−Managerial Approach, 14/e 18. Price. twice as much profit as Kmart even though they had about the same sales revenue. place price promotion produ c Perreault−McCarthy: Basic Marketing: A Global−Managerial Approach, 14/e 18. Price. not make allowances for cost variations as output changes Perreault−McCarthy: Basic Marketing: A Global−Managerial Approach, 14/e 18. Price Setting in the Business World Text © The McGraw−Hill Companies,