Economics: Understanding Price and Its Importance

Overview of Price and Its Importance

• Price is the sacrifice made to acquire a good or service, including time lost while waiting to acquire it.
• Price plays two roles in the evaluation of product alternatives: the Sacrifice Effect and the Information Effect.
• The Sacrifice Effect of Price refers to the cost of acquiring a good or service, including time lost.
• The Information Effect of Price suggests that higher quality equals higher price, based on research.

Importance of Price to Marketing Managers

• Prices are the key to revenues, which are the key to profits for an organization.
• Revenue is the price charged to customers multiplied by the number of units sold.
• Revenue pays for every activity of the company, and what's left over is profit.
• Managers strive to charge a price that will earn a fair profit, which equals the perceived value to target consumers.

Pricing Objectives

• No specific objectives mentioned, but it implies that marketing managers have pricing goals.

The Cost Determinant of Price

• Markup Pricing is the most popular method used by wholesalers and retailers to establish a selling price.
• Markup pricing uses the cost of buying the product from the producer, plus amounts for profit and for expenses not otherwise accounted for.
• The total determines the selling price, and markups are often based on experience.

Markup, Profit Maximization, and Break-Even Pricing

• Markup Pricing example: an item costs RM1.80 and is sold for RM2.20, carrying a markup of RM0.40 cents, which is a markup of 22 percent of the cost.
• Profit Maximization occurs when marginal revenue equals marginal cost, and the firm should continue manufacturing and selling the product.
• Break-Even Pricing determines what sales volume must be reached before the company breaks even, and no profits are earned.

Other Determinants of Price

• No specific other determinants of price mentioned, but it implies that there are other factors that influence pricing.

Setting the Right Price

• Price Strategy includes:
  • Price Skimming: charging a high introductory price, often coupled with heavy promotion.
  • Penetration Pricing: charging a relatively low price for a product initially as a way to reach the mass market.

Learn about the roles of price in evaluating product alternatives, including the Sacrifice Effect and the Information Effect.