Marketing Chapter 5: Pricing and its Importance

Study Notes

Price is what is given up in an exchange to acquire a good or service
Price plays two roles in the evaluation of product alternatives:
- The Sacrifice Effect: price is a sacrifice made to acquire a good or service, which may include time lost while waiting to acquire the good or service
- The Information Effect: higher quality is often inferred from higher prices

Prices are key to revenues, which in turn are key to profits for an organization
Managers strive to charge a price that will earn a fair profit, balancing perceived value to target consumers

Markup Pricing:
- Most popular method used by wholesalers and retailers to establish a selling price
- Does not directly analyze the costs of production
- Uses the cost of buying the product from the producer, plus amounts for profit and expenses
- Example: an item costs RM1.80 and is sold for RM2.20, carrying a markup of RM0.40 (22% of the cost)
Profit Maximization Pricing:
- Occurs when marginal revenue equals marginal cost
- Marginal cost: change in total costs associated with a one-unit change in output
- Marginal revenue: extra revenue associated with selling an extra unit of output
- Point of profit maximization: where marginal revenue equals marginal cost
Break-Even Pricing:
- Break-even analysis determines what sales volume must be reached before the company breaks even (total costs equal total revenue) and no profits are earned
- Advantage: provides a quick estimate of how much the firm must sell to break even and how much profit can be earned if a higher sales volume is obtained

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