Marketing Chapter 5: Pricing and its Importance

Overview of Price and Its Importance

• 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

Pricing Objectives

• 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

The Cost Determinant of Price

• 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

Other Determinants of Price

• No specific points mentioned in the text

Setting the Right Price

• 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

This quiz covers the fundamentals of pricing in marketing, including pricing objectives, cost determinants, and setting the right price. Understand the importance of price in marketing and its roles in evaluating products.