F11MKT300Pricing1 - Pricing Strategy Basic Concepts Basic...

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Pricing Strategy: Basic Concepts Basic Concepts of Pricing Economic Value to the Customer (EVC) Optimal Pricing - Basics
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Back to the Profit Equation… Profits (for a given product) Profits = Revenue – Costs = P rice x Q uantity Sold – Variable Costs – Fixed Costs = P X Q c X Q Fixed Costs, where c is the per unit variable cost = P X Q(P) c X Q(P) Fixed Costs Punch line : understanding Pricing is important because it affects multiple components of the profit function This is because Quantity Sold depends on Price (via the demand curve) as well
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Common Pricing Practices (1) q Cost-plus pricing : Adding a standard markup to the cost of the product. q Determine average cost = average variable cost + average fixed cost Total Variable Cost Quantity Constant per unit variable cost Per unit variable cost varies with quantity
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Common Pricing Practices (2) q Average fixed cost = Total Fixed Cost/Quantity Total Fixed Cost Quantity Invariant across full range of quantity Costs are fixed for only a certain range of quantity
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Common Pricing Practices (3) q Competition-based pricing : Setting price
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