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Chapter 17 - Chapter 17 Price Setting in the Business World...

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Chapter 17: Price Setting in the Business World o Price setting is a key strategy decision Two basic approaches Cost oriented Demand oriented o Some firms just use markups Markup: a dollar amount added to the cost of products to get the selling price Usually stated as a % Markup(precent): means % of selling price that is added to the cost to get the selling price Ex. $1.20 markup on the $3.60 selling price 33.33% MU Related to selling price for convenience Many intermediaries select a standard MU % and apply it to all products Different companies in same line of business often use same MU % Reason for this is that operating expenses are usually similar Markups are related to gross margin Gross margin: amount left after subtracting cost of sales (COGS) from net sales to cover expenses of selling products and operating the business Markup chain may be used in channel pricing Markup chain: sequence of markups firms use at different levels in a channel Determines the price structure in the whole channel MU is figured on selling price at each level of channel Each MU should cover costs of running the business and leave a profit High markups don’t always mean big profits If price is too high, customers won't buy Leads to low profits Lower markups can speed turnover and stockturn rate Stockturn rate : number of times the average inventory is sold in a year Low stockturn increases inventory carrying cost and ties up working capital Whether stockturn rate is high or low depends on industry and the product involved Mass merchandisers put low markups on fast selling items and high markups on items that sell less frequently Firm that brands a product is the one who usually sets the basic list price Some producers start with cost per unit figure and add a markup to obtain selling price o Average cost pricing is common and can be dangerous Average cost pricing: means adding a reasonable markup to the average cost of a product Doesn’t consider cost variations at different levels of output This is why mass production and distribution make sense Economies of scale o Marketing managers must consider various kinds of costs
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Average pricing may lead to losses because there are a variety of costs and each changes in a different way as output changes Ignoring demand is the major weakness of average cost pricing Also ignores competitor's costs and prices Total fixed cost: sum of those costs that are fixed in total no matter how much is produced Rent, depreciation, salaries, property taxes, insurance Total variable cost : sum of those changing expenses that are closely related to output
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