Chapter 17-Price Setting in the Business World

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

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Chapter 17-Price Setting in the Business World Tuesday, March 22, 2011 8:54 PM 1. Price Setting is a Key Strategy Decision 1.a. Two approaches to set prices: cost-oriented and demand-oriented 1. Some Firms Just Use Markups 1.a. Markups guide pricing by intermediaries 1.a.i. Markup: a dollar amount added to the cost of products to get the selling price 1.a.i.1. Usually stated as a percentage of the selling price 1.a. Markup percent is based on selling price-a convenient rule 1.a.i. Markup (percent): means percentage of selling price that is added to the cost to get the selling price 1.a. May use a standard markup percent 1.a.i. Makes pricing easier to select a standard markup percent and then apply it to all their products 1.a.i. Different companies in the same line of business often use the same markup percent because their operating expenses are usually similar 1.a. Markups are related to gross margins 1.a.i. A standard markup is often set close to the firm's gross margin 1.a.i. Gross margin is the amount left (after subtracting the cost of sales/CGS from net sales) to cover the expenses of selling products 1.a. Markup chain may be used in channel pricing 1.a.i. Markup chain: the sequence of markups firms use at different levels in a channel; determines the price structure in the whole channel 1.a.i.1. The markup is figured on the selling price at each level of the channel 1.a. High markups don’t always mean big profits 1.a.i. High markup may result in a price that's too high-a price at which few customers will buy 1.a. Lower markups can speed turnover and the stockturn rate 1.a.i. Stockturn rate: the number of times the average inventory is sold in a year 1.a.i.1. Low may be bad for profits->increases inventory carrying cost and ties up working capital 1.a. Mass-merchandisers run in fast company 1.a.i. Low markups on fast-selling items and higher markups on items that sell less frequently 1.a. Where does the markup chain start? 1.a.i. Firm that brands a product is usually the one that sets its basic list price 1. Average-Cost Pricing is Common and Can be Dangerous 1.a. Average-cost pricing: means adding a reasonable markup to the average cost of a product 1.b. It does not make allowances for cost variations as output changes 1.a.i. Easy to lose money
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1.a.ii. Problem with the average-cost approach is that it doesn't consider cost variations at different levels of output 1.a.i. Costs are high with low output, then economies of scale set in (the average cost per unit drops as the quantity produced increases) 1. Marketing Managers Must Consider Various Kinds of Costs
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This note was uploaded on 03/05/2012 for the course BUSI 406 taught by Professor Perreault during the Fall '11 term at UNC.

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

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