1. Pricing Methods Cost-based pricing
The seller determines the total cost of producing one unit of the product then adds an amount to cover additional costs and profit (markup)
Markup may be calculated as a percentage of total costs
Flaws
Difficulty of determining an effective markup percentage; price may be too high, resulting in lost sales, or price may be too low, resulting in lost profit
Separates pricing from other business functions that impact marketing decisions
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2. Pricing Methods Breakeven analysis Breakeven quantity Total revenue
The number of units that must be sold for total revenue (from all units sold) to equal the total cost (of all units sold)
Total revenue
The total amount received from sales of a product
Fixed cost
A cost incurred no matter how many units are produced or sold
Variable cost
A cost that depends on the number of units produced
Total cost
The sum of the fixed costs and the variable costs attributed to a product
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3. Breakeven Analysis
What is the lowest level of production and sales at which a company can break even on a particular product?
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4. Pricing Methods (cont’d)
Demand-based pricing
Based on the level of customer demand for the product
Product prices are high when demand is high and low when demand is weak
Price differentiation
Setting different prices in segmented markets based on segment characteristics (e.g., time of purchase, type of customer, or distribution channel)
Competition-based pricing
Based on meeting the challenge of competitors’ prices in markets where products are quite similar or price is an important customer consideration
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