Appendix 4 Flashcards
What are the factors that marketers must consider when determining the price of a product?
When determining the price of a product, marketers must consider demand factors (buyer-perceived value, which sets the price ceiling), costs (which set the price floor), competitors’ prices, reseller requirements, government regulations, and company objectives.
What is cost-plus pricing or markup pricing?
Cost-plus pricing or markup pricing is a pricing method that adds a standard markup to the cost of the product. This method considers the fixed and variable costs for a given level of production and the desired profit margin to determine the final selling price.
What is return on investment (ROI) pricing or target-return pricing?
Return on investment (ROI) pricing or target-return pricing is a pricing approach in which a company determines the price necessary to achieve a specific return on investment. This method takes into account the initial investment, desired return percentage, and expected sales to calculate the selling price that will yield the target return.
Equation for Unit Cost
Equation for Markup Price.
What are fixed costs?
Fixed costs are expenses that do not vary with production or sales levels. They include costs such as rent, interest, depreciation, and clerical and management salaries.
Fixed costs must be paid regardless of the level of output, and as output increases, the fixed cost per unit decreases since the total fixed costs are spread across more units of outpu
What are variable costs?
Variable costs are expenses that vary directly with the level of production. They include costs related to the direct production of the product, such as costs of goods sold (COGS), and many of the marketing costs associated with selling it.
Variable costs tend to be uniform for each unit produced, but they are called variable because their total varies with the number of units produced.
What are total costs?
Total costs are the sum of fixed and variable costs for any given level of production. They represent the combined expenses associated with producing and selling a specific number of units, and they help companies determine the minimum price they need to charge in order to cover all costs and achieve their desired profit margin.
What is a dollar markup?
A dollar markup is the difference between a company’s selling price for a product and its cost to manufacture or purchase it. For a retailer, the markup is the difference between the price it charges consumers and the cost the retailer must pay for the product.
What is reseller margin analysis?
Reseller margin analysis involves setting the suggested retail price and working backward to determine the price at which a manufacturer must sell the product to a wholesaler.
This process takes into account the markups required by resellers (wholesalers and retailers) that sell the product to consumers.
What is value-based pricing?
Value-based pricing is a pricing strategy that uses buyers’ perceptions of value, rather than the seller’s cost, to determine the price of a product. This approach aims to set a price that accurately reflects the perceived value of the product in the eyes of consumers, helping to maximize sales and profits while maintaining a competitive edge.
What is a markup chain?
Markup chain represents the sequence of markups used by firms at each level in a channel
Equation for markup percentage on cost
Equation for markup percentage on selling cost
What is break-even analysis?
Break-even analysis is a method that determines the unit volume and dollar sales needed to be profitable given a particular price and cost structure. At the break-even point, total revenue equals total costs, and profit is zero. Above this point, the company will make a profit; below it, the company will lose money.
Equation for Break-even volume
Equation for Break-even sales
Equation for Contribution margin and Break even sales using the CM
Equation for Contribution Margin using total sales and total variable costs
Although it is useful to know the break-even point, most companies are more interested in making a profit. Assume Wise Domotics would like to realize a $5 million profit in the first year. How many units must it sell at the $168 price to cover fixed costs and produce this profit? To determine this, Wise Domotics can simply add the profit figure to fixed costs and again divide by the unit contribution to determine unit sales:
As we saw previously, a profit goal can also be stated as a return on investment goal. For example, recall that Wise Domotics wants a 30% return on its $10 million investment. Thus, its absolute profit goal is $3 million This profit goal is treated the same way as in the previous example:
Finally, Wise Domotics can express its profit goal as a percentage of sales, which we also saw in previous pricing analyses. Assume Wise Domotics desires a 25% return on sales. To determine the unit and sales volume necessary to achieve this goal, the calculation is a little different from the previous two examples. In this case, we incorporate the profit goal into the unit contribution as an additional variable cost. Look at it this way: If 25% of each sale must go toward profits, that leaves only 75% of the selling price to cover fixed costs. Thus, the equation becomes:
Method one for estimating Total Market Demand
