CHAPTER 6 Flashcards
is a pricing strategy where businesses set a selling price based on a product’s production, manufacturing, and distribution costs.
Cost-based pricing
Typically, they arrive at this figure by adding a markup percentage to the total cost of making and delivering the
product.
Cost-based pricing
Pricing typically is more complex in services than it is in manufacturing.
Because there’s no ownership of services, it’s usually harder to determine
the financial costs of creating a process or intangible real-time performance
for a customer than it is to identify the labor, materials, machine time,
storage, and shipping costs associated with producing and distributing a
physical good.
In addition, due to the labor and infrastructure needed to create performances, many service organizations have a much higher ratio of fixed costs to variable costs than is typically found in manufacturing firms.
Service businesses with high fixed costs include those with expensive physical facilities (such as hospitals or colleges), or a fleet of vehicles (such as airlines or trucking companies), or a network (such as railroad, telecommunications, and gas pipeline companies.
COST-BASED PRICING
____________ are economic costs a supplier would continue to
incur (at least in the short run) even if no services were sold.
These costs are likely to include rent, depreciation, utilities, taxes, insurance, salaries and wages for managers and long-term employees, security, and interest payments
Fixed costs
refer to the economic costs associated with serving an additional customer, such as making an additional
bank transaction or selling an additional seat on a flight.
In many services, such costs are very low. For instance, very little labor
or fuel cost is involved in transporting an extra passenger on a flight.
Variable costs
_______________________ fall in between fixed and variable costs.
They represent expenses that rise or fall in a stepwise fashion as the volume of
business increases or decreases.
Examples include adding an extra flight to meet increased demand on a
specific route or hiring a part-time employee to work in a restaurant on busy weekends
Semi-variable costs
_____________ is the difference between the variable cost of selling an extra
unit of service and the money received from the buyer of that service. It
goes to cover fixed and semi-variable costs before creating profits.
Contribution
_________________-allows managers to know at what sales volume a
service will become profitable. The necessary analysis involves dividing the
total fixed and semi-variable costs by the contribution obtained on each unit
of service.
Breakeven Analysis
Another leg of the pricing tripod is value to the customer.
No customer will pay more for a service than he or she thinks it is worth.
So, marketers must understand how customers perceive service value to set an appropriate price.
Value-Based Pricing
Value-based pricing is a strategy for pricing goods or services that adjusts the price based on its perceived value rather than on its historical price.
The value-based pricing strategy is used
to increase revenue by increasing prices without a significant effect on volume.
Value-Based Pricing
____________, which is the sum of all perceived benefits (gross value) minus
the sum of all the perceived costs of the service. The greater the positive
difference between the two, the greater the net value
Net Value
________________ define the difference between the price customers pay and the amount they would actually have been willing to pay to obtain the desired benefits (or “utility”) offered by a specific product.
If the perceived costs of a service are greater than its perceived benefits, then
the service in question will possess a negative net value, and the consumer will not buy it.
Consumer surplus
Competing services are then evaluated via comparison of _____________
net value
Customers often incur significant
financial costs in searching for,
purchasing, and using the service,
above and beyond the purchase
price paid to the supplier.
RELATED MONETARY
COST
For instance, the cost of an evening
at the theater for a couple with young
children usually far exceeds the price
of two tickets, because it can include
expenses such as hiring a babysitter,
travel, parking, food and beverages.
RELATED MONETARY
COST
