“Yes, but what does it cost?”
What is price?
Psychological cost: The stress, anxiety, or mental difficulty of buying and using a product.
Operating costs: Costs involved in using a product.
Switching costs: Costs involved in moving from one brand to another.
Opportunity cost: The value of something that is given up to obtain something else.
Step1: Develop pricing objectives
Profit objectives: Pricing products with a focus on a target level of profit growth or a
desired net profit margin.
SMART objectives: Objectives that are specific, measurable, attainable, relevant, and
Sales or marketing share objectives
Sales or market share objective: Pricing products to maximize sales or to attain a desired
level of sales or market share.
Image enhancement objectives
Prestige products: Products that have a high price and that appeal to status-conscious
Costs, demand, revenue, and the pricing environment
Step2: Estimate demand and value
Demand curve: A plot of the quantity of a product that customers will buy in a market
during a period of time at various prices if all other factors remain the same.
Price elasticity of demand
Price elasticity of demand: The percentage change in unit sales that results from a
percentage change in price.
Elastic demand: Demand in which changes in price have large effects on the amount
Cross-elasticity of demand: When changes in the price of one product affect the demand
for another item.
Step3: determine costs
Variable and fixed costs
Variable costs: The costs of production (raw and processed materials, parts, and labour)
that are tied to and vary, depending on the number of units produced.
Fixed costs: Costs of production that do not change with the number of units produced.
Average fixed cost: The fixed cost per unit produced.
Total costs: The total of the fixed costs and the variable costs for a set number of units
Break-even analysis: A method for determining the number of units that a firm must
produce and sell at a given price to cover all its costs.
Break-even point: The point at which the total revenue and total costs are equal and
beyond which the company makes a profit; below that point, the firm will suffer a loss.
Contribution per unit: The difference between the price the firm charges for a product and the variable costs.
Marginal analysis: A method that uses cost and demand to identify the price that will
Marginal cost: The increase in total cost that results from producing one additional unit of a
Marginal revenue: The increase in total income or revenue that results from selling one
additional unit of a product.
Markups and margins: pricing through the channel
Markup: An amount added to the cost of a product to create the price at which a channel
member will sell the product.
Gross margin: The markup amount added to the cost of a product to cover the fixed costs
of the retailer or wholesaler and leave an amount for a profit.
Retailer margin: The margin added to the cost of a product by a retailer.
Wholesaler margin: The amount added to the cost of a product by a wholesaler.
List price or manufacturer’s suggested retail price (MSPR): The price the end customer is
expected to pay as determined by the manufacturer; also referred to as the suggested retail
Step4: examine the pricing environment
Consumer behavior & trend
Internal reference price: A set price or a price range in consumers’ minds that they refer to
in evaluating a product’s price.
The international environment
Price subsidies: Government payments made to protect domestic businesses or to
reimburse them when they must price at or below cost to make a sale. The subsidy can be a
cash payment or tax relief.
Pricing the product: establishing strategies
Step5: choose a pricing strategy
Strategies for profit or return objectives
Cost-plus pricing: A method of setting prices in which the seller totals all the unit costs for
the product and then adds the desired profit per unit.
Price-floor pricing: A method for calculating price in which, to maintain full plant operating
capacity, a portion of a firm’s output may be sold at a price that covers only marginal costs
Strategies based on demand
Demand-based pricing: A price-setting method based on estimates of demand at different
Target costing: A process in which firms identify the quality and functionality needed to
satisfy customers and what price whey are willing to pay before the product is designed;
the product is manufactured only if the firm can control costs to meet the required price.
Yield-management pricing: A practice of charging different prices to different customers to
manage capacity while maximizing revenues.
Variable pricing: A flexible pricing strategy that reflects what individual customers are
willing to pay. Skimming price: Charging a very high, premium price of a