As I was reading chapter 13 of my
Marketing textbook I was intrigued at the art of pricing a product. Price is such an important part of a product
in my mind because it essentially can be the make or break factor for a customer. The following blog explains the idea behind
this important factor by outlining the chapter within my marketing textbook.
First we will start out with the
basics. Price is the overall amount of
money or considerations an individual must exchange to own the product. The final price an individual must pay to own
a product is computed in the following equation:
Final Price= (List
Price)- (Incentives and Allowances)+(Extra Fees)
In my mind, I always thought value
was a mere word and that it fluctuated with each buyer, meaning different
objects had different values to certain individuals. In reality value is based off of the benefits
to price ratio, which certain marketers use to create value pricing which is
increasing value in products or services but maintaining or decreasing them in
price. Value can be computed with the
following formula:
Value=Perceived
Benefits/Price
In order for a firm to set a price
on a product they must consider many things such as profit and other associated
factors. When a company sets a price
they go through a six-step process known as price in the marketing mix. The steps are as follows:
1.
Identify
pricing objectives and constraints
2.
Estimate
demand and revenue
3.
Determine
cost, volume, and profit relationships
4.
Select
an approximate price level
A
company’s objectives can vary depending on each firm. Some objectives include profit, sales, market
share, or social responsibilities. All
companies experience constraints such as demand, cost of production, and
newness of the product.
A
simple way to estimate demand for a product is through demand curves which
relate the quantity of goods sold and the price at which said goods were sold
for. However economists also state that
consumer tastes, availability, and consumer income can have a big impact on
demand. In order to estimate revenues
companies utilize a revenue curve which is based off of total revenues which
are found using the formula TR=PxQ or Unit price X quantity sold.
Determining
costs is a critical measure for any decisions based upon price. The main costs that should be studied are
total cost (TC), Fixed Cost (FC), Unit variable cost (UVC) and marginal cost
(MC).
· Total cost is the total
expense a firm incurs whiling producing an item and is found by doing the
following calculation: TC= FC+VC
· Fixed Costs are expenses
that do not change throughout the production of a product whereas variable
costs are costs that can change.
· Unit variable cost is
variable cost except calculate don a per unit basis: UVC= VC/Q
· Marginal cost is the change
in total cost that results from producing one additional unit of a product or
MC= Change in TC/1 unit increase in Q.
One
calculation that I was recently introduced to was the break-even point
formula. We had to do this in our market
simulations in order to determine the quantity in which to sell at where our
total revenues equal total costs meaning the least we can sell without losing
money. This is found by doing the
formula BEPQuantity= FC/P-UVC.
Once all of these steps are
completed we can at last determine a price for the product. The reason this process is so extensive is
that price truly is a major factor of marketing and can ultimately determine a
products success rate, which will then reflect the success rate of a
company. In order for a company’s
product to be successful for both consumers and the business it must be set at
the right price.
The
information above is an outline of Ch.13 in Marketing by Roger A. Kerin, Steven
W. Hartley and William Rudelius, the 11th Edition
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