pricing decisions

price is the

most significant determinant of purchasing decisions

total sales revenue of a firm is a

direct reflection of price and volume

price and volume have a

inverse relationship (indirectly affects another)

as one goes up the other goes down

in the short run

price must be sufficient to cover variable cost plus a margin of profit for business longevity

variable cost increases as the

quantity of products sold increases

fixed costs remain

constant at different levels of quantity sold

average pricing

total cost / quantity sold to set a minimum price

drawback to average pricing it

overlooks the reality of higher average costs at lower sales levels

margin approach

pricing approach based on how much each unit contributes to cover fixed costs, and generating profits

contribution per unit

selling price per unit - variable costs per unit

contribution margin (CM)

contribution per unit / selling price

selling price of new product

average variable cost / (1-CM)

break-even analysis

requires the examination of cost- revenue relationships and incorporation of sales forecasts

break-even analysis allows the entrepreneur to

compare alternative cost and revenue estimates in order to determine acceptability of each price

break-even point

volume at which total sales revenue equals total costs and expenses

break even point (equation)

total fixed costs / (price - average variable cost)

the higher the total fixed costs

the more units the firm must sell to break even

the greater the difference between the unit selling price and the unit variable cost

the fewer the unit the firm must sell to break even

to evaluate other break-even points

the entrepreneur can plot additional sales lines for other prices on the chart

average pricing is an appropriate pricing approach for small businesses because the method takes into consideration fixed and variable costs

false

elasticity of demand

degree to which a change in price affects the quantity demanded

elastic demand

demand that changes substantially when there is a change in the price of a product or service

inelastic demand

demand that doesn’t change significantly when there is a change in price of a product or service

elasticity demand is important because

degree of elasticity sets limits on or provides opportunities for higher pricing

price strategies that reflect these market considerations include

penetration pricing

price skimming

follow-the-leader pricing

penetration pricing strategy

technique that sets lower than normal prices to hasten market acceptance of a product or service or to increase market share

price skimming strategy

technique that sets very high prices for limited period before reducing them to more competitive levels

when to use skimming price

little threat of short-term competition or when startup costs must be recovered rapidly

follow the leader pricing strategy

technique that uses a particular competitor as a model in setting prices