© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin—for use only with Essentials of Marketing

Markup

• Dollar amount added to the cost of the product to get the selling price

• Markup may be calculated as a percent of the selling price or as a percent of the cost– percent of selling price unless otherwise noted

• Products may be marked up several times through the channel– the sequence of markups is the “markup chain”

• High markups don't always mean high profits– depends on the stockturn rate

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin—for use only with Essentials of Marketing

Example of Markup Chain and Channel PricingExhibit 17-2

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin—for use only with Essentials of Marketing

Alternate Example of a Markup Chain and Channel Pricing

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin—for use only with Essentials of Marketing

Break-Even Analysis

• Used to evaluate whether the firm will be able to cover costs (break even) at a particular price

• Indicates the break-even point—sales (units or dollars) needed to break even

• Can be modified to incorporate a target return• Problems:

– assumes any quantity can be sold at a given price

– total cost curve is assumed to be a straight line

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin—for use only with Essentials of Marketing

Break-Even Chart for a Particular SituationExhibit 17-8

Psychological Pricing Techniques

• Leader Pricing (Loss Leaders)—setting price below cost to attract buyers to store

• Bait Pricing—using a very low price to attract buyers then switching them off to higher priced goods

• Odd Pricing—prices that end in less than whole dollar amounts

• Price Lining—pricing groups of merchandise rather than pricing items individually

• Complementary Pricing—pricing items high that are needed to operate or maintain the primary good

• Bundle Pricing—grouping products/services and offer them at a price less than the combined individual prices

Courtesy Colgate-Palmolive—for use only with Essentials of Marketing

Colgate toothbrushes at different price points

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin—for use only with Essentials of Marketing

Evaluating a Customer’s Price Sensitivity

• Are there substitute ways of meeting a need?

• Is it easy to compare prices?

• Who pays the bill?

• How great is the total expenditure?

• How significant is the end benefit?

• Is there already a sunk investment related to the purchase?