2. Setting Price Objectives
Companies want prices that will cover their
costs and make a reasonable profit.
Consumers want to get the best value and
expect the product to be comparably priced
to other similar products.
3. Objectives
1. Maximize Profits
- Set price as high as possible
- Usually smaller target markets where unique
products can be developed
1. Maintain an Image
- Consumers think price and quality are related
- Higher price means better quality
4. Determining a Price Range
Maximum Price
Minimum Price
Breakeven Analysis
Price Range
5. Breakeven Analysis
Breakeven point – quantity of a product that
must be sold for total revenues to match total
costs at a specific price.
Fixed costs: costs that do not change
Variable costs: costs that are directly related to
the quantity produced or sold
Total costs: fixed plus variable
Product price: price
Total revenue: anticipated quantity that will be
sold times the price
6. Breakeven Point =
Total fixed costs
Price – Variable costs per
unit
Price = $14
Total fixed costs =
$85,000
Variable costs = $2.80
85,000
14 – 2.80
= 7,589 units
8. Calculating a Selling Price
1. Gross Margin
Amount that is available to cover the expenses
and provide a profit.
1. Operating Expenses
All costs associated with actual business operations
1. Net Profit
Difference between the selling price and all costs
associated with the product sold.
9. Figuring Markups
Cost $3.50 Retail $2.80
Markup = $0.70
% based on retail = .70 / $3.50 = 20%
% based on cost = .70 / $2.80 = 25%
