Marketing Management, Millenium Edition - epiheirimatikotita.gr

222 CHAPTER 12 DESIGNING PRICING STRATEGIES AND PROGRAMSThe manufacturer’s unit cost is given by:Unit cost variable cost fixed costs $10 $300,000 $16unit sales 50,000If the manufacturer wants to earn a 20 percent markup on sales, its markup price isgiven by:Markup price unit cost $16 $20(1 desired return on sales) 1 0.2Here, the manufacturer charges dealers $20 per toaster and makes a profit of $4 perunit. If the dealers want to earn 50 percent on their selling price, they will mark up thetoaster to $40. This is equivalent to a cost markup of 100 percent.Does the use of standard markups make logical sense? Generally, no. Any pricingmethod that ignores current demand, perceived value, and competition is not likely tolead to the optimal price. Markup pricing works only if the marked-up price actuallybrings in the expected level of sales.Companies that introduce a new product often price it high, hoping to recovertheir costs as rapidly as possible. But a high-markup strategy could be fatal if a competitoris pricing low. This happened to Philips, the Dutch electronics manufacturer,in pricing its videodisc players. Philips wanted to make a profit on each videodiscplayer. Meanwhile, Japanese competitors priced low and succeeded in building theirmarket share rapidly, which in turn pushed down their costs substantially.Markup pricing remains popular for a number of reasons. First, sellers can determinecosts much more easily than they can estimate demand. By tying the price tocost, sellers simplify the pricing task. Second, when all firms in the industry use thispricing method, prices tend to be similar, which minimizes price competition. Third,many people feel that cost-plus pricing is fairer to both buyers and sellers: Sellers donot take advantage of buyers when demand becomes acute, and sellers earn a fairreturn on investment.Target-Return PricingIn target-return pricing, the firm determines the price that would yield its target rate ofreturn on investment (ROI). Target pricing is used by many firms, including GeneralMotors, which prices its automobiles to achieve a 15–20 percent ROI.Suppose the toaster manufacturer in the previous example has invested $1 millionand wants to earn a 20 percent return on its invested capital. The target-returnprice is given by the following formula:Target-return price unit cost desired return invested capitalunit sales $16 .20 $1,000,000 $2050,000The manufacturer will realize this 20 percent ROI provided its costs and estimated salesturn out to be accurate. But what if sales do not reach 50,000 units? The manufacturercan prepare a break-even chart to learn what would happen at other sales levels (Figure4-12). Note that fixed costs remain the same regardless of sales volume, while variablecosts, which are not shown in the figure, rise with volume. Total costs equal the sum offixed costs and variable costs; the total revenue curve rises with each unit sold.