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UW-Madison MARKETNG 300 - Chapter 17 Terms

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MKT 300 1nd Edition Lecture 25 Outline of Last Lecture XLIV. Chapter 16 Terms (part 2)XLV. Chapter 16 Concepts to Apply (part 2)Outline of Current Lecture XLVI. Chapter 17 Terms XLVII. Chapter 17 Concepts to Apply Current LectureXLVI. Chapter 17 Terms - Markup: a dollar amount added to the cost of products to get the selling price- Markup (percent): percentage of selling price that is added to the cost to get the selling price- Markup Chain: the sequence of markups firms use at different levels in a channel. Determines the prices structure in the whole channel. The markup is figured on selling price at each level of the channel.- Stockturn Rate: the number of times the average inventory is sold in a year- Average-cost Pricing: adding a reasonable markup to the average cost of a product- Total Fixed Cost: the sum of those costs that are fixed in total, o matter how much is produced. I.e.: rent, depreciations, managers’ salaries, property taxes, and insurance. Such costs stay the same even if production stops temporarily- Total Variable Cost: the sum of those changing expenses that are closely related to output. i.e.: Expenses for parts, wages, packaging materials, outgoing freight, and sales commissions. At zero output, total variable cost is zero.- Total Cost: the sum of total fixed and total variable costs. Changes in total cost depend on variations in total variable cost, since total fixed cost stays the same- Average Cost (per unit): obtained by dividing total cost by the related quantity (that is, the total quantity that causes the total cost)- Average Fixed Cost (per unit): obtained by dividing total fixed cost by the related quantity- Average Variable Cost (per unit): obtained by dividing total variable cost by the related quantityThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.- Break-even Analysis: evaluates whether the firm will be able to break even -- that is, cover all its costs – with a particular price. This is important because a firm must cover all costs in the long run or there is not much point in being in business- Break-even Point (BEP): the quantity where the firm’s total cost will just equal its total revenue- Fixed-cost (FC) Contribution per Unit: the assumed selling price per unit minus the variable cost per unit- Value-in-use Pricing: setting prices that will capture some of what customers will save by substituting the firm’s product for the one currently being used- Reference Price: the price they expect to pay- Leader Pricing: setting some very low prices – real bargains – to get customers into retail stores. The idea is not only to sell large quantities of the leading items but also to get customers into the store to buy other products- Bait Pricing: setting some very low prices to attract customers but trying to sell more expensive models or brands once the customer is in the store. For example, furniture advertises color TV for $199 but salespeople point out disadvantages of low-priced TV and convince them to buy a more expensive set- Psychological Pricing: setting prices that have special appeal to target customers- Dynamic Pricing:- Surge Pricing: pricing based on demand. Surge where demand is high (?)- Odd-even Pricing: setting prices that end in certain numbers. For example, poducts selling below $50 often end in the number 5 or 9. I.e: $24.95. For larger quantities: $99- Price lining: setting a few price levels for a product line and then marking all items at these pries. This approach assumes that customers have acertain reference price in mindthat they expect to pay for a product. Neckties priced at $20, $30, $40, not $20, $21, $22… Main advantage is simplicity for salespeople and customers. Sales may increase because (1) they can offer bigger variety in each price class and (2) easier to get customers to make decisions w/in one price class. Can also reduce costs because inventory is lower- Demand-backward Pricing: setting an acceptable final consumer price and working backward to what a producer can charge. Commonly used by producers of consumer products, especially shopping products such as women’s clothing and appliances. “market-minus” pricing. - Prestige Pricing: setting a rather high price to suggest high quality or high status. Want the best, so will pay the most. Used for luxury products such as furs, jewelry, and perfume. Also in service industries, where customer can’t see the product in advance and relies on price to judge its quality- Product-bundle Pricing: setting one price for a set of products. Firms who do this usually set the overall price so that it’s cheaper for the customer to buy the products at thesame time than separately. Encourages customers to buy products that they might not otherwise buy – because the added cost of the extras is not as high as it would normally be, so the value is betterXVVII. Chapter 17 Concepts to Apply 1. What is a markup? How is a mark-up percentage calculated in this book? Why are there two methods? a. A markup is a dollar amount added to the cost of products to get the selling price. Markup (percent) in this book is the percentage of selling price that is added to the cost tog et the selling price. They are related to selling price for convenience. One can also do a markup on cost, but it’s important to state clearlywhich markup percent you’re using.2. Be able to calculate a mark-up chain using both methods (see videos and homework)3. What is the relationship between mark-ups and stockturn? How do retailers use this relationship?a. Some retailers and wholesalers try to speed turnover to increase profit, even if it means reducing their markups. 4. What are the advantages and disadvantages of average cost pricing?a. Advantages:i. A useful input to pricing decisions to understand how costs operate at different levels of outputii. Average-cost pricing is simpleb. Disadvantages:i. Easy to lose money if you don’t sell as much as you expect toii. Doesn’t consider cost variations at different levels of output5. Know how to calculate a break even point in dollars and units.a. BEP (in units) = Total fixed cost/ Fixed cost contribution per unit6. Be able to identify basic variable and fixed costs.a. Fixed Costs: rent, depreciations, managers’ salaries, property taxes, and insurance. Such costs stay the same even if production stops temporarilyb.


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