CSCredit Sprint
Sign upStart free

Credit Sprint / Study guides / Marketing Unit 8

Credit Sprint's Guide to Marketing Unit 8: Pricing

CLEP® weight 11%

Price is the only element of the mix that produces revenue; the others create costs. This unit covers pricing objectives, how costs, demand and competition shape price, the main strategies, discounts, legal limits and the math of markups and break-even.

Break-even analysisUnits soldDollarsfixed costs total cost revenue break-even point

What you need to know

  • Price is the amount paid for a product. It signals value and quality, produces revenue and is the easiest mix element to change quickly.
  • Pricing objectives: profit (maximize or target return), sales or market share, status quo (stay competitive), survival and social or image goals.
  • Cost-plus pricing adds a markup to cost. Target-return pricing sets price to reach a specific profit goal. Break-even analysis finds the quantity where revenue equals total cost.
  • Demand-based (value-based) pricing starts with what buyers will pay. Competition-based pricing follows rivals: going-rate pricing or sealed-bid pricing.
  • Price elasticity of demand measures how much quantity demanded changes when price changes. If elastic (greater than 1), a price cut raises total revenue; if inelastic (less than 1), a price rise raises total revenue.
  • Demand is less elastic when there are few substitutes, the item is a necessity, the purchase is a small part of income, or buyers have little time to adjust.
  • Skimming sets a high initial price and lowers it over time; it suits innovative products with a segment willing to pay. Penetration sets a low initial price to win share quickly.
  • Psychological pricing: odd-even pricing ($19.99), prestige pricing, reference price and price lining (a few set price points). Leader pricing sells a staple at a low price to draw traffic.
  • Bundling sells items together at one price. Everyday low pricing (EDLP) holds steady prices; high-low pricing alternates regular and sale prices.
  • Discounts and allowances: cash discount (for prompt payment), trade or functional discount (to channel members), quantity discount (cumulative or noncumulative), seasonal discount and trade-in or promotional allowances.
  • Geographic pricing: FOB origin (buyer pays freight), uniform delivered (same price everywhere), zone pricing and freight absorption.
  • Legal and ethical issues: price fixing (illegal), predatory pricing, deceptive pricing, price discrimination (Robinson-Patman) and resale price rules.

Formulas and rules

Markup on cost = markup ÷ cost × 100
Markup on selling price = markup ÷ selling price × 100
Selling price = cost + markup
Break-even quantity = fixed costs ÷ (price − variable cost per unit)
Elasticity = % change in quantity demanded ÷ % change in price
Total revenue = price × quantity

Exam traps

Watch forMarkup percentage depends on the base: on cost or on selling price. The same dollar markup gives different percentages.
Watch forContribution per unit is price minus VARIABLE cost; fixed costs are not subtracted per unit.
Watch forIf demand is elastic, raising price LOWERS total revenue.
Watch forSkimming is a high starting price; penetration is a low starting price.

Key terms

  • Cost-plus pricing: Setting price by adding a markup to cost.
  • Markup: The amount added to cost to get the selling price.
  • Break-even point: The quantity at which total revenue equals total cost.
  • Fixed costs: Costs that do not change with output.
  • Variable costs: Costs that change with output.
  • Value-based pricing: Setting price by what buyers perceive the product is worth.
  • Going-rate pricing: Setting price at or near competitors' prices.
  • Price elasticity of demand: The responsiveness of quantity demanded to a price change.
  • Price skimming: A high initial price that is lowered over time.
  • Penetration pricing: A low initial price to win share quickly.
  • Prestige pricing: A high price to signal quality and status.
  • Odd-even pricing: Prices that end in odd numbers like $9.99.
  • Price lining: Selling a line at a few set price points.
  • Leader pricing: Pricing a popular item low to draw shoppers.
  • Bundle pricing: Selling several items together at one price.
  • Cash discount: A price cut for paying quickly.
  • Trade discount: A discount to channel members for performing functions.
  • Quantity discount: A price cut for buying more.
  • FOB origin: The buyer pays the freight from the seller's location.
  • Uniform delivered pricing: Every buyer pays the same price, with freight included.
  • Price fixing: Competitors agreeing on prices; illegal.
  • Predatory pricing: Pricing very low to drive out competitors.

Practice questions

Five of the 58 Unit 8 questions in Credit Sprint. Every choice is explained in the app.

1. Price is the only element of the marketing mix that
  1. can never change
  2. creates costs
  3. produces revenue
  4. is set by the government
Show answer

produces revenue. The other three Ps create costs.

2. Fixed costs are costs that
  1. only exist at high output
  2. rise with each unit produced
  3. do not change with the quantity produced
  4. are zero in the short run
Show answer

do not change with the quantity produced. Rent and salaries are examples.

3. A firm sells 400 units with total cost of $3,200 and revenue of $4,000. Profit is
  1. $7,200
  2. $3,200
  3. $4,000
  4. $800
Show answer

$800. $4,000 − $3,200.

4. Cost-plus pricing sets price by
  1. asking buyers what they will pay
  2. adding a fixed percentage or amount to unit cost
  3. setting the lowest price possible
  4. matching the competitor's price
Show answer

adding a fixed percentage or amount to unit cost. It is simple but ignores demand.

5. Price skimming means
  1. giving the product away
  2. setting a low initial price to gain share
  3. setting prices equal to competitors
  4. setting a high initial price and lowering it over time
Show answer

setting a high initial price and lowering it over time. It captures buyers who are willing to pay more.