Break-even Analysis and Target Profit Pricing
Another cost-oriented pricing approach is break-even pricing or a variation called target profit pricing. The firm tries to determine the price at which it will break even or make the target profit it is seeking.
Total Revenue
1200
1000 Total Cost
800
600
400
Total fixed cost
200
0 10 20 30 40 50 Units sold (in’000)
Total Fixed cost = Br 300,000
Variable cost per unit = Br 10
Slope of Total Revenue = Br 20 which is price of the good.
The total revenue and total cost curves cross at 30,000 units. This is the break-even volume. At Br 20, the company must sell at least 30,000 units to break-even; that is, for total revenue to cover total cost. Break even volume can be calculated using the following formula:
Breakeven volume = Fc/ price-vc = 300,000/(20-10) = 30,000 units
If the company wants to make a target profit, it must sell more than 30,000 units at Br 20 each.
Value-based Pricing – Uses buyer’s perceptions of value, not the seller’s cost as the key to pricing. Value based pricing means that the marketer cannot design a product and marketing program and then set the price. Price is considered along with the other marketing mix variables before the marketing program is set.
Competition Based Pricing
Consumers will base their judgments of a product’s value on the prices that competitors charge for similar products. One form of competition based pricing is going rate pricing, in which a firm bases its price largely on competitors prices, with less attention paid to its own costs or to demand. The firm might charge the same as , more than or less than its major competitors.
Competition based pricing is also used when firms bid for jobs. Using sealed –bid pricing, a firm bases its price on how it thinks competitors will price rather than its own cost or on the demand.
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