Page 127 - Marketing the Basics 2nd

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(TRP) Target Return Price
= Unit Cost + [(Opportunity Cost)×(Fixed Costs)] / Sales Unit
Returning to our example above, the target return price for our restaurateur would be:
$17.50 + (30% × 1,000,000) / 80,000 = $21.25 (the TRP)
So, she will earn a 30 per cent ROI if her product is priced at $21.25. One advantage of using the TRP scheme is that it allows the company to estimate its break-even point should sales not reach the expected amount. As the name suggests, the break-even point is the least amount of units needed to be sold in order for the firm to recover its production costs. Recall, the total cost is the sum of the variable cost and the fixed cost. Where the total cost curve intersects with the projected revenue curve is the firm’s break-even point.
Mathematically, it can be expressed as:
Break-Even Volume = Fixed Costs/(Price − Variable Cost)
Plugging in the numbers from our culinary example yields: 1,000,000 /($25 −$5) = 50,000 units (the break-even volume)
Our restaurateur must sell 50,000 plates of food to cover her oper- ating expenses.
PERCEIVED-VALUE PRICING
The drawback to the previous two pricing methods is that they aggregate consumers into one group. In reality there are different types of consumers, each has a different perception as to what the price of the product should be. Some purchase a good because of the price, some buy a good because of the quality and features, while others buy products because they are concerned about price and do not take into account the power of the brand. Brands reduce uncertainty, and the consumer is willing to pay a premium to eliminate it. Discovering exactly how high that premium is depends on the value the consumer places on the product’s features and other marketing-mix elements. That value will always be changing and requires constant monitoring. This is even more important on