Exam 21: Developing and Applying a Pricing Strategy

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Markup pricing and target pricing are two different pricing strategies that a firm can utilize to determine the selling price of its products or services.

Markup pricing is a cost-based pricing strategy where the selling price is determined by adding a markup percentage to the cost of the product. The markup percentage is typically based on factors such as desired profit margin, competition, and market conditions. This strategy is relatively simple and easy to implement, but it may not always take into account the perceived value of the product or the price that the market is willing to pay.

On the other hand, target pricing is a customer-driven pricing strategy where the selling price is determined based on the price that the customers are willing to pay for the product. This strategy takes into account the perceived value of the product, customer demand, and competitive pricing. Target pricing allows the firm to set prices that are more aligned with customer preferences, which can lead to increased sales and market share.

A firm can utilize both markup and target pricing techniques by using them in combination. For example, the firm can use markup pricing to determine the minimum selling price required to cover costs and achieve a desired profit margin. Then, the firm can use target pricing to adjust the selling price based on customer demand and competitive pricing. By using both techniques, the firm can set prices that are competitive in the market while also ensuring profitability. Additionally, the firm can also use dynamic pricing strategies to adjust prices in real-time based on changes in demand, competition, and other market conditions. By utilizing both markup and target pricing techniques, a firm can effectively balance cost considerations with customer preferences to maximize sales and profitability.

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a. Total variable costs: These are costs that vary with the level of production. As a company produces more goods, total variable costs will increase because more materials and labor are needed to produce the additional units.

b. Average variable costs: This is the total variable cost divided by the quantity of goods produced. As production increases, average variable costs may decrease initially due to economies of scale, but eventually may start to increase as additional resources are needed to produce more goods.

c. Total fixed costs: These are costs that do not change with the level of production. As a company produces more goods, total fixed costs remain constant because they are not directly related to the quantity of goods produced.

d. Average fixed costs: This is the total fixed cost divided by the quantity of goods produced. As production increases, average fixed costs will decrease because the fixed costs are spread over a larger number of units.

e. Total costs: This is the sum of total variable costs and total fixed costs. As a company produces more goods, total costs will increase due to the increase in variable costs, while fixed costs remain constant.

f. Average total costs: This is the total cost divided by the quantity of goods produced. As production increases, average total costs may initially decrease due to economies of scale, but may eventually start to increase as additional resources are needed to produce more goods.