Basic Marketing: A Global Managerial Approach

Perreault−McCarthy: Basic
Marketing: A
Global−Managerial
Approach, 14/e

18. Price Setting in the
    Business World

Text © The McGraw−Hill

Companies, 2002

Price Setting in the Business World 523

average cost! Further, the quantity the firm actually sells (times price) determines

total revenue (and total profit or loss). A decision made in one area affects each of

the others, directly or indirectly. Average-cost pricing does not consider these effects.^4

A manager who forgets this can make serious pricing mistakes.

Some aggressive firms use a variation of average-cost pricing called experience

curve pricing. Experience curve pricingis average-cost pricing using an estimate of

futureaverage costs. This approach is based on the observation that over time—as

an industry gains experience in certain kinds of production—managers learn new

ways to reduce costs. In some industries, costs decrease about 15 to 20 percent each

time cumulative production volume (experience) doubles. So a firm might set

average-cost prices based on where it expects costs to be when products are sold in

the future—not where costs actually are when the strategy is set. This approach is

Price per unit

Total revenue 
 Price x Quantity

$30,000 
 $3.00 x 10,000

$40,000 
 $2.00 x 20,000

$57,000 
 $1.90 x 30,000

$66,000 
 $1.65 x 40,000

$75,000 
 $1.50 x 50,000

$72,000 
 $1.20 x 60,000

Quantity (000)

0 10 20 30405060 70

1.20

1.50

1.65

1.90

2.00

$3.00

Exhibit 18-6

Evaluation of Various Prices

along a Firm’s Demand

Curve

Experience curve

pricing is even riskier

Cost-oriented selling

price per unit

Quantity demanded

at selling price

?

Average total

cost per unit

Profit per

unit

Average fixed

cost per unit

Variable cost

per unit

Estimated quantity

to be sold

Exhibit 18-7

Summary of Relationships

among Quantity, Cost, and

Price Using Cost-Oriented

Pricing