Setting the Price 223
According to this break-even chart, the total revenue and total cost curves cross
at 30,000 units. This is the break-even volume.It can be verified by the following formula:
Break-even volume fixed cost $300,00030,000
pricevariable cost $20 10If the manufacturer sells 50,000 units at $20, it earns a $200,000 profit on its $1 million
investment. But much depends on price elasticity and competitors’ prices, two ele-
ments that are ignored by target-return pricing. In practice, the manufacturer needs
to consider different prices and estimate their probable impacts on sales volume and
profits. The manufacturer should also search for ways to lower its fixed or variable
costs, because lower costs will decrease its required break-even volume.
Perceived-Value Pricing
An increasing number of companies base price on customers’perceived value.They see
the buyers’ perceptions of value, not the seller’s cost, as the key to pricing. Then they
use the other marketing-mix elements, such as advertising, to build up perceived value
in buyers’ minds.^11
For example, when DuPont developed a new synthetic fiber for carpets, it
demonstrated to carpet manufacturers that they could afford to pay DuPont as much
as $1.40 per pound for the new fiber and still make their target profit. DuPont calls the
$1.40 the value-in-use price.But pricing the new material at $1.40 per pound would
leave the carpet manufacturers indifferent. So DuPont set the price lower than $1.40
to induce carpet manufacturers to adopt the new fiber. In this situation, DuPont used
its manufacturing cost only to judge whether there was enough profit to go ahead with
the new product.
The key to perceived-value pricing is to determine the market’s perception of
the offer’s value accurately. Sellers with an inflated view of their offer’s value will over-
price their product, while sellers with an underestimated view will charge less than
they could. Market research is therefore needed to establish the market’s perception
of value as a guide to effective pricing.^12
Figure 4-12 Break-Even Chart