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

520 Chapter 18

520

Average-cost pricing may lead to losses because there are a variety of costs—and

each changes in a different way as output changes. Any pricing method that uses cost

must consider these changes. To understand why, we need to define six types of costs.

1.Total fixed costis the sum of those costs that are fixed in total—no matter

how much is produced. Among these fixed costs are rent, depreciation, man-

agers’ salaries, property taxes, and insurance. Such costs stay the same even if

production stops temporarily.

2.Total variable cost,on the other hand, is the sum of those changing expenses

that are closely related to output—expenses for parts, wages, packaging materi-

als, outgoing freight, and sales commissions.

At zero output, total variable cost is zero. As output increases, so do variable

costs. If Levi’s doubles its output of jeans in a year, its total cost for denim cloth

also (roughly) doubles.

3.Total costis the sum of total fixed and total variable costs. Changes in total cost

depend on variations in total variable cost—since total fixed cost stays the same.

The pricing manager usually is more interested in cost per unit than total cost

because prices are usually quoted per unit.

1.Average cost(per unit) is obtained by dividing total cost by the related

quantity (that is, the total quantity that causes the total cost).

Marketing Manager Must Consider Various Kinds of Costs

520 Chapter 20

Are Women Consumers Being Taken to the Cleaners?

Women have complained for years that they pay

more than men for clothes alterations, dry cleaning,

shirt laundering, haircuts, shoes, and a host of other

products. For example, a laundry might charge $2.25

to launder a woman’s white cotton shirt and charge

only $1.25 for an identical shirt delivered by a man.

A survey by a state agency in California found that

of 25 randomly chosen dry cleaners, 64 percent

charged more to launder women’s cotton shirts than

men’s; 28 percent charged more to dry clean

women’s suits. And 40 percent of 25 hair salons sur-

veyed charged more for basic women’s haircuts.

Soon after the survey, California passed a law ban-

ning such gender-based differences in prices—and

New York and Massachusetts followed suit. An infor-

mal study by KRON-TV confirmed that pricing

differences continued to be common in California.

Publicity about the $1,000 fine for violations may

change that. On the other hand, there’s nothing in any

law to say that Mennen antiperspirant for men, priced

at $2.89 for 2.25 ounces, can’t be a better deal than

Mennen’s Lady Speed Stick, which is $2.69 for one-

third fewer ounces. Such differences are common

with health and beauty aids.

Some consumers feel that such differences in

pricing are unethical. Critics argue that firms are dis-

criminating against women by arbitrarily charging

them higher prices. Not everyone shares this view. A

spokesperson for an association of launderers and

cleaners says that “the automated equipment we use

fits a certain range of standardized shirts. A lot of

women’s blouses have different kinds of trim... and

lots of braid work, and it all has to be hand-finished. If

it involves hand-finishing, we charge more.” Some

cleaners charge more for doing women’s blouses

because the average cost is higher than the average

cost for men’s shirts. Some just charge more because

women buy anyway.

There are no federal laws to regulate the prices

that dry cleaners, hair salons, or tailors charge. Still,

most experts argue that such laws, including the

state rules, are unnecessary. After all, customers who

don’t like a particular cleaner’s rates are free to visit a

competitor who may charge less.

Many firms face the problem of how to set prices

when the average costs are different to serve different

customers. For example, poor, inner-city consumers

often pay higher prices for food. But inner-city retail-

ers also face higher average costs for facilities,

shoplifting, and insurance. Some firms don’t like to

charge different consumers different prices, but they

also don’t want to charge everyone a higher average

price—to cover the expense of serving high-cost

customers.^3

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There are three kinds

of total cost

There are three kinds

of average cost