Titus Bicycle Advertisement Cubic Zirconia

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- 24,000

Assumes fixed costs of $300,000 and constant unit variable costs of $10.

Assumes fixed costs of $300,000 and constant unit variable costs of $10.

Target costing

Pricing that starts with an ideal selling price, then targets costs that will ensure that the price is met.

Titus Advertisement Lofty Prices
Positioning on high price: Titus features its lofty prices in its advertising "suggested retail price: $7,750.00."

made for other marketing mix variables may affect pricing decisions. For example, a decision to position the product on high-performance quality will mean that the seller must charge a higher price to cover higher costs. And producers whose resellers are expected to support and promote their products may have to build larger reseller margins into their prices.

Companies often position their products on price and then tailor other marketing mix decisions to the prices they want to charge. Here, price is a crucial product-positioning factor that defines the product's market, competition, and design. Many firms support such price-positioning strategies with a technique called target costing, a potent strategic weapon. Target costing reverses the usual process of first designing a new product, determining its cost, and then asking, "Can we sell it for that?" Instead, it starts with an ideal selling price based on customer-value considerations and then targets costs that will ensure that the price is met. For example, when Honda set out to design the Fit, it began with a $13,950 starting price point and 34-mpg operating efficiency firmly in mind. It then designed a stylish, peppy little car with costs that allowed it to give target customers those values.

Other companies deemphasize price and use other marketing mix tools to create nonprice positions. Often, the best strategy is not to charge the lowest price but rather to differentiate the marketing offer to make it worth a higher price. For example, Bang & Olufsen—known for its cutting-edge consumer electronics—builds more value into its products and charges sky-high prices. For example, a B&O 50-inch BeoVision 4 highdefinition TV will cost you $7,500; a 65-inch model runs $13,500. A complete B&O sound system? Well, you don't really want to know. But target customers recognize Bang & Olufsen's very high quality and are willing to pay more to get it.

Some marketers even position their products on high prices, featuring high prices as part of their product's allure (see Real Marketing 10.2). For example, beverage-maker Grand Marnier offers a $225 bottle of Cuvée du Cent Cinquantenaire that's marketed with the tagline "Hard to find, impossible to pronounce, and prohibitively expensive." AAnd Titus Cycles, a premium bicycle manufacturer, features its high prices and its advertising. One ad humorously shows a man giving his girlfriend a "cubic zirconia" engagement ring so that he can purchase a Titus Solera for himself. Suggested retail price: $7,750.00.

Thus, marketers must consider the total marketing strategy and mix when setting prices. If the product is positioned on nonprice factors, then decisions about quality, promotion, and distribution will strongly affect price. If price is a crucial positioning factor, then price will strongly affect decisions made about the other marketing mix elements. But even when featuring price, marketers need to remember that customers rarely buy on price alone. Instead, they seek products that give them the best value in terms of benefits received for the prices paid.

Organizational Considerations

Management must decide who within the organization should set prices. Companies handle pricing in a variety of ways. In small companies, prices are often set by top management rather than by the marketing or sales departments. In large companies, pricing is typically handled by divisional or product line managers. In industrial markets, salespeople may be allowed to negotiate with customers within certain price ranges. Even so, top management sets the pricing objectives and policies, and it often approves the prices proposed by lower-level management or salespeople.

In industries in which pricing is a key factor (airlines, aerospace, steel, railroads, oil companies), companies often have pricing departments to set the best prices or to help others in setting them. These departments report to the marketing department or top management. Others who have an influence on pricing include sales managers, production managers, finance managers, and accountants.

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