Firms successful at creating customer value with the other marketing mix activities must capture this value in the prices they earn; price being the sum of all the values that customers exchange to gain the benefits of having or using a particular product or service. A company does not set a single price, but rather a pricing structure that covers different items in its line. This pricing structure changes over time as products move through their life cycles. The company adjusts its prices to reflect changes in costs and demand and to account for variations in buyers and situations.
Pricing structures are also determined by how a firm might view itself as an integral partner in a value network. It may be thought of as an overall system of formal and informal relationship within which the firm participates to procure, transform, enhance, and ultimately supply its offering in final form within a market space. This value network is a strategic approach to cut costs and maximize process efficiencies, in the pursuit of the ultimate objective; to co-create value, a most important component of the pricing structure.
Washburn Guitars: Using Break Even Points to Make Pricing Decisions
Washburn Guitar manufactures instruments in four categories—one-of-a-kind, batch custom, mass customized, and mass produced—and must set prices in each category that enable it to stay in business. Bill Abel, Washburn’s VP of sales, is responsible for setting the prices for the firm’s guitar lines. Looking at a new line whose suggested retail price is $349, Abel estimates elements of Washburn’s fixed and variable costs to project the likely break-even point and profit. You should calculate break-even points and profits under various conditions and assess the effects of moving two production facilities to a single new location.
To do this, you must first understand how to calculate the following:
Key terms and equations defined and explained in Chapter 13: Price (P), Total Revenue (TR), Total Cost (TC), Fixed Costs (FC), Variable Costs (VC), Unit Variable Costs (UVC), and Break-Even Point (BEP). Also, ask the following questions:
- How do you compute Unit Variable Cost (UVC)?
- How do you compute total cost (TC)?
- What is a break-even point? How do you calculate it?
- What is the profit equation?
Once you understand these cost equations, compute the break-even point for the new line of guitars if the retail price is (a) $349; (b) $389; and (c) $309. Also, (d) if Washburn achieves the sales target of 2,000 units at the $349 retail price, what will its profit be?
Assume that the merger with Parker leads to the cost reductions projected in the case. Show the (a) new break-even point at a $349 retail price for this line of guitars and (b) new profit if it sells 2,000 units.
Please review the following information about the pricing considerations for Washburn Guitars:
Background on Washburn Guitars
- Read the video case in the textbook on pages 367-368.
- Watch the Washburn Guitar case video: http://www.viddler.com/embed/ce85a490/?f=1&autoplay=0&player=full&disablebranding=0 (Links to an external site.)Links to an external site.
- Review the following online websites and articles:
- S. Music Aims for the ‘Perfect Experience,’” Music Trades, July 2012
- http://www.washburn.com/news/pdf/MusicTrades-US%20Music.pdf (Links to an external site.)Links to an external site.
- Washburn Guitars (business operations) Factory Tour https://www.youtube.com/watch?v=kXyM89SAQG (Links to an external site.)Links to an external site.
Based on the information provided, put yourself in the position of a marketing consultant brought in to the company to critically examine the campaign’s ability to meet its’ pricing objectives, and then formulate a set of well-developed and supported recommendations to the company’s senior leadership team. The recommendation should be logically presented, well-supported, and thoroughly vetted.
Kerin, R. A. & Hartley, S. W. (2017). Marketing. (13th ed.). New York, New York: McGraw-Hill Education.
Washburn History. (n.d.). Retrieved July 8, 2016, from Washburn.com: http://www.washburn.com/community/