Week 7 · Chapter

Chapter 7 — Who Buys and at What Price: Marketing, Products & Pricing

Introduction to Business Free sample edition

The module's primary reading · ~35–45 minutes · Objective 4 (analyze how a firm creates value through operations, quality management, and information systems, and through marketing — target markets, the marketing mix, the product life cycle, pricing and break-even, distribution, and promotion), Objective 1 (describe what a business is — profit, risk, and the not-for-profit contrast — its stakeholders, the factors of production, and the forces in its external environment, and explain how economic systems, supply and demand, market structures, and the economy's health indicators shape business decisions) · Read it first this week; the lecture, the slides, the tutorial, and the quiz all build on it.

In plain language

A business can make a great product and still fail if nobody wants it or the price does not cover the costs. Marketing (finding out what buyers want and getting it to them at a price that works) is how a business answers both questions. This week you will choose whom a business serves and build its marketing mix (the four big decisions about the product, its price, how it reaches buyers, and how buyers hear about it). Then you will find the break-even point (the number of sales a business needs before it earns any profit). Last, you will see why a lower price can make that number go up, not down.

Why you already care about this

Think about the last time a price made you stop. Maybe a sandwich went up by a dollar, or a streaming plan you liked added a cheaper tier with ads. You noticed, and you may have changed what you bought. You were reacting to someone's pricing decision, and you were part of their market.

The coffee cart faces the same choices from the other side. It charges 5 dollars a drink. Each drink costs it 2 dollars in cups, lids, beans, and milk. Its fixed costs for the year come to 36,000 dollars. How many drinks does it have to sell before it makes a single dollar of profit? By the end of this chapter you will be able to work that out, and you will see why dividing 36,000 by 5 gives the wrong count.

This week finishes the unit on making the product and selling it. You will meet the idea behind marketing, choose a target market, build the cart's marketing mix, separate products from services, follow a product through its life, and then run the cart's numbers.

By the end of this chapter you will be able to:

explain the marketing concept and why marketing is more than advertising;
define a target market and sort buyers on geographic, demographic, psychographic, and behavioral bases;
build a marketing mix with the four Ps for a small business;
tell a product from a service, and place a product in one of the four life-cycle stages;
separate fixed from variable costs and compute the break-even point in units, in units a day, and in revenue;
compute markup on cost and margin on price from the same price and cost, and say why they differ;
compare skimming and penetration pricing, and explain why a lower price raises the break-even.

Carry this line with you: divide by what each sale leaves over, not by the price.

Where we are

Already covered: Week 1, The Idea and Its Environment, introduced the cart and its SWOT; Week 2, The Market It Sells Into: Economics for Business, placed the cart in monopolistic competition; Week 3, From Idea to Plan: Entrepreneurship, Small Business & the Business Plan, built the cart's plan, its start-up list, and its loan; Week 4, Choosing a Legal Form: Ownership, Franchising & Mergers, chose the cart's legal form; Week 5, What the Business Owes: Ethics & Social Responsibility, asked what a business owes the people its choices touch; Week 6, Making the Product: Operations, Quality & Information Systems, mapped how the cart makes each drink.
This week: the second half of the making-and-selling unit: the marketing concept, target markets and segmentation, buyer behavior, the four Ps, products versus services, the product life cycle, and pricing with the break-even point, markup and margin, and skimming versus penetration.
How they connect: Week 6 showed what it takes to make a drink; this week puts a price on it and asks how many drinks must sell to cover the cart's costs.
Where we're going next: Week 8, Midterm Review & the Growth Question, reviews Weeks 1 to 7 and asks what changes when one cart becomes two.

Three earlier weeks matter most here. In Week 2 you placed the cart in monopolistic competition: many sellers, each drink a little different, and easy entry. That is why the cart has to give buyers a reason to choose it. In Week 3 the cart took a 10,000-dollar equipment loan at 10 percent a year, so the first year's interest is 1,000 dollars. That 1,000 dollars returns this week as one of the cart's fixed costs. And in Week 6 you saw that the cart can make at most 30 drinks an hour, so any sales goal has to fit inside that ceiling.

1. Start with the customer: the marketing concept

Picture an illustrative neighborhood bike shop with a slow month. The owner's first idea is to buy a stack of flyers. Instead, the owner asks the riders who come in what they need. Many of them commute by bike, and they say the same thing: repairs are only done while they are at work.

So the shop opens early two mornings a week for quick repairs before work. It has not spent a dollar on ads yet. Word spreads among commuters anyway, because the shop now offers something they wanted and the shop down the street does not.

That is marketing in its full sense. Advertising is one small piece of it.

The marketing concept is the idea that a business should find out what customers want and deliver it better than its rivals do, while still earning a profit.

Notice the three parts. First, it starts with the customer, not the product. Second, it compares the business with its rivals. Third, it has to pay: an offer that pleases buyers but loses money on every sale is not the marketing concept at work.

Worked example — the bike shop runs the three tests. The shop is illustrative, and the example uses no figures.

What do customers want? Commuting riders want repairs that do not cost them a day without a bike.
Better than rivals? No nearby shop offers early-morning repairs, so the shop fills a gap.
Profitably? The early hours bring in repair work the shop was not getting before; the owner checks that the extra work covers the cost of opening early.

In words: the shop changed what it offered before it changed what it said, and that order is the marketing concept.

Misconception check. Students often think marketing means advertising: ads, posts, and slogans. That is tempting, because ads are the part of marketing everyone sees. But the bike shop's best marketing move was a change in its hours, made before any ad ran. The cure is to ask first what buyers want and whether the business can deliver it at a profit; telling buyers about it comes later.

Memory hook: listen first; sell second.

2. Choose whom to serve: target markets and segmentation

Picture an illustrative community gym that tries to please everyone. It runs the same classes at the same times with the same message for all. Retirees find the music too loud, early-shift nurses find no class before 6 a.m., and serious lifters find the weights too few. Trying to serve everyone, it serves no one especially well.

A business does better when it chooses.

A target market is the particular group of buyers a business decides to serve and builds its offer around.

To choose a target, a business first splits its market into groups.

Market segmentation is splitting a whole market into smaller groups of buyers who share a trait, so a business can choose which groups to serve and how.

Four bases for splitting a market are widely used.

Geographic segmentation is grouping buyers by where they live or work, such as a neighborhood, a city, or a region.
Demographic segmentation is grouping buyers by measurable traits such as age, life stage, household size, or income.
Psychographic segmentation is grouping buyers by their lifestyle, values, and interests rather than by measurable traits.
Behavioral segmentation is grouping buyers by how they use a product, how often they buy it, and what benefit they want from it.

Worked example — the gym splits its market four ways. The gym is illustrative, and the example uses no figures.

Geographic: people who live or work within a short drive of the gym.
Demographic: retirees, who are free in the middle of the day.
Psychographic: people who value company and want exercise to feel social.
Behavioral: members who come at the same early hour every day, before work.

The gym then picks a target: retirees who want a social, low-impact class at midday. It builds a midday class around them, with music they like and time to talk afterward.

In words: one gym, four ways to group its buyers, and one clear choice of whom to serve first.

An illustrative independent bookstore shows the same tool in another setting. Its behavioral segment of "people who buy a book every week" wants a reading club and early notice of new titles. Its geographic segment of nearby office workers wants a quick lunch-hour browse. Same store, two targets, two different offers.

Once a business knows whom it serves, it needs a picture of how those buyers decide.

Buyer behavior is how and why people decide what to buy, from noticing a need through comparing options, buying, and judging the purchase afterward.

A bookstore buyer might notice a need (a gift for a friend), compare options (two novels and a cookbook), buy one, and then judge it when the friend opens it. Each step is a place where a business can help or lose the sale.

Misconception check. Students often think the biggest market is always the best target, so a business should aim at "everyone." That is tempting, because more buyers sounds like more sales. But an offer built for everyone fits no one closely, as the gym found. The cure is to split the market first and then choose the group the business can serve better than its rivals.

Pause and try this. Choose one: (a) name a business you use and say which segmentation base best describes why you are in its target market; or (b) explain in two sentences why "people who come every morning before work" is a behavioral segment and not a demographic one.

Memory hook: split, then choose.

3. Build the mix: the four Ps

Picture the coffee cart on a weekday morning, parked outside the new office building two blocks from its usual spot. Everything about that scene is a choice: what it sells, what it charges, where it parks, and how people find out it is there.

Those choices have a name.

The marketing mix is the set of decisions a business controls in bringing an offer to market, conventionally organized as the four Ps.

The four Ps are the four parts of the marketing mix: product, price, place, and promotion. Some courses add further Ps for services, but these four are the ones this course uses. The framework comes from McCarthy (1960), Basic Marketing. The further Ps some courses add are people, process, and physical evidence; conventions differ, so only the four are tested here.

Here are the four, one at a time.

Product, in the marketing mix, is what the business offers to meet a buyer's want, including its features, quality, and packaging; it can be a good or a service.
Price, in the marketing mix, is the amount a buyer pays for one unit of what the business sells.
Place, in the marketing mix, is every decision about how the offer reaches the buyer, including where, when, and through whom it is sold, not only a store's address.
Promotion, in the marketing mix, is the ways a business tells buyers about its offer and persuades them to try it.

Worked example — the coffee cart's marketing mix. The cart and its mix are illustrative, constructed for this course.

Product: espresso drinks made to order.
Price: 5 dollars a drink.
Place: the cart moves to the office building two blocks away on weekdays and to the farmers' market on weekends. That is a place decision about where, when, and for whom.
Promotion: how the word gets out. The cart's promotion budget and its tools wait for Week 9, Reaching More Customers: Distribution, Promotion & Digital Commerce.

In words: the cart's mix is a made-to-order drink, at 5 dollars, brought to where office workers and market shoppers already are, with the word-of-mouth plan still to come.

Notice how the cart's strength from Week 1, that it can move to where the customers are, is really a place advantage. A café with four walls has one address; the cart picks its place every morning.

Misconception check. Students often think place means only a store's location, the street address. That is tempting, because "place" sounds like a spot on a map. But place covers every decision about how the product reaches the buyer: which days, which hours, which route, and through whom. The cart's place is two places, chosen by day of the week. The cure is to read place as "how the offer gets to the buyer," not "where the building is."

Memory hook: place is the path, not the pin.

4. Separate products from services: can you put it on a shelf?

Picture two things you could buy this week. One is a bag of coffee beans at a market stall. The other is a ride across town from an illustrative ride-share driver. The bag can sit on a shelf until a buyer comes. The ride cannot.

A service is an offer that is produced and used at the same moment, such as a haircut or a ride, so it cannot be made ahead and stored.

A good, like the bag of beans, can be made ahead, counted, and kept as inventory. A service has no shelf. The ride happens as the rider takes it.

Worked example — what an empty seat costs. The driver is illustrative, and the example uses no figures.

The good: the market stall roasts beans on a slow afternoon and sells the bags later in the week. Unsold bags wait on the shelf.
The service: the driver drives from one side of town to the other with an empty back seat. That empty seat cannot be saved for the evening rush.
What follows: the driver has to match the hours worked to the hours riders want rides, because unsold time is gone for good.

In words: a business that sells a good can make ahead and store; a business that sells a service has to match its capacity to demand as it happens.

The coffee cart sits in between. Each drink is a good, but it is made in front of the buyer, and the cart's 30-drinks-an-hour ceiling from Week 6 cannot be stored either. An empty hour at the machine is lost, the way the driver's empty seat is.

Misconception check. Students often treat a product and a service as interchangeable, as if a ride were a good that happens to move. That is tempting, because both are things people pay for. But a service is produced and used at the same moment, so it cannot be stored; a slow hour cannot be saved for a busy one. The cure is to ask, "Can I put it on a shelf?"

Memory hook: if it can't sit on a shelf, it's a service.

5. Follow a product's life: the product life cycle

Picture an illustrative phone accessory, a charging case made for one phone model. When it first appears, few people have heard of it. A year later, every store carries one and rivals copy it. Then the phone model is replaced, and sales of the case fade.

That arc has a name.

The product life cycle is a classroom model of a product's sales over time in four stages: introduction, growth, maturity, and decline.

Introduction: the product is new, few buyers know it, and sales are low.
Growth: buyers catch on, sales climb fast, and rivals start to appear.
Maturity: most buyers who want it already have it, sales level off, and rivals compete hard on price.
Decline: buyers move to something newer, and sales fall.

Worked example — two products, two stages. Both products are illustrative, and the example uses no figures.

The charging case, a year after launch: sales are climbing fast and rival cases are appearing. That is growth.
The same case after its phone model is replaced: sales are falling as buyers switch phones. That is decline.
An illustrative streaming plan that most households in its market already have: sales of new subscriptions have leveled off, and rival plans compete on price and extras. That is maturity.

In words: a product's stage shows up in its sales trend and its rivals, not in its age alone.

Honesty note: the product life cycle is a model, a simplification you can hold in one hand. Real products do not follow a timetable. Some stay in maturity for decades, some skip straight from introduction to decline, and a smart change can push a mature product back into growth.

Misconception check. Students often think every product moves through the four stages on a fixed schedule, like a calendar. That is tempting, because the stages come in a neat order. But the life cycle is a classroom model: it describes a common shape, not a timetable. The cure is to place a product by its current sales trend and its competition, then ask what could change that trend.

Pause and try this. Choose one: (a) name a product you use and argue which life-cycle stage it is in, giving one sign from its sales or its rivals; or (b) explain why a product's age alone cannot tell you its stage.

Memory hook: new, catching on, leveling off, fading.

6. Find the break-even point: fixed and variable costs

Picture the cart's owner on opening morning. The permit is paid, the insurance is paid, and the loan's interest is due whatever happens. None of that changes if the cart sells ten drinks or a hundred. But every drink sold uses a cup, a lid, beans, and milk.

Those are two kinds of cost, and pricing starts by telling them apart.

A fixed cost is a cost that stays the same however many units a business sells in a period, such as rent, insurance, or loan interest.

A variable cost is a cost that rises with every unit sold, such as the cup, lid, beans, and milk in each drink.

An illustrative family farm's weekend stall shows the same split. The stall fee is fixed: the farm pays it whether it sells many baskets of berries or few. The baskets and labels are variable: each basket sold uses one.

Now combine the two kinds of cost with the price. Each drink sells for 5 dollars, but 2 of those dollars go straight to the cup and its contents. The rest is what the drink contributes.

The per-unit margin is the price of one unit minus its variable cost: the dollars each sale contributes toward covering fixed costs.

The break-even point is the number of units a business must sell to cover all its costs, found as fixed costs divided by the price minus the variable cost per unit; below it the business loses money, above it the business earns a profit.

Break-even revenue is the sales in dollars at the break-even point, found as the break-even units times the price.

The formula, on one line with its named inputs:

break-even units = fixed costs ÷ (price − variable cost per unit)

Worked example — the cart's break-even. The cart's figures are illustrative, constructed for this course and not real data; money is in dollars, and volume is in drinks a year.

Per-unit margin: price 5 − variable cost 2 = 3 dollars a drink toward fixed costs.
Fixed costs: operating expenses 35,000 + interest 1,000 = 36,000 dollars a year.
Break-even units: 36,000 ÷ (5 − 2) = 36,000 ÷ 3 = 12,000 drinks a year.
Break-even per day: 12,000 ÷ 250 = 48 drinks a day over 250 operating days.
Break-even revenue: 12,000 × 5 = 60,000 dollars a year.

In words: at 5 dollars a drink the cart has to sell 12,000 drinks a year, about 48 customers a day, before it earns a single dollar of profit. The 12,000th drink covers the last dollar of fixed costs; from the 12,001st drink on, each sale adds 3 dollars of profit.

Now check that against Week 6. The cart can make 30 drinks an hour, so 48 drinks is well under two hours of full-speed work. The goal fits inside the ceiling, which tells the owner the problem is finding 48 buyers a day, not making the drinks.

Caveat: a break-even assumes one price and a constant variable cost per unit. Real carts run specials, and bean prices move. The model still gives the owner a clear target, and the owner reruns it whenever the price or a cost changes.

In practice (your tools). You can run the break-even in any free spreadsheet, such as Google Sheets. Type 36000 in cell B2 for fixed costs, 5 in cell B3 for the price, and 2 in cell B4 for the variable cost per unit. In cell B5 type =B2/(B3-B4) for the break-even units. In cell B6 type =B5/250 for the drinks a day, and in cell B7 type =B5*B3 for the break-even revenue. The parentheses in B5 make the spreadsheet subtract before it divides.

Misconception check. Students often compute the break-even as fixed costs divided by the price: 36,000 ÷ 5 = 7,200 drinks. That is tempting, because the price is the number on the menu board. But 2 of every 5 dollars pay for the cup and its contents, so only 3 dollars of each sale is left to cover fixed costs. The cure is to divide by the per-unit margin, price minus variable cost: 36,000 ÷ 3 = 12,000 drinks. At 7,200 drinks the cart would still be losing money.

Memory hook: divide by what each sale leaves over.

7. Compare markup and margin: one gap, two percentages

Picture two people talking about the same drink. One says, "We mark it up 150 percent." The other says, "Our margin is 60 percent." They sound as if they disagree. They are describing the same 3-dollar gap.

The difference is what each one divides by.

Markup on cost is the gap between price and cost stated as a percentage of the cost: (price minus cost) divided by cost, times 100.

Margin on price is the gap between price and cost stated as a percentage of the price: (price minus cost) divided by price, times 100.

The two formulas, each on one line:

markup on cost = (price − cost) ÷ cost × 100

margin on price = (price − cost) ÷ price × 100

Worked example — the cart's markup and margin. The cart's figures are illustrative, constructed for this course; the cost here is the 2-dollar variable cost per drink.

The gap: 5 − 2 = 3 dollars a drink.
Markup on cost: (5 − 2) ÷ 2 × 100 = 3 ÷ 2 × 100 = 150 percent.
Margin on price: (5 − 2) ÷ 5 × 100 = 3 ÷ 5 × 100 = 60 percent.

In words: the same 3-dollar gap is a 150 percent markup on cost and a 60 percent margin on price. The markup is larger because it divides by the smaller number, the cost.

An illustrative campus bookstore shows the same pattern at a smaller gap. It buys a sweatshirt for 20 dollars and sells it for 25. The gap is 25 − 20 = 5 dollars. Markup on cost: 5 ÷ 20 × 100 = 25 percent. Margin on price: 5 ÷ 25 × 100 = 20 percent. Again the markup is the larger figure.

Why does this matter? If a manager wants a 60 percent margin and a new hire applies a 60 percent markup instead, every item ends up priced too low. The words sound alike, and the gap between them is real money.

In practice (your tools). In a free spreadsheet such as Google Sheets, type 5 in cell B2 for the price and 2 in cell B3 for the cost. In cell B4 type =(B2-B3)/B3*100 for the markup on cost, and in cell B5 type =(B2-B3)/B2*100 for the margin on price. Only the cell you divide by changes.

Misconception check. Students often think markup and margin are the same percentage, two words for one number. That is tempting, because both start from the same gap between price and cost. But markup divides the gap by the cost, and margin divides it by the price, so for the cart one is 150 percent and the other is 60 percent. The cure is to ask, "A percentage of what?" before you trust any markup or margin.

Memory hook: markup over cost, margin over price.

8. Choose a launch price: skimming versus penetration

Picture two launches. The illustrative charging case from section 5 comes out at a high price, sold first to the buyers most eager for it, and the price comes down over the following months. The illustrative streaming plan launches at a very low monthly price to sign up as many households as it can, fast.

Those are the two classic launch strategies.

Price skimming is launching a new product at a high price to the buyers most eager for it and cutting the price over time.

Penetration pricing is launching a new product at a low price to build sales volume and market share fast.

Each has a reason. Skimming earns more on each early sale from the buyers who value the product most. Penetration trades a smaller amount per sale for a large number of buyers, hoping to win them before rivals do.

Whether either one works depends on how buyers react to price.

Price sensitivity is how strongly buyers change the amount they buy when the price changes; this course describes it in words and never computes it.

Office workers who want a drink two blocks from their desks might barely react to a small price change. Farmers' market shoppers, with a chain café in sight, might react a great deal. The cart's owner has to judge which buyers it is serving.

Now see what a lower price does to the cart's break-even.

Worked example — a 4-dollar penetration price. The cart's figures are illustrative, constructed for this course; fixed costs and the variable cost stay the same.

Per-unit margin at 4 dollars: 4 − 2 = 2 dollars a drink.
Break-even units: 36,000 ÷ (4 − 2) = 36,000 ÷ 2 = 18,000 drinks a year.
Compared with the 5-dollar price: 18,000 − 12,000 = 6,000 more drinks a year.

In words: dropping the price to 4 dollars raises the break-even to 18,000 drinks, because each sale contributes 2 dollars instead of 3. That is 18,000 versus 12,000, one and a half times as many drinks (18,000 ÷ 12,000 = 1.5), before the cart earns a dollar of profit.

So the penetration price is a bet. It pays off only if the lower price brings in at least 6,000 more drinks a year than the 5-dollar price would. Whether buyers react that strongly is the price-sensitivity question, and the owner has to judge it; the arithmetic cannot answer it.

Misconception check. Students often think a lower price lowers the break-even, because a cheaper product should be easier to sell. That is tempting, and it is half right: a lower price may bring more buyers. But the break-even counts what each sale contributes, and at 4 dollars each drink contributes 2 dollars instead of 3. The cure is to recompute the per-unit margin first: a lower price raises the break-even, from 12,000 to 18,000 drinks.

Pause and try this. Choose one: (a) describe a product you have seen launched at a high price that later fell, and say what kind of buyer paid the early price; or (b) explain in two sentences why a penetration price is a bet on price sensitivity.

Memory hook: cut the price, raise the bar.

Key terms

marketing concept — The idea that a business should find out what customers want and deliver it better than its rivals do, while still earning a profit. (first used: 1. Start with the customer: the marketing concept)
target market — The particular group of buyers a business decides to serve and builds its offer around. (first used: 2. Choose whom to serve: target markets and segmentation)
market segmentation — Splitting a whole market into smaller groups of buyers who share a trait, so a business can choose which groups to serve and how. (first used: 2. Choose whom to serve: target markets and segmentation)
geographic segmentation — Grouping buyers by where they live or work, such as a neighborhood, a city, or a region. (first used: 2. Choose whom to serve: target markets and segmentation)
demographic segmentation — Grouping buyers by measurable traits such as age, life stage, household size, or income. (first used: 2. Choose whom to serve: target markets and segmentation)
psychographic segmentation — Grouping buyers by their lifestyle, values, and interests rather than by measurable traits. (first used: 2. Choose whom to serve: target markets and segmentation)
behavioral segmentation — Grouping buyers by how they use a product, how often they buy it, and what benefit they want from it. (first used: 2. Choose whom to serve: target markets and segmentation)
buyer behavior — How and why people decide what to buy, from noticing a need through comparing options, buying, and judging the purchase afterward. (first used: 2. Choose whom to serve: target markets and segmentation)
marketing mix — The set of decisions a business controls in bringing an offer to market, conventionally organized as the four Ps. (first used: 3. Build the mix: the four Ps)
four Ps — The four parts of the marketing mix: product, price, place, and promotion. Some courses add further Ps for services, but these four are the ones this course uses. (first used: 3. Build the mix: the four Ps)
product — In the marketing mix, what the business offers to meet a buyer's want, including its features, quality, and packaging; it can be a good or a service. (first used: 3. Build the mix: the four Ps)
price — In the marketing mix, the amount a buyer pays for one unit of what the business sells. (first used: 3. Build the mix: the four Ps)
place — In the marketing mix, every decision about how the offer reaches the buyer, including where, when, and through whom it is sold, not only a store's address. (first used: 3. Build the mix: the four Ps)
promotion — In the marketing mix, the ways a business tells buyers about its offer and persuades them to try it. (first used: 3. Build the mix: the four Ps)
service — An offer that is produced and used at the same moment, such as a haircut or a ride, so it cannot be made ahead and stored. (first used: 4. Separate products from services: can you put it on a shelf?)
product life cycle — A classroom model of a product's sales over time in four stages: introduction, growth, maturity, and decline. (first used: 5. Follow a product's life: the product life cycle)
fixed cost — A cost that stays the same however many units a business sells in a period, such as rent, insurance, or loan interest. (first used: 6. Find the break-even point: fixed and variable costs)
variable cost — A cost that rises with every unit sold, such as the cup, lid, beans, and milk in each drink. (first used: 6. Find the break-even point: fixed and variable costs)
per-unit margin — The price of one unit minus its variable cost: the dollars each sale contributes toward covering fixed costs. (first used: 6. Find the break-even point: fixed and variable costs)
break-even point — The number of units a business must sell to cover all its costs, found as fixed costs divided by the price minus the variable cost per unit; below it the business loses money, above it the business earns a profit. (first used: 6. Find the break-even point: fixed and variable costs)
break-even revenue — The sales in dollars at the break-even point, found as the break-even units times the price. (first used: 6. Find the break-even point: fixed and variable costs)
markup on cost — The gap between price and cost stated as a percentage of the cost: (price minus cost) divided by cost, times 100. (first used: 7. Compare markup and margin: one gap, two percentages)
margin on price — The gap between price and cost stated as a percentage of the price: (price minus cost) divided by price, times 100. (first used: 7. Compare markup and margin: one gap, two percentages)
price skimming — Launching a new product at a high price to the buyers most eager for it and cutting the price over time. (first used: 8. Choose a launch price: skimming versus penetration)
penetration pricing — Launching a new product at a low price to build sales volume and market share fast. (first used: 8. Choose a launch price: skimming versus penetration)
price sensitivity — How strongly buyers change the amount they buy when the price changes; this course describes it in words and never computes it. (first used: 8. Choose a launch price: skimming versus penetration)

Summary

The marketing concept starts with what customers want, beats rivals at it, and stays profitable; advertising is only one part of marketing.
Segmentation splits a market on geographic, demographic, psychographic, or behavioral bases; the target market is the group a business chooses to serve.
The marketing mix is the four Ps: product, price, place, and promotion; place is every decision about how the offer reaches the buyer.
A service is produced and used at the same moment and cannot be stored; a good can be made ahead.
The product life cycle runs introduction, growth, maturity, and decline, and it is a model, not a timetable.
The cart's break-even is 36,000 ÷ (5 − 2) = 12,000 drinks a year, 48 a day, and 60,000 dollars of revenue.
The same 3-dollar gap is a 150 percent markup on cost and a 60 percent margin on price.
Skimming launches high and cuts the price; penetration launches low; at 4 dollars the cart's break-even rises to 18,000 drinks.

Check your understanding

Work these before looking at the answers — they are ungraded, and the answers (with reasoning) are at the bottom of the page.

An illustrative bike-repair stand charges 50 dollars for a tune-up. Each tune-up uses 10 dollars of parts and supplies. The stand's fixed costs are 14,000 dollars a year. Find the per-unit margin, the break-even in tune-ups, and the break-even revenue. A friend divides 14,000 by 50 and gets 280 tune-ups; explain what went wrong.
An illustrative campus bookstore buys a planner for 10 dollars and sells it for 20 dollars. Compute the markup on cost and the margin on price, and say why they differ.
An illustrative yoga studio sells single classes at 10 dollars. Each class visit costs it 2 dollars in supplies and cleaning, and its fixed costs are 24,000 dollars a year. The owner considers an opening price of 8 dollars. Find the break-even in class visits at each price, and say what the lower price does.
For an illustrative library café, name the segmentation base each group uses: (a) students who come in during exam weeks to study late; (b) people who live within walking distance; (c) parents of young children; (d) people who care about buying fair-trade coffee. Then say whether the café's "a seat and a fresh drink for an hour" is a good or a service, and why.

Answers (worked reasoning — read after attempting)

Per-unit margin: 50 − 10 = 40 dollars a tune-up. Break-even: 14,000 ÷ (50 − 10) = 14,000 ÷ 40 = 350 tune-ups a year. Break-even revenue: 350 × 50 = 17,500 dollars a year. The friend divided by the price, but 10 of every 50 dollars goes to parts, so only 40 dollars of each tune-up is left to cover fixed costs. At 280 tune-ups the stand would still be losing money.
The gap is 20 − 10 = 10 dollars. Markup on cost: 10 ÷ 10 × 100 = 100 percent. Margin on price: 10 ÷ 20 × 100 = 50 percent. They differ because the markup divides the gap by the cost (10 dollars) and the margin divides it by the price (20 dollars); the smaller divisor gives the larger percentage.
At 10 dollars: per-unit margin 10 − 2 = 8 dollars, so the break-even is 24,000 ÷ 8 = 3,000 class visits. At 8 dollars: per-unit margin 8 − 2 = 6 dollars, so the break-even is 24,000 ÷ 6 = 4,000 class visits. The lower price raises the break-even by 4,000 − 3,000 = 1,000 visits, because each visit contributes less. The trap is assuming a cheaper class means fewer visits are needed.
(a) Behavioral: the group is defined by how and when they use the café. (b) Geographic: the group is defined by where they live. (c) Demographic: life stage is a measurable trait. (d) Psychographic: the group is defined by a value. The seat and drink for an hour is mostly a service: the hour at the table is produced and used at the same moment, and an empty seat at 3 o'clock cannot be saved for the evening. The drink itself is a good, so the café sells both, like the coffee cart.

Next up in this module: the Readings & Resources page, the lecture tutorial, the practice set, and the quiz — and next week the midterm review gathers the break-even model, markup versus margin, and the tools from Weeks 1 to 6 before the cart faces its growth question.

Built with The Course Maker · samples.thecoursemaker.com