Part 7: Pricing Decisions :Part 7: Pricing Decisions Price Concepts and Approaches Pricing Strategies


Chapter 18 :Chapter 18 Price Concepts and Approaches


Chapter Objectives :18-3 Chapter Objectives Outline the legal constraints on pricing. Identify the major categories of pricing objectives. Explain price elasticity and its determinants. List the practical problems involved in applying price theory concepts to actual pricing decisions. Explain the major cost-plus approaches to price setting. List the chief advantages and shortcomings of using breakeven analysis in pricing decisions. Explain the superiority of modified breakeven analysis over the basic breakeven model and the role of yield management in pricing decisions. Identify the major pricing challenges facing online and international marketers.


Pricing and the Law :18-4 Pricing and the Law Price: the exchange value of a good or service Robinson-Patman Act Federal legislation prohibiting price discrimination that is not based on a cost differential Also prohibits selling at unreasonably low prices to eliminate competition


Slide 5:18-5 Unfair Trade Laws Require sellers to maintain minimum prices for comparable merchandise. These laws were intended to protect small specialty shops. Designed to protect small stores and businesses from the predatory pricing practices of larger chain stores Fair Trade Laws Allow manufacturers to stipulate minimum prices for their products and force retailers to adhere to them Enable companies to establish and maintain product images


Pricing Objectives and theMarketing Mix :18-6 Pricing Objectives and theMarketing Mix Prices, and the resulting sales, determine how much revenue a company receives Prices thus influence a firm’s profits Prices also influence the firm’s employment of the factors of production: Natural resources Capital Human Resources Entrepreneurship


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Slide 8:18-8 Profitability ObjectivesFor-profit firms must set prices with profitability in mind Profit Maximization: point at which the additional revenue gained by increasing the price of a product equals the increase in total costs Target-Return Objectives: Short-run or long-run pricing objectives of achieving a specified return on either sales or investment


Slide 9:18-9 Volume Objectives Sales maximization: A minimum profit level is set and firms seek to maximizes sales Market-share objectives: the goal set for controlling a portion of the market for a firm’s good or service The Product Impact of Market Strategies (PIMS) Project: Research that discovered a strong positive relationship between a firm’s market share and product quality and its return on investment


Slide 10:18-10 Meeting Competition: Seeks simply to meet competitor’s prices Value Pricing: Pricing strategy that emphasizes the benefits derived from a product in comparison to the price and quality levels of competing offerings


Slide 11:18-11 Prestige Objectives: Prices are set at a relatively high level in order to develop and maintain an image of quality and exclusiveness that appeals to status-conscious consumers


Pricing Objectives of Not-for-Profit Organizations :18-12 Pricing Objectives of Not-for-Profit Organizations Profit maximization Cost recovery Market incentives Market suppression


Methods for Determining Prices :18-13 Methods for Determining Prices Customary Prices: traditional prices that consumers expect to pay for a good or service


Price Determination inEconomic Theory :18-14 Price Determination inEconomic Theory Demand: schedule of the amounts of a firm’s good or service that consumers purchase at different prices during a specified period Supply: schedule of the amounts of a good or service that firms will offer for sale at different prices during a specified time period


Slide 15:18-15 Four Market Structures Pure Competition: Market structure characterized by homogeneous products in which there are so many buyers and sellers that none has a significant influence on price Monopolistic Competition: Market structure involving a heterogeneous product and product differentiation among competing suppliers, allowing the marketer some degree of control over prices


Slide 16:18-16 Oligopoly: Market structure involving relatively few sellers and barriers to new competitors due to high start-up costs Monopoly: Market structure involving only one seller of a good or service for which no close substitutes exist


Slide 17:18-17 Distinguishing features of the Four Market Structures


Slide 18:18-18 Cost and Revenue CurvesPrice is often determined by analyzing the cost and revenue curves Average total cost is calculated by dividing the total costs by the number of units produced Marginal cost is the change in total cost that results from producing an additional unit of output Average revenue is calculated by dividing total revenue by the quantity of goods or services sold Marginal revenue is the change in total revenue that results from selling an additional unit of output


Slide 19:18-19 Determining Price by Relating Marginal Revenue to Marginal Cost


Slide 20:18-20 Price Determination using Marginal Analysis


Slide 21:18-21 The Concept Of Elasticity In Pricing Strategy Elasticity: measure of responsiveness of purchasers and suppliers to changes in price Determinants Of Elasticity Availability of Substitutes or complements Luxury or Necessity Portion of Budget Time Perspective


Slide 22:18-22 Elasticity and RevenueElasticity of demand exerts an important influence on total revenue as a result in the changes in the price of a good or service For example, should a city’s transit authority raise or lower price for public transportation? The answer, of course, lies in the elasticity of demand for public transportation


Slide 23:18-23 Practical Problems of Price Theory Marketers may thoroughly understand price theory concepts but still encounter difficulty in applying them in practice. Practical limitations interfering with price setting include the facts that: Many firms don’t attempt to maximize profits Estimating demand curves is a difficult process


Price Determination in Practice :18-24 Price Determination in Practice Cost-plus pricing: practice of adding a percentage of a specified dollar amount (markup) to the base cost of a product to cover unassigned costs and provide a profit


Slide 25:18-25 Alternative Pricing Procedures Full-cost pricing uses all relevant variable costs and allocates fixed costs that cannot be directly attributed to the production of the specific item in setting a product’s price. Incremental-cost pricing attempts to overcome arbitrary allocation of fixed costs by only considering costs directly attributable to the product itself when setting prices


Slide 26:18-26 Breakeven analysis: pricing technique used to determine the number of products that must be sold at a specified price in order to generate sufficient revenue to cover total cost Target Returns A desired dollar return A percentage of sales Evaluation of Breakeven Analysis


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Toward Realistic Pricing :18-28 Toward Realistic Pricing In actual practice, most pricing approaches are largely cost oriented They thus violate the marketing concept New approaches being developed are incorporating the element of consumer demand


Slide 29:18-29 The Modified Breakeven Concept Pricing technique used to evaluate consumer demand by comparing the number of products that must be sold at a variety of prices in order to cover total cost with estimates of expected sales at the various prices


Slide 30:18-30 Modified Breakeven Chart


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Slide 32:18-32 Revenue and Cost data for Modified Breakeven Analysis


Slide 33:18-33 Yield Management: pricing strategy that allows marketers to vary prices based on such factors as demand, even though the cost of providing those goods or services remains the same Designed to maximize sales in situations such as airfares, lodging, auto rentals, and theater tickets where costs are fixed


Global Issues in Price Determination :18-34 Global Issues in Price Determination Global Prices must support the firm’s broader goals including: Product development Advertising and sales Customer support Competitive plans Financial objectives


Slide 35:18-35 In General, there are five pricing objectives that firms can use to set prices in global marketing Profitability, volume, meeting competition, and prestige, are the same as those discussed earlier In addition international marketers work to achieve price stability Price stability is the ability to maintain consistent prices during major economic fluctuations and periods of political change