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

2. Price Concepts and Approaches
Chapter 18
Price Concepts and Approaches

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.

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

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

6. Pricing Objectives and the Marketing 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

7. Objective
Purpose
Example
Profitability Objectives
Profit Maximization
Target Return
Low introductory interest rates on credit cards with high standard rates after 6 months.
Volume Objectives     
Sales Maximization
Market Share
Dell’s low-priced PCs increase market share and sales of services
Meeting Competition Objectives  
Value Pricing
Per-song charges for music downloads
Prestige Objectives  
Lifestyle
Image
High-priced luxury autos such as BMW and watches by Piaget
Not-for-Profit Objectives
Cost Recovery
Market Incentives
Market Suppression
High prices for tobacco and alcohol to reduce consumption

8. Profitability Objectives For-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

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

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

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

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

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

14. Price Determination in Economic 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

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

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

17. Distinguishing features of the Four Market Structures
Characteristics
Pure Competition
Monopolistic Competition
Oligopoly
Monopoly
Number of competitors
Many
Few to many
Few
No direct competitors
Ease of entry into industry by new firms
Easy
Somewhat Difficult
Difficult
Regulated by government
Similarity of goods or services offered by competing firms
Similar
Different
Can be either similar or different
No directly competing goods or service
Control over prices by individual firms
None
Some
Considerable
Demand curves facing individual firms
Totally elastic
Can be either elastic or inelastic
Kinked; inelastic below kink; more elastic above
Examples
2000-acre ranch
Banana Republic BP
Commonwealth Edison

18. Cost and Revenue Curves Price 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

19. Determining Price by Relating Marginal Revenue to Marginal Cost

20. Profits (Total Revenue – Total Costs)
Price Determination using Marginal Analysis
Price
Number Sold
Total Revenue
Marginal Revenue
Total Costs
Marginal Costs
Profits (Total Revenue – Total Costs)
($50)
$34 1 57 $7
(23) 32 2 64 30 62 5 3 90 26 66 4 24 28
112 22 69 43
130 18 73 6
144 14 78 7
154 10 84 70 20 8
160 91 9
162
100 16
(2)
110 11 50

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

22. Elasticity and Revenue Elasticity 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

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

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

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

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

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

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

30. Modified Breakeven Chart

32. Breakeven Point -No. of Sales Required to Break Even
Revenue and Cost data for Modified Breakeven Analysis
Revenues
Costs
Price
Quantity Demanded
Total Revenue
Total Fixed Cost
Total Variable Cost
Total Cost
Breakeven Point -No. of Sales Required to Break Even
Total Profit (or Loss)
$15
2,500
$37,500
$40,000
$12,500
$52,500
4,000
$(15,000) 10
10,000
100,000
40,000
50,000
90,000
8,000 9
13,000
117,000
65,000
105,000
110,000
12,000 8
14,000
112,000
70,000
13,334
2,000 7
15,000
75,000
115,000
20,000
(10,000)

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

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

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