chap 18

Part 7: Pricing DecisionsPrice Concepts and ApproachesPricing Strategies

Chapter 18Price Concepts and Approaches

Copyright 2006 by South-Western, a division of Thomson Learning, Inc. All rights reserved.

18-*Chapter ObjectivesOutline 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.


18-*Pricing and the LawPrice: the exchange value of a good or service

Robinson-Patman ActFederal legislation prohibiting price discrimination that is not based on a cost differentialAlso prohibits selling at unreasonably low prices to eliminate competition


18-*Unfair Trade LawsRequire 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 storesFair Trade LawsAllow manufacturers to stipulate minimum prices for their products and force retailers to adhere to themEnable companies to establish and maintain product images


18-*Pricing Objectives and theMarketing MixPrices, and the resulting sales, determine how much revenue a company receivesPrices thus influence a firms profitsPrices also influence the firms employment of the factors of production:Natural resourcesCapitalHuman ResourcesEntrepreneurship


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ObjectivePurposeExampleProfitability ObjectivesProfit MaximizationTarget ReturnLow introductory interest rates on credit cards with high standard rates after 6 months.Volume ObjectivesSales MaximizationMarket Share Dells low-priced PCs increase market share and sales of servicesMeeting Competition ObjectivesValue PricingPer-song charges for music downloadsPrestige ObjectivesLifestyleImageHigh-priced luxury autos such as BMW and watches by PiagetNot-for-Profit ObjectivesProfit MaximizationCost RecoveryMarket IncentivesMarket Suppression High prices for tobacco and alcohol to reduce consumption


18-*Profitability Objectives For-profit firms must set prices with profitability in mindProfit 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


18-*Volume ObjectivesSales maximization: A minimum profit level is set and firms seek to maximizes salesMarket-share objectives: the goal set for controlling a portion of the market for a firms good or serviceThe Product Impact of Market Strategies (PIMS) Project: Research that discovered a strong positive relationship between a firms market share and product quality and its return on investment


18-*Meeting Competition: Seeks simply to meet competitors prices

Value Pricing: Pricing strategy that emphasizes the benefits derived from a product in comparison to the price and quality levels of competing offerings


18-*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


18-*Pricing Objectives of Not-for-Profit OrganizationsProfit maximization

Cost recovery

Market incentives

Market suppression


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


18-*Price Determination inEconomic TheoryDemand: schedule of the amounts of a firms 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


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


18-*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


18-*Distinguishing features of the Four Market Structures

CharacteristicsPure CompetitionMonopolistic Competition Oligopoly MonopolyNumber of competitorsManyFew to manyFewNo direct competitorsEase of entry into industry by new firmsEasySomewhat DifficultDifficultRegulated by governmentSimilarity of goods or services offered by competing firmsSimilarDifferentCan be either similar or differentNo directly competing goods or serviceControl over prices by individual firmsNoneSomeSomeConsiderableDemand curves facing individual firmsTotally elasticCan be either elastic or inelasticKinked; inelastic below kink; more elastic aboveCan be either elastic or inelasticExamples2000-acre ranchBanana RepublicBPCommonwealth Edison


18-*Cost and Revenue Curves Price is often determined by analyzing the cost and revenue curvesAverage total cost is calculated by dividing the total costs by the number of units producedMarginal cost is the change in total cost that results from producing an additional unit of outputAverage revenue is calculated by dividing total revenue by the quantity of goods or services soldMarginal revenue is the change in total revenue that results from selling an additional unit of output


18-*Determining Price by Relating Marginal Revenue to Marginal Cost


18-*Price Determination using Marginal Analysis

Price Number Sold Total Revenue Marginal Revenue Total Costs Marginal CostsProfits (Total Revenue Total Costs)($50) $341$34$3457$7(23)32264306252303902666424284112226934326513018734572461441478566227154108467020816069176918916221009621610160(2)1101150


18-*The Concept Of Elasticity In Pricing StrategyElasticity: measure of responsiveness of purchasers and suppliers to changes in price

Determinants Of ElasticityAvailability of Substitutes or complementsLuxury or NecessityPortion of BudgetTime Perspective


18-*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 serviceFor example, should a citys transit authority raise or lower price for public transportation?The answer, of course, lies in the elasticity of demand for public transportation


18-*Practical Problems of Price TheoryMarketers 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 dont attempt to maximize profitsEstimating demand curves is a difficult process


18-*Price Determination in PracticeCost-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


18-*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 products 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


18-*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 ReturnsA desired dollar returnA percentage of salesEvaluation of Breakeven Analysis


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18-*Toward Realistic PricingIn actual practice, most pricing approaches are largely cost orientedThey thus violate the marketing conceptNew approaches being developed are incorporating the element of consumer demand


18-*The Modified Breakeven ConceptPricing 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


18-*Modified Breakeven Chart


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18-*Revenue and Cost data for Modified Breakeven Analysis

RevenuesCosts Price Quantity Demanded Total Revenue Total Fixed Cost Total Variable Cost Total CostBreakeven Point -No. of Sales Required to Break EvenTotal Profit (or Loss)$152,500$37,500$40,000$12,500$52,5004,000$(15,000)1010,000100,00040,00050,00090,0008,00010,000

913,000117,00040,00065,000105,000110,00012,000814,000112,00040,00070,000110,00013,3342,000715,000105,00040,00075,000115,00020,000(10,000)


18-*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 sameDesigned to maximize sales in situations such as airfares, lodging, auto rentals, and theater tickets where costs are fixed


18-*Global Issues in Price DeterminationGlobal Prices must support the firms broader goals including:Product developmentAdvertising and salesCustomer supportCompetitive plansFinancial objectives


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

chap 18

Documents

division of thomson

actual pricing decisions

major pricing challenges

minimum prices

price setting

price elasticity

price discrimination

price theory concepts