Chap 18

Part 7: Pricing Decisions
18. Price Concepts and Approaches

19. Pricing Strategies
Copyright 2006 by South-Western, a division of Thomson Learning, Inc. All rights reserved.
Chapter 18
Price Concepts
and Approaches
Chapter Objectives
1.
2.
3.
4.
5.
6.
7.
8.
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.
18-3
Pricing and the Law

Price:
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
18-4
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
18-5
Pricing Objectives and the

Marketing Mix
Prices, and the resulting sales, determine how
much revenue a company receives
Prices thus influence a firms profits
Prices also influence the firms employment of
the factors of production:
Natural resources
Capital
Human Resources
Entrepreneurship
18-6
Objective
Purpose
Example
Profitability
Objectives
ProfitMaximization
TargetReturn
Lowintroductoryinterestrates
oncreditcardswithhigh
standardratesafter6months.
VolumeObjectives
SalesMaximization
MarketShare
DellslowpricedPCsincrease
marketshareandsalesof
services
MeetingCompetition
Objectives
ValuePricing
Persongchargesformusic
downloads
PrestigeObjectives
Lifestyle
Image
Highpricedluxuryautossuch
asBMWandwatchesbyPiaget
NotforProfit
Objectives
ProfitMaximization
CostRecovery
MarketIncentives
MarketSuppression
Highpricesfortobaccoand
alcoholtoreduceconsumption
18-7
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
18-8
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
firms good or service
The 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
18-9
Meeting Competition: Seeks simply to

meet competitors prices
Value Pricing:
Pricing Pricing strategy that
emphasizes the benefits derived from a
product in comparison to the price and
quality levels of competing offerings
18-10
Prestige Objectives:
Objectives Prices are set at
a relatively high level in order to develop
and maintain an image of quality and
exclusiveness that appeals to statusconscious consumers
18-11
Pricing Objectives of Not-for-Profit

Organizations
Profit maximization
Cost recovery
Market incentives
Market suppression
18-12
Methods for Determining Prices

Customary Prices: traditional prices that
consumers expect to pay for a good or
service
18-13
Price Determination in
Economic Theory
Demand: 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
18-14
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
18-15
Oligopoly:
Oligopoly Market structure involving
relatively few sellers and barriers to new
competitors due to high start-up costs
Monopoly:
Monopoly Market structure involving only
one seller of a good or service for which no
close substitutes exist
18-16
Distinguishing features of the Four Market Structures

Pure
Competition
Monopolistic
Competition
Oligopoly
Monopoly
Numberofcompetitors
Many
Fewtomany
Few
Nodirectcompetitors
Easeofentryinto
industrybynewfirms
Easy
Somewhat
Difficult
Difficult
Regulatedby
government
Similarityofgoodsor
servicesofferedby
competingfirms
Similar
Different
Canbeeither
similaror
different
Nodirectlycompeting
goodsorservice
Controloverpricesby
individualfirms
None
Some
Some
Considerable
Demandcurvesfacing
individualfirms
Totallyelastic
Canbeeither
elasticor
inelastic
Kinked;
inelasticbelow
kink;more
elasticabove
Canbeeitherelasticor
inelastic
2000acre
ranch
Banana
Republic
BP
CommonwealthEdison
Characteristics
Examples
18-17
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
18-18
Determining Price by Relating Marginal Revenue to

Marginal Cost
18-19
Price Determination using Marginal Analysis

Profits
(Total
Revenue
Marginal Total
Costs
Costs)
($50)
Price
Number
Sold
Total
Revenue
Marginal
Revenue
Total
Costs
$34
$34
$34
57
$7
(23)
32
64
30
62
30
90
26
66
24
28
112
22
69
43
26
130
18
73
57
24
144
14
78
66
22
154
10
84
70
20
160
91
69
18
162
100
62
16
10
160
(2)
110
11
50
18-20
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
18-21
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 citys transit
authority raise or lower price for public
transportation?
The answer, of course, lies in the elasticity
of demand for public transportation
18-22
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 dont attempt to maximize
profits
Estimating demand curves is a difficult
process
18-23
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
18-24
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
18-25
Breakeven analysis:
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
18-26
18-27
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
18-28
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
18-29
Modified Breakeven Chart
18-30
18-31
Revenue and Cost data for Modified Breakeven Analysis

Revenues
Costs
Total
Variable
Cost
Total
Cost
Breakeven
PointNo.
ofSales
Requiredto
BreakEven
TotalProfit
(orLoss)
Price
Quantity
Demanded
Total
Revenue
Total
Fixed
Cost
$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
10,000
13,000
117,000
40,000
65,000
105,000
110,000
12,000
14,000
112,000
40,000
70,000
110,000
13,334
2,000
15,000
105,000
40,000
75,000
115,000
20,000
(10,000)
18-32
Yield Management:
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
18-33
Global Issues in Price Determination

Global Prices must support the firms
broader goals including:
Product development
Advertising and sales
Customer support
Competitive plans
Financial objectives
18-34
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
18-35

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Part 7: Pricing Decisions

18. Price Concepts and Approaches

Outline the legal constraints on pricing.

Pricing and the Law

Unfair Trade Laws

Pricing Objectives and the

Meeting Competition: Seeks simply to

Pricing Objectives of Not-for-Profit

Methods for Determining Prices

Four Market Structures

Distinguishing features of the Four Market Structures

Cost and Revenue Curves

Determining Price by Relating Marginal Revenue to

Price Determination using Marginal Analysis

The Concept Of Elasticity In Pricing Strategy

Elasticity and Revenue

Practical Problems of Price Theory

Price Determination in Practice

Alternative Pricing Procedures

Toward Realistic Pricing

The Modified Breakeven Concept

Modified Breakeven Chart

Revenue and Cost data for Modified Breakeven Analysis

Global Issues in Price Determination

In General, there are five pricing objectives

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