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Part 7: Pricing DecisionsPart 7: Pricing Decisions
18.Price Concepts and Approaches
19.Pricing Strategies
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Chapter 18Chapter 18
Price ConceptsPrice Conceptsand Approachesand Approaches
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Chapter ObjectivesChapter Objectives
1. Outline the legal constraints on pricing.
2. Identify the major categories of pricing objectives.
3. Explain price elasticity and its determinants.
4. List the practical problems involved in applying price
theory concepts to actual pricing decisions.
5. Explain the major cost-plus approaches to price setting.
6. List the chief advantages and shortcomings of using
breakeven analysis in pricing decisions.
7. Explain the superiority of modified breakeven analysis
over the basic breakeven model and the role of yieldmanagement in pricing decisions.
8. Identify the major pricing challenges facing online and
international marketers.
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Pricing and the LawPricing and the Law
PricePrice: the exchange value of a good or service
RobinsonRobinson--Patman ActPatman Act
Federal legislation prohibiting price
discrimination that is not based on a cost
differential
Also prohibits selling at unreasonably low
prices to eliminate competition
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Unfair Trade LawsUnfair Trade Laws
Require sellers to maintain minimum prices
for comparable merchandise. These lawswere intended to protect small specialtyshops.
Designed to protect small stores and
businesses from the predatory pricingpractices of larger chain stores
Fair Trade LawsFair Trade Laws
Allow manufacturers to stipulate minimum
prices for their products and force retailers toadhere to them
Enable companies to establish and maintainproduct images
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Pricing Objectives and thePricing Objectives and the
Marketing MixMarketing 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
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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
Dells 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
Profit Maximization
Cost Recovery
Market Incentives
Market Suppression
High prices for tobacco and
alcohol to reduce consumption
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Profitability ObjectivesProfitability Objectives
For-profit firms must set prices withprofitability in mind
Profit Maximization: point at which the
additional revenue gained by increasing
the price of a product equals the increasein total costs
Target-Return Objectives: Short-run or
long-run pricing objectives of achieving a
specified return on either sales orinvestment
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Volume ObjectivesVolume Objectives
Sales maximization
:A minimum profitlevel is set and firms seek to maximizes
sales
Market-share objectives: the goal set for
controlling a portion of the market for afirms good or service
The Product Impact of Market Strategies
(PIMS) Project: Research that discovered
a strong positive relationship between afirms market share and product quality and
its return on investment
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Meeting Competition:Meeting Competition: Seeks simply tomeet competitors prices
Value PricingValue Pricing: Pricing strategy that
emphasizes the benefits derived from aproduct in comparison to the price and
quality levels of competing offerings
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Prestige ObjectivesPrestige 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
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Pricing Objectives of NotPricing Objectives of Not--forfor--ProfitProfit
OrganizationsOrganizations
Profit maximization
Cost recovery
Market incentives
Market suppression
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Methods for Determining PricesMethods for Determining Prices
Customary Prices: traditional prices that
consumers expect to pay for a good or
service
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Price Determination inPrice Determination in
Economic TheoryEconomic 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
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Four Market Structures
Pure Competition: Market structure
characterized by homogeneous productsin which there are so many buyers and
sellers that none has a significant
influence on price
Monopolistic Competition: Marketstructure involving a heterogeneous
product and product differentiation among
competing suppliers, allowing the
marketer some degree of control over
prices
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OligopolyOligopoly: Market structure involvingrelatively few sellers and barriers to new
competitors due to high start-up costs
MonopolyMonopoly: Market structure involving onlyone seller of a good or service for which noclose substitutes exist
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Distinguishing features of the Four Market Structures
CharacteristicsPure
CompetitionMonopolisticCompetition 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 orservices offered by
competing firms
Similar Different Can be either similar or
different
No directly competinggoods or service
Control over prices by
individual firms
None Some Some Considerable
Demand curves facing
individual firms
Totally elastic Can be either
elastic or
inelastic
Kinked;
inelastic below
kink; more
elastic above
Can be either elastic or
inelastic
Examples 2000-acre
ranch
Banana
Republic
BP Commonwealth Edison
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Cost and Revenue CurvesCost and Revenue CurvesPrice is often determined by analyzing the cost
and revenue curvesAverage 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 ofoutput
Average revenue is calculated by dividing totalrevenue by the quantity of goods or services
soldMarginal revenue is the change in total
revenue that results from selling an additionalunit of output
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Determining Price by Relating Marginal Revenue toMarginal Cost
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Price Determination using Marginal Analysis
Price
Number
Sold
Total
Revenue
Marginal
Revenue
Total
Costs
Marginal
Costs
Profits
(TotalRevenue
Total
Costs)
($50)
$34 1 $34 $34 57 $7 (23)
32 2 64 30 62 5 2
30 3 90 26 66 4 24
28 4 112 22 69 3 43
26 5 130 18 73 4 57
24 6 144 14 78 5 66
22 7 154 10 84 6 70
20 8 160 6 91 7 69
18 9 162 2 100 9 62
16 10 160 (2) 110 11 50
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The Concept Of Elasticity In Pricing StrategyThe Concept Of Elasticity In Pricing Strategy
Elasticity: measure of responsiveness ofpurchasers and suppliers to changes in price
Determinants Of ElasticityDeterminants Of ElasticityAvailability of Substitutes or
complements
Luxury or Necessity
Portion of Budget
Time Perspective
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Elasticity and RevenueElasticity 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 citys transitauthority raise or lower price for public
transportation?
The answer, of course, lies in the elasticity
of demand for public transportation
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Practical Problems of Price TheoryPractical Problems of Price Theory
Marketers may thoroughly understandprice 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 difficultprocess
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Alternative Pricing ProceduresAlternative Pricing Procedures
Full-cost pricing uses all relevant
variable costs and allocates fixed coststhat 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
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Breakeven analysisBreakeven analysis: pricing technique
used to determine the number of productsthat must be sold at a specified price in order
to generate sufficient revenue to cover total
cost
Target ReturnsA desired dollar return
A percentage of sales
Evaluation of Breakeven Analysis
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Toward Realistic PricingToward Realistic Pricing
In actual practice, most pricing
approaches are largely cost oriented
They thus violate the marketing concept
New approaches being developed areincorporating the element of consumer
demand
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The Modified Breakeven ConceptThe 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 costwith estimates of expected sales at the
various prices
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Modified Breakeven Chart
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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 10,000
9 13,000 117,000 40,000 65,000 105,000 110,000 12,000
8 14,000 112,000 40,000 70,000 110,000 13,334 2,000
7 15,000 105,000 40,000 75,000 115,000 20,000 (10,000)
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Yield ManagementYield 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
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Global Issues in Price DeterminationGlobal Issues in Price Determination
Global Prices must support the firms
broader goals including:
Product development
Advertising and sales
Customer support
Competitive plans
Financial objectives
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In General, there are five pricing objectives
that firms can use to set prices in globalmarketing
Profitability, volume, meeting competition,
and prestige, are the same as those
discussed earlier
In addition international marketers work to
achieve price stability
Price stabilityis the ability to maintainconsistent prices during major economic
fluctuations and periods of political change