CHAPTER 18 Pricing Concepts Chapter Objectives 1

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Presentation transcript:

CHAPTER 18 Pricing Concepts Chapter Objectives 1 Outline the legal constraints on pricing. Identify the major categories of pricing objectives. Explain price elasticity and its determinants. 4 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. 7 Explain the use of yield management in pricing decisions. Identify the major pricing challenges facing online and international marketers. 2 8 5 3 6

PRICING AND THE LAW • Robinson-Patman Act • Unfair-trade laws • Federal, state, and local laws all influence pricing decisions. • Tariffs levied on imported goods and services can help firms protect local markets. • Government regulation also imposes costs that affect prices. • Robinson-Patman Act Federal legislation prohibiting price discrimination that is not based on a cost differential; also prohibits selling at an unreasonably low price to eliminate competition. • Unfair-trade laws State laws requiring sellers to maintain minimum prices for comparable merchandise. • Fair-trade laws Statutes enacted in most states that once permitted manufacturers to stipulate a minimum retail price for their product. • Fair-trade laws eventually invalidated by the 1975 Consumer Goods Pricing Act.

PRICING OBJECTIVES AND THE MARKETING MIX • Organizational objectives and more specific marketing objectives guide the development of pricing objectives. • Profit maximization Point at which the additional revenue gained by increasing the price of a product equals the increase in total costs. • Target-return objective Short-run or long-run pricing objectives of achieving a specified return on either sales or investment. • Profit Impact of Market Studies (PIMS) project Research that discovered a strong positive relationship between a firm’s market share and product quality and its return on investment. • Value pricing Pricing strategy emphasizing benefits derived from a product in comparison to the price and quality levels of competing offerings. PRESTIGE OBJECTIVES • Establishing a relatively high price to develop and maintain an image of quality and exclusiveness that appeals to status- conscious consumers.

Difference from for profits? PRICING OBJECTIVES OF NOT-FOR-PROFIT ORGANIZATIONS Difference from for profits?

METHODS FOR DETERMINING PRICES • Prices traditionally determined in two basic ways: • Supply and demand. • Cost-oriented analyses. • Customary prices Traditional prices that customers expect to pay for certain goods and services. • Prices traditionally determined in two basic ways: • Supply and demand. • Cost-oriented analyses. • Customary prices Traditional prices that customers expect to pay for certain goods and services. • Companies try to balance consumer pricing expectations with the realities of rising costs. • Pricing example: rising energy costs. • Rising demand and limited refinery capacity led to gasoline prices of more than $3 per gallon. • Rising energy costs affect businesses throughout the country through rising delivery costs.

PRICE DETERMINATION IN ECONOMIC THEORY • Demand —the amounts of a firm’s product that consumers will purchase at different prices during a specified time period. • Supply—the amounts of a good or service that will be offered for sale at different prices during a specified period. • Pure competition—a market structure with so many buyers and sellers that no single participant can significantly influence price. • Monopolistic competition—diverse parties exchange heterogeneous, relatively well-differentiated products, giving marketers some control over prices. • Oligopoly—relatively few sellers; each has large influence on price. • Monopoly—a market structure in which only one seller of a product exists and for which there are no close substitutes

COST AND REVENUE CURVES • Product’s total cost = ___________ + _____________ • Variable costs change with the level of production. • Include ___________ and ___________ • Fixed costs remain stable at any ________ level within a certain range. • Marginal cost = ______ . • Average total costs = (_______ + ______ ) ÷ ______ Determining Price by Relating Marginal Revenue to Marginal Cost COST AND REVENUE CURVES • Product’s total cost = total variable costs + total fixed costs. • Variable costs change with the level of production. • Include raw materials and labor costs. • Fixed costs remain stable at any production level within a certain range. • Include lease payments or insurance costs). • Average total costs = (variable + fixed costs) ÷ no. of units produced. • Marginal cost—change in total cost that results from producing an additional unit of output.

Price that brings highest profit

THE CONCEPT OF ELASTICITY IN PRICING STRATEGY • Elasticity determined by … • Demand often shows less elasticity in the short run than in the long run. • Elasticity has a strong influence on revenue. PRACTICAL PROBLEMS OF PRICE THEORY • Many firms do not attempt to ________ profits. • Demand curves are difficult to _________. • Elasticity Measure of responsiveness of purchasers and suppliers to a change in price. • >1, said to be elastic supply or demand; <1, said to be inelastic supply or demand. • Elasticity determined by availability of substitutes or complements, product’s role as a complement to another product, whether product is perceived as a necessity or luxury, and other factors. • Demand often shows less elasticity in the short run than in the long run. • Elasticity has a strong influence on revenue. PRACTICAL PROBLEMS OF PRICE THEORY • Many firms do not attempt to maximize profits. • Demand curves are difficult to estimate.

PRICE DETERMINATION IN PRACTICE • Cost-plus pricing— • Full-cost pricing— • Incremental-cost pricing— • Breakeven analysis • Cost-plus pricing—uses a base-cost figure per unit and adds a markup to cover unassigned costs and to provide a profit. • Full-cost pricing—uses all relevant variable costs in setting a product’s price. • Incremental-cost pricing—attempts to use only costs directly attributable to a specific output in setting prices. • Breakeven analysis Pricing technique used to determine the number of products that must be sold at a specified price to generate enough revenue to cover total cost. • Point at which total revenue = total cost, expressed in units or dollars. • Cost-based model that does not consider demand.

THE MODIFIED BREAKEVEN CONCEPT • Modifications that account for demand are necessary for effective pricing. • Demand considerations include: • Degree of price elasticity. • Consumer price expectations. • Existence and size of specific market segments. • Buyer perceptions of strengths and weaknesses of substitute products. • Modified breakeven analysis Pricing technique used to evaluate consumer demand by comparing the number of products that must be sold at a variety of prices to cover total cost with estimates of expected sales at the various prices.

YIELD MANAGEMENT • Yield management • 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. • Example: Varying prices for tickets for a Broadway show based on day, time, and seat location. • Example: Varying availability of restricted and nonrestricted airline tickets in the months and weeks before the flight to maximize revenues.

GLOBAL ISSUES IN PRICE DETERMINATION • Prices must support the company’s broader goals. • Firms use four domestic pricing strategies: • Profitability—if company is a price leader. • Volume—expose foreign markets to competition when trade barriers are lowered. • Meeting competition—important in Europe where common currency has led to price convergence. • Prestige—valid when products are associated with intangible benefits, such as high quality, exclusiveness, or attractive design. • Also often have a fifth objective: price stability.

PRICING AND THE LAW • Federal, state, and local laws all influence pricing decisions. • Tariffs levied on imported goods and services can help firms protect local markets. • Government regulation also imposes costs that affect prices. • Robinson-Patman Act Federal legislation prohibiting price discrimination that is not based on a cost differential; also prohibits selling at an unreasonably low price to eliminate competition. • Unfair-trade laws State laws requiring sellers to maintain minimum prices for comparable merchandise. • Fair-trade laws Statutes enacted in most states that once permitted manufacturers to stipulate a minimum retail price for their product. • Fair-trade laws eventually invalidated by the 1975 Consumer Goods Pricing Act.

• Profit maximization Point at which the additional revenue gained by increasing the price of a product equals the increase in total costs. • Target-return objective Short-run or long-run pricing objectives of achieving a specified return on either sales or investment. • Profit Impact of Market Studies (PIMS) project Research that discovered a strong positive relationship between a firm’s market share and product quality and its return on investment. • Value pricing Pricing strategy emphasizing benefits derived from a product in comparison to the price and quality levels of competing offerings. PRESTIGE OBJECTIVES • Establishing a relatively high price to develop and maintain an image of quality and exclusiveness that appeals to status- conscious consumers.

PRICING OBJECTIVES OF NOT-FOR-PROFIT ORGANIZATIONS • Pricing strategy helps them achieve specific goals: • Profit maximization. • Cost recovery. • Market incentives that encourage increased usage. • Market suppression that discourages the use of certain products, such as taxes that raise the price of tobacco products.