Copyright © 2004 by South-Western, a division of Thomson Learning, Inc. All rights reserved. Chapter 13 Price Determination

Copyright © 2004 by South-Western, a division of Thomson Learning, Inc. All rights reserved Pricing and the Law Price Price: the exchange value of a good or service Robinson-Patman Act Robinson-Patman Act Prohibits price discrimination that is not based on a cost differential Prohibits selling at unreasonably low prices to eliminate competition

Copyright © 2004 by South-Western, a division of Thomson Learning, Inc. All rights reserved Protecting Image by Avoiding Price Discounting

Copyright © 2004 by South-Western, a division of Thomson Learning, Inc. All rights reserved Pricing Objectives and the Marketing Mix Prices determine how much revenue a company receives Prices influence a firm’s profits Prices influence how a firm uses factors of production: Natural resources Capital Human Resources Entrepreneurship

Copyright © 2004 by South-Western, a division of Thomson Learning, Inc. All rights reserved Pizza Hut, what would you say about their pricing objectives?

Copyright © 2004 by South-Western, a division of Thomson Learning, Inc. All rights reserved Profitability For-profit firms must set prices with profitability in mind Profit Maximization Target-Return Objectives

Copyright © 2004 by South-Western, a division of Thomson Learning, Inc. All rights reserved The OfficeDepot seems to understand the needs and methods for profits. Even in the recent economic slow down OfficeDepot has held their own in the marketplace.

Copyright © 2004 by South-Western, a division of Thomson Learning, Inc. All rights reserved Volume Sales maximization Market-share objectives The PIMS Project: Research supports a strong positive relationship between a firm’s market share and its return on investment

Copyright © 2004 by South-Western, a division of Thomson Learning, Inc. All rights reserved Price as a Tool to Achieve Volume Objectives

Copyright © 2004 by South-Western, a division of Thomson Learning, Inc. All rights reserved Glad GladWare Containers Using Price to Achieve a Market Share Objective

Copyright © 2004 by South-Western, a division of Thomson Learning, Inc. All rights reserved Clorox Increasing Profitability through Product Quality and Market Share

Copyright © 2004 by South-Western, a division of Thomson Learning, Inc. All rights reserved This ad is aimed at increasing profitability by building volume and market share for Sprint.

Copyright © 2004 by South-Western, a division of Thomson Learning, Inc. All rights reserved Meeting Competition Meeting Competition Seeks simply to meet competitor’s prices Value Pricing

Copyright © 2004 by South-Western, a division of Thomson Learning, Inc. All rights reserved Prestige Objectives Waterford Prestige Pricing Maintains a High- Quality Image

Copyright © 2004 by South-Western, a division of Thomson Learning, Inc. All rights reserved Prestige Pricing: Prices for lynx boom boom drivers 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

Copyright © 2004 by South-Western, a division of Thomson Learning, Inc. All rights reserved Pricing Objectives of Not-for-Profit Organizations Profit maximization Cost recovery Market incentives Market suppression

Copyright © 2004 by South-Western, a division of Thomson Learning, Inc. All rights reserved Methods for Determining Prices Customary Prices: traditional prices that consumers expect to pay for a good or service Cough Suppressants Are Typical of the Products That Use Customary Pricing – So Customary That This “Classic” International Ad Doesn’t Even Mention Price

Copyright © 2004 by South-Western, a division of Thomson Learning, Inc. All rights reserved Price Determination in Economic Theory Demand Supply

Copyright © 2004 by South-Western, a division of Thomson Learning, Inc. All rights reserved Four Market Structures Pure Competition Monopolistic Competition

Copyright © 2004 by South-Western, a division of Thomson Learning, Inc. All rights reserved Internet Service Providers Operate in a Monopolistic Competition Market Structure – Some Even Offer Free Service

Copyright © 2004 by South-Western, a division of Thomson Learning, Inc. All rights reserved Oligopoly Oligopoly

Copyright © 2004 by South-Western, a division of Thomson Learning, Inc. All rights reserved Monopoly Monopoly  Anti-trust legislation  Government regulated monopolies

Copyright © 2004 by South-Western, a division of Thomson Learning, Inc. All rights reserved Cost and Revenue Curves Cost and Revenue Curves Price is often determined by analyzing the cost and revenue curves Average total cost Marginal cost Average revenue Marginal revenue

Copyright © 2004 by South-Western, a division of Thomson Learning, Inc. All rights reserved The Concept Of Elasticity In Pricing Strategy The Concept Of Elasticity In Pricing Strategy Elasticity: measure of responsiveness of purchasers and suppliers to changes in price One Internet Service Provider, Freeinternet.Com, Uses Ads Like This One to Differentiate Itself From Its Competitors in an Elastic Market With Many Substitutes

Copyright © 2004 by South-Western, a division of Thomson Learning, Inc. All rights reserved Determinants Of Elasticity Determinants Of Elasticity Availability of Substitutes Luxury or Necessity Portion of Budget Time Perspective

Copyright © 2004 by South-Western, a division of Thomson Learning, Inc. All rights reserved Four Seasons Hotels Inelastic demand for a service viewed as a necessity for upscale travelers

Copyright © 2004 by South-Western, a division of Thomson Learning, Inc. All rights reserved Elasticity and Revenue 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

Copyright © 2004 by South-Western, a division of Thomson Learning, Inc. All rights reserved Practical Problems of Price Theory Practical Problems of Price Theory Marketers may thoroughly understand price theory concepts but still encounter difficulty in applying them in practice.  Estimating demand curves is a difficult process

Copyright © 2004 by South-Western, a division of Thomson Learning, Inc. All rights reserved Price Determination in Practice Cost-plus pricing: practice of adding a percentage of a specified dollar amount to the base cost of a product to cover unassigned costs and provide a profit

Copyright © 2004 by South-Western, a division of Thomson Learning, Inc. All rights reserved Alternative Pricing Procedures Full-cost pricing Incremental-cost pricing

Copyright © 2004 by South-Western, a division of Thomson Learning, Inc. All rights reserved 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 The target return may be set as:  A desired dollar return  A percentage of sales

Copyright © 2004 by South-Western, a division of Thomson Learning, Inc. All rights reserved 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

Copyright © 2004 by South-Western, a division of Thomson Learning, Inc. All rights reserved The Modified Breakeven Concept 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

Copyright © 2004 by South-Western, a division of Thomson Learning, Inc. All rights reserved Yield Management Yield Management: pricing strategy designed to maximize sales in situations such as airfares, lodging, auto rentals, and theater tickets where costs are fixed Prices for a Round-Trip Flight Between NYC and Miami Varied in From $190 to $739 in coach.

Copyright © 2004 by South-Western, a division of Thomson Learning, Inc. All rights reserved 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

Copyright © 2004 by South-Western, a division of Thomson Learning, Inc. All rights reserved In general firms that set prices in global marketing follow the same objectives with one addition: Price stability is the ability to maintain consistent prices during major economic fluctuations and periods of political change