Pricing Decisions Jeremy Kees, Ph.D.

Pricing Overview PricePrice: the exchange value of a good or service Robinson-Patman ActRobinson-Patman Act –Federal legislation prohibiting price discrimination that is not based on a cost differential Fair Trade LawsFair Trade Laws –Allow manufacturers to stipulate minimum prices for their products and force retailers to adhere to them

The Importance of Pricing… Prices, and the resulting sales, determine how much revenue a company receives Prices thus influence a firm’s profits Prices also influence the firm’s employment of the factors of production: –Natural resources –Capital –Human Resources –Entrepreneurship

At the most basic level… VALUE = Benefits / Price What constitutes a high price?? (for you)

How marketers add value (and thus justify prices) Reliability Performance Longevity –Service Cost (initial/lifetime) Environmental safety Aesthetics or design Prestige

Just a few strategic issues… How much focus should be on costs? Should we always strive for the industry’s traditional margins How often should we revise price? (often enough to capitalize on market changes) Should pricing decisions happen independently or as an intrinsic element of market-positioning strategy? How much should we vary price for different products, segments, channels, and purchase occasions?

ObjectivePurposeExample _____________ Objectives Profit Maximization Target Return Low introductory interest rates on credit cards with high standard rates after 6 months. _____________ Objectives Sales Maximization Market Share Dell’s low-priced PCs increase market share and sales of services _____________ Objectives Value PricingPer-song charges for music downloads _____________ Objectives Lifestyle Image High-priced luxury autos such as BMW and watches by Piaget _____________ Objectives Cost Recovery Market Incentives Market Suppression High prices for tobacco and alcohol to reduce consumption

Determining Prices “3 Cs” –Customer Demand –Cost Function –Competitors Prices

Determining Prices Customary Pricing Economic Theory Cost-Plus Pricing Full-cost pricing Incremental-cost pricing Breakeven analysisBreakeven analysis