1. CONTEMPORARY MARKETING
Seventeenth Edition
PART 7
Pricing Decisions
Chapter 18
Pricing Concepts
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2. Objectives (1 of 2) Discuss the legal constraints on pricing.
Identify the four major categories of pricing objectives.
Explain price elasticity and its determinants.
Describe the three practical problems involved in applying price theory concepts to actual pricing decisions.

3. Objectives (2 of 2)
Explain the two major cost-plus approaches to price setting.
Discuss the three shortcomings of using breakeven analysis in pricing decisions.
Explain the use of yield management in pricing decisions.
Identify the five major pricing challenges facing online and international marketers.

4. Pricing Laws for Contemporary Marketers
Robinson-Patman Act
Unfair-trade laws
Fair-trade laws

5. Table 18.1 - Pricing Objectives
Purpose
Example
Profitability objectives
Profit maximization Target return
Samsung’s initially high price for the Blue-ray disc player
Volume objectives
Sales maximization Market share
Delta’s low fares in new markets
Meeting competition objectives
Value pricing
Walmart’s lower prices on private house bands
Prestige objectives
Lifestyle
Image
High-priced luxury autos such a Bentley
Not-for-profit objectives
Profit maximization
Cost recovery
Market incentives
Market suppression
Reduced or zero tolls for high-occupancy vehicles to encourage carpooling

6. Methods for Determining Prices
Prices are 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

7. 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

8. Type of Market Structure
Table Distinguishing Features of the Four Market Structures (1 of 2)
Type of Market Structure
Characteristics
Pure Competition
Monopolistic Competition
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 or services offered by competing firms
Similar
Different
Can be either similar or different
No directly competing goods or services

9. Table 18.2 - Distinguishing Features of the Four Market Structures (2 of 2)
Characteristics
Pure Competition
Monopolistic Competition
Oligopoly
Monopoly
Control over prices by individual firms
None
Some
Considerable
Demand curves facing individual firms
Totally elastic
Can be either elastic or inelastic
Kinked; inelastic below kink; more elastic above
Examples
Indiana soybean farm
Best Buy stores
Verizon Wireless
Pharmaceutical company that holds patents on specific drugs

10. Figure 18.1 - Determining Price by Relating Marginal Revenue to Marginal Cost

11. The Concept of Elasticity in Pricing Strategy
Elasticity - Measure of responsiveness of purchasers and suppliers to a change in price
Elasticity of demand
Elasticity of supply

12. Practical Problems of Price Theory
Many firms do not attempt to maximize profits
Demand curves are difficult to estimate

13. Price Determination in Practice
Cost-plus pricing - Practice of adding a percentage of specified dollar amount to:
The base cost of a product to cover unassigned costs and to provide a profit
Allows businesses with low costs to set prices lower than those of competitors’ and still make a profit

14. Alternative Pricing Procedures
Full-cost pricing - Uses all relevant variable costs in setting a product’s price and allocates those fixed costs not directly attributed to the production of the priced item
No consideration of competition or demand for the item
Any method for allocating overhead is arbitrary and may be unrealistic

15. Breakeven Analysis (1 of 2)
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

16. Breakeven Analysis (2 of 2)

17. Figure 18.2 - Breakeven Chart

18. Target Returns
Most managers include a targeted profit in their analyses

19. Figure 18.3 - Modified Breakeven Chart: Parts A and B

20. Table 18.4 - Revenue and Cost Data for Modified Breakeven Analysis
Revenues
Costs
Price
Quality Demand
Total Revenue
Total Fixed Cost
Total Variable Cost
Total Cost
Breakeven Point (Number of Units Required to Break Even)
Total Profit (or Loss)
$15
2,500
$37,500
$40,000
$12,500
$52,000
4,000
$(15,000) 10
10,000
100,000
40,000
50,000
90,000
8,000 9
13,000
117,000
65,000
105,000
12,000 8
14,000
112,000
70,000
110,000
13,334
2,000 7
15,000
75,000
115,000
20,000
(10,000)

21. Yield Management
Allows marketers to vary prices based on factors as demand, even though the cost of providing those goods or services remains the same

22. Global Issues in Price Determination
Prices must support the company’s broader goals
Domestic pricing strategies
Profitability
Volume
Meeting competition
Prestige
Price stability