Pricing Decision in Market Structure

Part 7: Pricing Decisions
18. Price Concepts and Approaches 19. Pricing Strategies
Copyright 2006 by South-Western, a division of Thomson Learning, Inc. All rights reserved.
Chapter 18
Price Concepts and Approaches
Chapter Objectives
1. 2. 3. 4. 5. 6. 7. Outline the legal constraints on pricing. Identify the major categories of pricing objectives. Explain price elasticity and its determinants. 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. Explain the superiority of modified breakeven analysis over the basic breakeven model and the role of yield management in pricing decisions. Identify the major pricing challenges facing online and international marketers.
8.
18-3
Pricing and the Law

Price the exchange value of a good or service Price: Robinson-Patman Act RobinsonFederal legislation prohibiting price discrimination that is not based on a cost differential Also prohibits selling at unreasonably low prices to eliminate competition
18-4
Unfair Trade Laws Require sellers to maintain minimum prices for comparable merchandise. These laws were intended to protect small specialty shops. Designed to protect small stores and businesses from the predatory pricing practices of larger chain stores Fair Trade Laws Allow manufacturers to stipulate minimum prices for their products and force retailers to adhere to them Enable companies to establish and maintain product images
18-5
Pricing Objectives and the Marketing 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
18-6
Objective Profitability Objectives Volume Objectives
Purpose Profit Maximization Target Return Sales Maximization Market Share Value Pricing Lifestyle Image Profit Maximization Cost Recovery Market Incentives Market Suppression
Example Low introductory interest rates on credit cards with high standard rates after 6 months. Dells low-priced PCs increase market share and sales of services Per-song charges for music downloads High-priced luxury autos such as BMW and watches by Piaget High prices for tobacco and alcohol to reduce consumption
Meeting Competition Objectives Prestige Objectives Not-for-Profit Objectives
18-7
Profitability Objectives For-profit firms must set prices with profitability in mind Profit Maximization: point at which the additional revenue gained by increasing the price of a product equals the increase in total costs Target-Return Objectives: Short-run or long-run pricing objectives of achieving a specified return on either sales or investment
18-8
Volume Objectives Sales maximization: A minimum profit level is set and firms seek to maximizes sales Market-share objectives: the goal set for controlling a portion of the market for a firms good or service The Product Impact of Market Strategies (PIMS) Project: Research that discovered a strong positive relationship between a firms market share and product quality and its return on investment
18-9
Meeting Competition: Seeks simply to meet competitors prices Value Pricing Pricing strategy that Pricing: emphasizes the benefits derived from a product in comparison to the price and quality levels of competing offerings
18-10
Prestige Objectives Prices are set at Objectives: a relatively high level in order to develop and maintain an image of quality and exclusiveness that appeals to statusconscious consumers
18-11
Pricing Objectives of Not-for-Profit Not-forOrganizations

Profit maximization Cost recovery Market incentives Market suppression
18-12
Methods for Determining Prices

Customary Prices: traditional prices that consumers expect to pay for a good or service
18-13
Price Determination in Economic 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
18-14
Four Market Structures Pure Competition: Market structure characterized by homogeneous products in which there are so many buyers and sellers that none has a significant influence on price Monopolistic Competition: Market structure involving a heterogeneous product and product differentiation among competing suppliers, allowing the marketer some degree of control over prices
18-15
Oligopoly Market structure involving Oligopoly: relatively few sellers and barriers to new competitors due to high start-up costs Monopoly Market structure involving only Monopoly: one seller of a good or service for which no close substitutes exist
18-16
Distinguishing features of the Four Market Structures

Pure Competition
Many Easy Similar
Characteristics
Number of competitors Ease of entry into industry by new firms Similarity of goods or services offered by competing firms Control over prices by individual firms Demand curves facing individual firms
Monopolistic Competition
Few to many Somewhat Difficult Different
Oligopoly
Few Difficult Can be either similar or different Some Kinked; inelastic below kink; more elastic above BP
Monopoly
No direct competitors Regulated by government No directly competing goods or service Considerable Can be either elastic or inelastic
None Totally elastic
Some Can be either elastic or inelastic Banana Republic
Examples
2000-acre ranch
Commonwealth Edison
18-17
Cost and Revenue Curves Price is often determined by analyzing the cost and revenue curves Average 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 of output Average revenue is calculated by dividing total revenue by the quantity of goods or services sold Marginal revenue is the change in total revenue that results from selling an additional unit of output
18-18
Determining Price by Relating Marginal Revenue to Marginal Cost
18-19
Price Determination using Marginal Analysis

Profits (Total Revenue Total Costs) ($50) $34 32 30 28 26 24 1 2 3 4 5 6 $34 64 90 112 130 144 $34 30 26 22 18 14 57 62 66 69 73 78 $7 5 4 3 4 5 (23) 2 24 43 57 66
Price
Number Sold
Total Revenue
Marginal Revenue
Total Costs
Marginal Costs
22
20 18 16
7
8 9 10
154
160 162 160
10
6 2 (2)
84
91 100 110
6
7 9 11
70
69 62 50
18-20
The Concept Of Elasticity In Pricing Strategy Elasticity: measure of responsiveness of purchasers and suppliers to changes in price Determinants Of Elasticity Availability of Substitutes or complements Luxury or Necessity Portion of Budget Time Perspective
18-21
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 For example, should a citys transit authority raise or lower price for public transportation? The answer, of course, lies in the elasticity of demand for public transportation
18-22
Practical Problems of Price Theory Marketers may thoroughly understand price 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 difficult process
18-23
Price Determination in Practice

Cost-plus pricing: practice of adding a percentage of a specified dollar amount (markup) to the base cost of a product to cover unassigned costs and provide a profit
18-24
Alternative Pricing Procedures Full-cost pricing uses all relevant variable costs and allocates fixed costs that 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
18-25
Breakeven analysis pricing technique analysis: 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 A desired dollar return A percentage of sales Evaluation of Breakeven Analysis
18-26
18-27
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
18-28
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
18-29
Modified Breakeven Chart
18-30
18-31
Revenue and Cost data for Modified Breakeven Analysis

Revenues
Costs
Breakeven Point -No. of Sales Required to Break Even Total Profit (or Loss)
Price
Quantity Demanded
Total Revenue
Total Fixed Cost
Total Variable Cost
Total Cost
$15 10
2,500 10,000
$37,500 100,000
$40,000 40,000
$12,500 50,000
$52,500 90,000
4,000 8,000
$(15,000) 10,000
9 8 7
13,000 14,000 15,000
117,000 112,000 105,000
40,000 40,000 40,000
65,000 70,000 75,000
105,000 110,000 115,000
110,000 13,334 20,000
12,000 2,000 (10,000)
18-32
Yield Management pricing strategy that Management: 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
18-33
Global Issues in Price Determination

Global Prices must support the firms broader goals including: Product development Advertising and sales Customer support Competitive plans Financial objectives
18-34
In General, there are five pricing objectives that firms can use to set prices in global marketing Profitability, volume, meeting competition, and prestige, are the same as those discussed earlier In addition international marketers work to achieve price stability Price stability is the ability to maintain consistent prices during major economic fluctuations and periods of political change
18-35

Pricing Decision in Market Structure

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Part 7: Pricing Decisions

18. Price Concepts and Approaches 19. Pricing Strategies

Pricing and the Law

Pricing Objectives and the Marketing Mix

Objective Profitability Objectives Volume Objectives

Meeting Competition Objectives Prestige Objectives Not-for-Profit Objectives

Pricing Objectives of Not-for-Profit Not-forOrganizations

Methods for Determining Prices

Price Determination in Economic Theory

 Distinguishing features of the Four Market Structures

None Totally elastic

Some Can be either elastic or inelastic Banana Republic

 Determining Price by Relating Marginal Revenue to Marginal Cost

 Price Determination using Marginal Analysis

Price Determination in Practice

Toward Realistic Pricing

 Modified Breakeven Chart

 Revenue and Cost data for Modified Breakeven Analysis

Total Fixed Cost

Total Variable Cost

13,000 14,000 15,000

117,000 112,000 105,000

40,000 40,000 40,000

65,000 70,000 75,000

105,000 110,000 115,000

110,000 13,334 20,000

12,000 2,000 (10,000)

Global Issues in Price Determination

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Distinguishing features of the Four Market Structures

Determining Price by Relating Marginal Revenue to Marginal Cost

Price Determination using Marginal Analysis

Modified Breakeven Chart

Revenue and Cost data for Modified Breakeven Analysis