Chapter 18 Pricing Concepts

1. Chapter 18 Pricing Concepts

2. Objectives • 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.

3. Legal Constraints on Pricing • The Robinson-Patman Act • Known as the Anti-A&P Act. • Was technically an amendment to the Clayton Act. • Prohibits price discrimination in sales to wholesalers, retailers, and others producers. • Differences in price must reflect cost differentials. • Prohibits selling at unreasonably low prices in order to drive competitors out of business.

4. Legal Constraints on Pricing • Unfair-Trade Laws • Require sellers to maintain minimum prices for comparable merchandise. These laws were intended to protect small specialty shops. • Typical state laws set retail price floors at cost plus some modest markup.

5. Legal Constraints on Pricing • Fair-Trade Laws • Allow manufacturers to stipulate minimum retail prices. • Assert that a product’s image, determined in part by its price, is a property right of the manufacturer. • Exclusivity is one method manufacturers use to maintain minimum price. • Has its roots in the Depression era. • California became the first state to enact fair-trade legislation. • These laws became invalid with the passage of the Consumer Goods Pricing Act (1975).

6. Four Major Groups of Pricing Objectives • Profitability • Volume • Meeting Competition • Prestige

7. Objective Purpose Example Profitability objectives • Profit maximization • Target return Low introductory interest rates on credit cards with high standard rates after 6 months Volume objectives • Sales maximization • Market share Dell’s low-priced PCs increase market share and sales of service Meeting competition objectives • Value pricing Price wars among major airlines Prestige objectives • Lifestyle • Image High-priced luxury autos such as Ferrari and watches by Rolex Not-for-profit objectives • Profit maximization • Cost recovery • Market incentives • Market suppression High prices for tobacco and alcohol to reduce consumption Pricing Objectives

8. Pricing For many consumers high price indicates quality. • When viewing Gucci timepieces consumers see quality.

9. Profit Impact of Market Strategies (PIMS) Project • Study conducted by the Marketing Science Institute. • Analyzed more than 2,000 firms. • Revealed that two important factors influencing profitability were: • Product quality • Market share • The leading brand typically generates after-tax ROI of 18 percent.

10. Pricing of the Not-For-Profit Organizations Goals • Profit maximization. • Cost recovery. Recover only the actual cost of operating the unit. • Market incentives. Lower-than-average pricing policy or offer a free service. • Market suppression. High prices help to accomplish social objectives.

11. Elasticity in Pricing Strategy • Elasticity is the measure of responsiveness of purchasers and suppliers to price changes. • The elasticity of demand is the percentage change in the quantity of a good or service demanded  the percentage change in its price. • The price elasticity of supply of a product is the percentage change in the quantity of a good or service supplied  the percentage change in its price.

12. Problems of Price Theory • Many firms do not attempt to maximize profits. • It is difficult to estimate demand curves.

13. Cost-Plus Approaches to Price Setting • Cost-plus pricing, the most popular method, uses a base-cost figure per unit and adds a markup to cover unassigned costs and to provide a profit. • Works well for a business that keeps its costs low. • Two most common cost-oriented pricing procedures: • Full-cost pricing uses all relevant variable costs and allocates fixed costs. • Allows the marketer to recover all costs plus the amount added as a profit margin. • The full-cost deficiencies. • First, there is no consideration of competition or demand for the item. • Second, any method for allocating overhead is arbitrary. • One way to overcome the arbitrary allocation of fixed expenses is: • 2. Incremental-cost pricing, which attempts to use only those costs directly attributable to specific output in setting prices.

14. Breakeven Chart • Breakeven Analysisis a means of determining the number of goods or services that must be sold at a given price to generate sufficient revenue to cover total costs. • The breakeven point is the point at which total revenue just equals total cost.

15. Shortcomings of Breakeven Analysis • First, the model assumes that costs can be divided into fixed and variable categories. • The model assumes that per-unit variable costs do not change at different levels of operation. • Finally, the basic breakeven model does not consider demand.

16. Pricing Challenges Facing Online and International Marketers Five pricing objectives: • Profitability • Volume • Meeting competition • Prestige • Price stability