Pricing Concepts

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• Chapter 18
• Pricing Concepts

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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.

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Legal Constraints on Pricing

• The Robinson-Patman Act
• Known as the Anti-AP 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.

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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.

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Legal Constraints on Pricing

• Fair-Trade Laws
• Allow manufacturers to stipulate minimum retail
  prices.
• Assert that a products 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).

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Four Major Groups of Pricing Objectives

• Profitability
• Volume
• Meeting Competition
• Prestige

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Pricing Objectives
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Pricing

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

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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.

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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.

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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.

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Problems of Price Theory

• Many firms do not attempt to maximize profits.
• It is difficult to estimate demand curves.

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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.

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Breakeven Chart

• Breakeven Analysis is 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.

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Calculating Breakeven

• Breakeven Analysis is 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.
• BEP fixed costs\contribution
• Contribution selling price less variable cost

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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.

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Pricing Challenges Facing Online and
International Marketers

• Five pricing objectives
• Profitability
• Volume
• Meeting competition
• Prestige
• Price stability