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Chapter 18
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PRICING CONCEPTS
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© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 18 Pricing Concepts
1. Define Price.
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Chapter 18 Pricing Concepts
Introduction
▮ Price - Exchange value of a good or service▮ A higher-than-average price can convey an
image of prestige▮ A lower-than-average price may connote good
value
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Chapter 18 Pricing Concepts
Pricing and the Law
▮ Federal, state, and local laws all influence pricing decisions
▮ Countries impose tariffs to protect domestic suppliers
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Chapter 18 Pricing Concepts
Pricing and the Law
▮ Government regulation also imposes costs that affect prices
▮ Some companies use regulatory cost recovery as a source of additional revenue
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Chapter 18 Pricing Concepts
2. What are the three important pricing laws for marketers to know?
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Chapter 18 Pricing Concepts
Robinson-Patman Act
▮ Federal legislation prohibiting price discrimination that is not based on a cost differential
▮ Prohibits selling at an unreasonably low price to eliminate competition
▮ Inspired by price competition triggered by the rise of grocery store chains
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Chapter 18 Pricing Concepts
Robinson-Patman Act
▮ Price discrimination - Some consumers pay more than others for the same product
▮ A defense based on cost differentials works only:• If the price differences do not exceed the cost
differences resulting from selling to various classes of buyers
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Chapter 18 Pricing Concepts
Unfair-Trade Laws
▮ State laws requiring sellers to maintain minimum prices for comparable merchandise
▮ Intended to protect small specialty stores from loss-leader tactics
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Chapter 18 Pricing Concepts
Fair-Trade Laws
▮ Statutes enacted in most states that once permitted manufacturers to stipulate a minimum retail price for their product
▮ Assumes a product’s price is part of its image, which the manufacturer owns
▮ These laws became invalid with the passage of the Consumer Goods Pricing Act (1975)
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Chapter 18 Pricing Concepts
3. What are the various pricing objectives?
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Chapter 18 Pricing Concepts
Table 18.1 - Pricing Objectives
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Chapter 18 Pricing Concepts
Profitability Objectives
▮ Basic formulas for profit and revenue:
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Chapter 18 Pricing Concepts
Volume Objectives
▮ Belief that increased sales volume is more important in the long run than immediate profits
▮ Can maximize sales through pricing and nonprice factors such as service and quality
▮ Market-share objective - The goal of controlling a portion of the market for a firm’s product
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Chapter 18 Pricing Concepts
Meeting Competition Objectives
▮ Firms sometimes set prices to match established industry price leaders
▮ Shifts marketing mix to focus on nonprice variables
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Chapter 18 Pricing Concepts
Value Pricing
▮ Emphasizes benefits derived from a product in comparison to the price and quality levels of competing offerings
▮ Works best for relatively low-priced goods and services
▮ Challenge is convincing customers that low-priced brands offer quality comparable to that of a higher-priced product
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Chapter 18 Pricing Concepts
Prestige Objectives
▮ Develop and maintain an image of quality and exclusiveness that appeals to status-conscious consumers
▮ Example: Tag Heuer watches
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Chapter 18 Pricing Concepts
4. What are the pricing objectives for not-for-profit organizations?
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Chapter 18 Pricing Concepts
Pricing Objectives of Not-for-Profit Organizations ▮ Pricing strategy helps them achieve specific
goals• Profit maximization• Cost recovery• Market incentives• Market suppression
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Chapter 18 Pricing Concepts
5. What are the four types of market structures in which businesses operate?
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Chapter 18 Pricing Concepts
Table 18.2 - Distinguishing Features of the Four Market Structures
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Chapter 18 Pricing Concepts
6. What are the three methods of determining prices?
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Chapter 18 Pricing Concepts
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
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Chapter 18 Pricing Concepts
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 - Market structure with so many buyers and sellers that no single participant can significantly influence price
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Chapter 18 Pricing Concepts
Price Determination in Economic Theory
▮ Monopolistic competition - Diverse parties exchange heterogeneous, relatively well-differentiated products, giving marketers some control over prices
▮ Oligopoly - Relatively few sellers; each has large influence on price
▮ Monopoly - Only one seller of a product exists and for which there are no close substitutes
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Chapter 18 Pricing Concepts
Cost and Revenue Curves
▮ A product’s total cost is composed of total variable costs and total fixed costs• Variable costs - Change with the level of
production• Raw materials and labor costs
• Fixed costs - Remain stable at any production level within a certain range• Lease payments or insurance costs
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Chapter 18 Pricing Concepts
Cost and Revenue Curves
▮ Average total costs - Costs calculated by dividing the sum of the variable and fixed costs by the number of units produced
▮ Marginal cost - Change in total cost that results from producing an additional unit of output
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Chapter 18 Pricing Concepts
Figure 18.1 - Determining Price by Relating Marginal Revenue to Marginal Cost
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Chapter 18 Pricing Concepts
Table 18.3 - Price Determination Using Marginal Analysis
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Chapter 18 Pricing Concepts
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• Inelastic
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Chapter 18 Pricing Concepts
Determinants of Elasticity
▮ Availability of substitutes or complements• Role as a complement to another product
▮ Number of business transactions conducted online
▮ Whether product is perceived as a necessity or luxury
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Chapter 18 Pricing Concepts
Determinants of Elasticity
▮ Portion of a person’s budget spent on an item▮ Demand shows less elasticity in the short run
than in the long run
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Chapter 18 Pricing Concepts
Elasticity and Revenue
▮ Elasticity has a strong influence on revenue▮ Price cuts will increase revenues for products
with elastic demand▮ Price increases will increase revenue for
products with inelastic demand
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Chapter 18 Pricing Concepts
Practical Problems of Price Theory
▮ Many firms do not attempt to maximize profits▮ Demand curves are difficult to estimate
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Chapter 18 Pricing Concepts
Cost-Oriented Analysis
▮ Cost-plus pricing - Uses a base-cost figure per unit and adds a markup 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
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Chapter 18 Pricing Concepts
Alternative Pricing Procedures
▮ Full-cost pricing • Uses all relevant variable costs in setting a
product’s price• Allocates the 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
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Chapter 18 Pricing Concepts
Alternative Pricing Procedures
▮ Incremental-cost pricing - Attempts to use only costs directly attributable to a specific output in setting prices
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Chapter 18 Pricing Concepts
Alternative Pricing Procedures
▮ If firm is contracted for an additional 5,000 units, the lowest possible price would be $9/unit under full-cost pricing
▮ Under incremental-cost pricing, prices above $5/unit are permitted:
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Chapter 18 Pricing Concepts
Breakeven Analysis
▮ 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
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Chapter 18 Pricing Concepts
Figure 18.2 - Breakeven Chart
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Chapter 18 Pricing Concepts
Target Returns
▮ Most managers include a targeted profit in their analyses:
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