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Chapter 13
Price Determination
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Pricing and the Law
 Price: the exchange value of a good or service
 Robinson-Patman Act
Prohibits price discrimination that is not based
on a cost differential
Prohibits selling at
unreasonably low prices
to eliminate competition
13-2
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 Protecting Image by
Avoiding Price
Discounting
13-3
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Pricing Objectives and the
Marketing Mix
 Prices determine how much revenue a company
receives
 Prices influence a firm’s profits
 Prices influence how a firm uses factors of
production:
Natural resources
Capital
Human Resources
Entrepreneurship
13-4
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Pizza Hut, what would you say
about their pricing objectives?
13-5
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 Profitability
For-profit firms must set prices with
profitability in mind
Profit Maximization
Target-Return Objectives
13-6
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The OfficeDepot seems to
understand the needs and
methods for profits. Even in the
recent economic slow down
OfficeDepot has held their own in
the marketplace.
13-7
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 Volume
Sales maximization
Market-share objectives
The PIMS Project: Research supports a
strong positive relationship between a firm’s
market share and its return on investment
13-8
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 Price as a Tool to
Achieve Volume
Objectives
13-9
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 Glad GladWare
Containers
 Using Price to
Achieve a
Market Share
Objective
13-10
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 Clorox
 Increasing
Profitability
through Product
Quality and
Market Share
13-11
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This ad is aimed at
increasing profitability by
building volume and market
share for Sprint.
13-12
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 Meeting Competition
Seeks simply to meet competitor’s prices
Value Pricing
13-13
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 Prestige Objectives
 Waterford
Prestige Pricing
Maintains a HighQuality Image
13-14
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Prestige Pricing: Prices for lynx
boom boom drivers are set at a
relatively high level in order to
develop and maintain an image of
quality and exclusiveness that
appeals to status-conscious
consumers
13-15
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Pricing Objectives of Not-for-Profit
Organizations
 Profit maximization
 Cost recovery
 Market incentives
 Market suppression
13-16
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Methods for Determining Prices
 Customary Prices: traditional prices that
consumers expect to pay for a good or
service
Cough Suppressants Are Typical of
the Products That Use Customary
Pricing – So Customary That This
“Classic” International Ad Doesn’t
Even Mention Price
13-17
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Price Determination in
Economic Theory
 Demand
 Supply
13-18
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 Four Market Structures
Pure Competition
Monopolistic Competition
13-19
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Internet Service Providers
Operate in a Monopolistic
Competition Market Structure
– Some Even Offer Free
Service
13-20
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Oligopoly
13-21
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Monopoly
Anti-trust legislation
Government regulated monopolies
13-22
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 Cost and Revenue Curves
Price is often determined by analyzing the cost and
revenue curves
Average total cost
Marginal cost
Average revenue
Marginal revenue
13-23
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 The Concept Of Elasticity In Pricing Strategy
Elasticity: measure of responsiveness of
purchasers and suppliers to changes in price
One Internet Service Provider,
Freeinternet.Com, Uses Ads Like
This One to Differentiate Itself
From Its Competitors in an Elastic
Market With Many Substitutes
13-24
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 Determinants Of Elasticity
Availability of Substitutes
Luxury or Necessity
Portion of Budget
Time Perspective
13-25
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 Four Seasons Hotels
 Inelastic demand for a service viewed as a necessity
for upscale travelers
13-26
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 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
13-27
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 Practical Problems of Price Theory
Marketers may thoroughly understand
price theory concepts but still encounter
difficulty in applying them in practice.
Estimating demand curves is a difficult
process
13-28
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Price Determination in Practice
 Cost-plus pricing: practice of adding a
percentage of a specified dollar amount to the
base cost of a product to cover unassigned
costs and provide a profit
13-29
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Alternative Pricing Procedures
 Full-cost pricing
 Incremental-cost pricing
13-30
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 Breakeven analysis: pricing technique 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
The target return may be set as:
A desired dollar return
A percentage of sales
13-31
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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
13-32
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 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
13-33
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 Yield Management: pricing strategy designed to
maximize sales in situations such as airfares,
lodging, auto rentals, and theater tickets where
costs are fixed
 Prices for a Round-Trip
Flight Between NYC
and Miami Varied in
From $190 to $739
in coach.
13-34
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Global Issues in Price Determination
 Global Prices must support the firm’s broader
goals including:
Product development
Advertising and sales
Customer support
Competitive plans
Financial objectives
13-35
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 In general firms that set prices in global
marketing follow the same objectives with
one addition:
Price stability is the ability to maintain
consistent prices during major economic
fluctuations and periods of political change
13-36
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