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Marketing Management
Pricing
in the Economic and
Competitive Environment
Paul Dishman, Ph.D.
Department of Business Management
Marriott School of Management
Brigham Young University
Lecture 12
Marketing Management
Price
• Price is the sum of all the values that
consumers exchange for the benefits of
having or using the product or service.
• Price has been the major factor affecting
buyer choice; nonprice factors have become
increasingly important in buyer-choice
behavior.
• Price is the only element in the marketing
mix that produces revenues; all others
represent costs.
Paul Dishman, Ph.D.
Marketing Management
Factors Affecting Price Decisions
( Fig. 10.1)
External Factors
Internal Factors
Marketing Objectives
Marketing Mix Strategy
Costs
Organizational
considerations
Pricing
Decisions
Nature of the market
and demand
Competition
Other environmental
factors (economy,
resellers, government)
Paul Dishman, Ph.D.
Marketing Management
Internal Factors Affecting Pricing
Decisions: Marketing Objectives
Survival
Low Prices to Cover Variable Costs and
Some Fixed Costs to Stay in Business.
Marketing
Objectives
Current Profit Maximization
Choose the Price that Produces the
Maximum Current Profit, Etc.
Market Share Leadership
Low as Possible Prices to Become
the Market Share Leader.
Product Quality Leadership
High Prices to Cover Higher
Performance Quality and R & D.
Paul Dishman, Ph.D.
Marketing Management
Factors Affecting Pricing:
Marketing Objectives
• Other specific objectives include:
– Set prices low to prevent competition from entering
the market,
– Prices might be reduced temporarily to create
excitement or draw more customers.
• Nonprofit and public organization may have
other pricing objectives such as:
– University aims for partial cost recovery,
– Hospital may aim for full cost recovery,
– Theater may price to fill maximum number of seats.
Paul Dishman, Ph.D.
Marketing Management
Internal Factors Affecting Pricing
Decisions: Marketing Mix
Product Design
Nonprice
Positions
Price
Distribution
Promotion
Paul Dishman, Ph.D.
Marketing Management
Types of Cost Factors that
Affect Pricing Decisions
Fixed Costs
(Overhead)
Variable Costs
Costs that don’t
vary with sales or
production levels.
Costs that do vary
directly with the
level of production.
Executive Salaries, Rent
Raw materials
Total Costs
Sum of the Fixed and Variable Costs for a Given
Level of Production
Paul Dishman, Ph.D.
Marketing Management
Types of Cost Factors that
Affect Pricing Decisions
• As a firm gains experience in production, it learns how to
do it better.
• The experience curve (or the learning curve) indicates
that average cost drops with accumulated production
experience.
• Strategy: company should price products low; sales
increases; costs continue to decrease; and then lower
prices further.
• Risks are present with this strategy.
Paul Dishman, Ph.D.
Marketing Management
External Factors Affecting
Pricing Decisions
Market and
Demand
Competitors’ Costs,
Prices, and Offers
Other External Factors
Economic Conditions
Reseller Needs
Government Actions
Social Concerns
Paul Dishman, Ph.D.
Marketing Management
Market and Demand Factors
Affecting Pricing Decisions
Pricing in Different Types of Markets
Pure Competition
Many Buyers and Sellers
Who Have Little
Effect on the Price
Monopolistic
Competition
Many Buyers and Sellers
Who Trade Over a
Range of Prices
Pure Monopoly
Single Seller
Oligopolistic
Competition
Few Sellers Who Are
Sensitive to Each Other’s
Pricing/ Marketing
Strategies
Paul Dishman, Ph.D.
Marketing Management
Demand Curves and
Price Elasticity of Demand
A Demand Curve is a Curve that Shows the
Number of Units the Market Will Buy in a Given
Time Period at Different Prices that Might be
Charged.
Price Elasticity Refers to How Responsive
Demand Will be to a Change in Price.
Price Elasticity of Demand = % Change in Quantity Demanded
% Change in Price
Paul Dishman, Ph.D.
Marketing Management
Price
Price Elasticity of Demand
A. Inelastic Demand Demand Hardly Changes With
a Small Change in Price.
P2
P1
Price
Q2 Q1
Quantity Demanded per Period
B. Elastic Demand Demand Changes Greatly With
a Small Change in Price.
P’
2
P’1
Q2
Q1
Quantity Demanded per Period
Paul Dishman, Ph.D.
Marketing Management
Major Considerations in Setting
Price (Fig. 10.5)
Paul Dishman, Ph.D.
Marketing Management
Cost-Based Pricing
Certainty About
Costs
Price Competition
Is Minimized
Much Fairer to
Buyers & Sellers
Unexpected
Situational
Factors
Pricing is
Simplified
Cost-Plus
Ethical
Pricing is an
Approach That
Adds a
Standard
Markup
to the
Attitudes
Costofof the
Others
Product.
Simplest
Pricing
Method
Ignores
Current
Demand &
Competition
Paul Dishman, Ph.D.
Marketing Management
Breakeven Analysis or
Target Profit Pricing
Cost in Dollars (millions)
Tries to Determine the Price at Which a Firm
Will Break Even or Make a Certain Target Profit.
Total Revenue
12
10
Target Profit
($2 million)
8
6
Total Cost
4
Fixed Cost
2
200
400
600
800
1,000
Sales Volume in Units (thousands)
Paul Dishman, Ph.D.
Marketing Management
Competition-Based Pricing
Setting Prices
Going-Rate
Company Sets Prices Based on What
Competitors Are Charging.
?
?
Sealed-Bid
Company Sets Prices Based on
What They Think Competitors
Will Charge.
Paul Dishman, Ph.D.