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Chapter 12
Price Determination and Pricing Strategies
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McGraw-Hill/Irwin
Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved.
After studying this chapter, you
should be able to:
• Discuss relationships among price,
demand, demand elasticity, and revenue.
• Understand methods for determining price.
• Recognize different pricing strategies and
the conditions that best the choice of a
strategy.
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After studying this chapter, you
should be able to:
• Recognize the importance of adapting
prices under shifting economic and
competitive situations.
• Understand the ethical considerations
involved in setting and communicating
prices.
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Price Determination: An Overview
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Price
Demand Curves
P
D
Q
Quantity
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Price Elasticity of Demand
% Change in quantity demanded
Price Elasticity of Demand =
% Change in price
•
•
•
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Elastic Demand
Inelastic Demand
Cross Elasticity of Demand
Costs, Volume, and Profits
• Fixed Costs (FC)
• Variable Costs (VC)
• Total Costs (TC)
TC = (VC X Q) + FC
• Marginal Cost MC)
• Marginal Revenue (MR)
• Total Revenue (TR)
Total Revenue = Price X Quantity
Profits = TR - TC
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Price Determination Methods
• Markup Pricing
Price = Unit Cost + Markup
or
Price = Unit Cost/(1-k)*
*k = desired % markup
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Price Determination Methods
Break-Even Analysis
$
Total Revenue
Profit
Fixed Cost
Loss
BEP
Quantity (units)
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Total Cost
Price Determination Methods
• Target-Return Pricing
(Desired return X Invested capital)
Price = Unit Cost +
Expected Unit Sales
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Price Determination Methods
•
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Target-Cost Pricing
1. Define market segments for new product.
2. Product is designed based on competitive
advantages and disadvantages.
3. Position product in context of overall company
strategy.
4. Fine-tune product based on customer’s
preferences, perceived value and willingness to
pay.
5. Estimate various price-responsiveness with
simulations.
6. Estimate target costs between optimal price and
Price Determination Methods
• Income-Based Pricing
– Real Estate
– Marketable Securities
– Businesses
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Prices and Customer Value
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Pricing Strategies
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Differential Pricing
Product Line Pricing
Second-market discounting
Periodic discounting
Bundling
Premium pricing
Partitional pricing
Competitive Pricing
Psychological Pricing
Penetration pricing
Price signaling
Going-rate pricing
Odd-even pricing
Customary pricing
One-sided claims
B2B Pricing Strategies
• New Product Pricing
– Price Skimming
– Penetration Pricing
– Experience Curve
Pricing
• Competitive Pricing
– Leader Pricing
– Parity Pricing
– Low-Price Supplier
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• Price Line Pricing
– Complementary
Product Pricing
– Price Bundling
– Customer Value Pricing
• Cost-based Pricing
– Cost-plus Pricing
Adapting Prices: Decreases and Increases
•
Price Reduction
Traps:
1. Low-quality trap
2. Fragile market share
trap
3. Shallow pockets trap
• Acceptable Price
Range:
– Prices the buyer is
willing to pay.
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Adapting Prices: Reacting to
Competitive Price Changes
• Temporary retail price reductions substantially
increase store traffic and sales.
• Large-market-share brands are hurt less by
price changes from smaller competitors.
• Frequent price dealing lowers consumers’
reference prices, which may hurt brand equity.
• Price changes for high-quality brands affect
weaker brands and private-label brands
disproportionately.
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Adapting Prices: Price Discounts and
Allowances
• Cash Discounts
• Trade Sales Promotion Allowances
• Quantity Discounts
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Adapting Prices: Geographical Pricing
FOB Origin Pricing
Uniform Delivered
Price
Zone Pricing
Freight Absorption
Pricing
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Competitive Bidding and Negotiated Pricing
• Sealed-bid Pricing
• Reverse Auctions
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Pricing Services
Price is influenced by the
nature of the service involved.
The larger the market share,
the higher the price that
can be charged.
Managing off-peak demand
makes pricing services difficult.
Bundling services into a single
package and price is a
common strategy.
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FTC Pricing Guidelines
• Comparisons with former prices.
• Comparisons with other retailer prices.
• Comparisons with prices suggested by
manufacturers or other non-retail
distributors.
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Deceptive Pricing Practices
• Bait and Switch
• Predatory Pricing
• Unit Pricing
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