Learning Objectives

After working through this chapter and the study guide, you should be able to:

1. Describe the role of pricing in the marketing mix.

2. Explain the economic principles that link price to sales and profits.

3. Describe approaches to pricing based on cost, competition, and customer value.

4. Compute prices based on markup and markdown pricing.

5. Execute a breakeven analysis.

6. Discuss legal and ethical issues surrounding pricing.

Chapter Summary

In order to establish a product/service price, marketing managers must be able to understand the concepts behind the price. The first area of understanding is the economics of pricing. This includes what a demand curve is (a graphical representation of the quantity of a product demanded at various prices) and marginal analysis (a technique for finding the greatest profits by measuring the economic effect of producing and selling each additional unit of product). 

Demand curves are influenced by a number of items. A product’s life cycle changes the demand curve for the product. The marketing manager must be able estimate demand at various price levels. This is partially accomplished by understanding the demographics of the target markets, the market’s psychological behavior towards various prices or price changes, and the product’s price elasticity (measure of sensitivity of demand to changes in price). Knowing these influences help the marketing manager estimate revenue for the product/service. 

There are a number of approaches in pricing products/services. One is referred to as pricing based on cost. In this situation, fixed and variable costs are involved. A second is called pricing based on the competition, while a third is named pricing based on customer value. In pricing based on cost, the marketing manager can apply markup pricing (adding a percentage to the product’s cost to set the price), rate-or-return pricing (adding a desired rate of return on investment to the total cost of the product), and breakeven analysis (determining sales volume to cover total costs). 

Pricing based on competition is primarily concerned with what the a firm’s competition prices products/services and then determining whether to price below, at , or above the competition. Discount retail stores such as WalMart and Kmart advertise that they will match or beat the competition’s price, just bring in the advertisement. 

Pricing based on customer value evaluates what the customer is willing to pay for a product/service based off of the value they perceive they will receive. This is sometimes referred as value pricing which is the perceived benefits minus the perceived costs. Methods employed to obtain data on customer perceptions of price include reference pricing and demand-backward pricing. 

Important issues surrounding pricing are legal and ethical considerations. The Federal government has enacted certain laws regarding illegal pricing including the Sherman Antitrust Act, the Consumer Goods Pricing Act, the Federal Trade Commission Act and the Robinson-Patman Act. These various acts contain laws regarding pricing fixing, deceptive pricing, price discrimination, predatory pricing, and dumping. On the over side, are pricing tactics that are legal but unethical. These tactics could include prices that are intended to confuse, high prices intending to indicate quality, and prices that encourage consumers to buy features that they really do not need.

Key Terms

Price Breakeven analysis

Demand curve Breakeven point

Price elasticity Reference price

Total revenue Demand-backward pricing

Average revenue Value pricing

Marginal revenue Price fixing

Profit Deceptive pricing

Marginal analysis Price discrimination

Fixed costs Predatory pricing

Variable costs Dumping

Markup pricing Bait and switch

Rate-of-return pricing

Technology Implications 

The WWW has seen the emergence of a new genre of entrepreneurs. A spectrum of product and service providers have set up virtual stores providing their customers distinct benefits. Amazon.com is one such example of an online bookstore that lets customers search over a million tittles by author, tittle, or subject. Special features at this site include contests, reviews, and features by topic areas. Since Amazon sources directly from the manufacturer they price their wares well below traditional store based booksellers. This combination of technology and price has shaken up not only, the book retailing industry but the whole category of shopping products including (autos, furniture, music, computers etc.). This ability to compare prices keeps getting enhanced with the emergence of specialized companies furnishing this information for a price. While auto brokers have been the traditional providers of such information there is a growing level of specialization. For example it is now possible for an individual to shop for term-life insurance without salesperson contact (http://www.quotesmith.com).