Pricing Decisions

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  Managerial Economics

  The Analysis of Business Decisions

  • Stephen Hill(Author)
  • 2016(Publication Date)
  • Red Globe Press

    (Publisher)

  CHAPTER9 Pricing Decisions Contents INTRODUCTION 208 A GENERAL PRICING MODEL 209 MONOPOLY AND ENTRY 210 PRICING NEW PRODUCTS 213 PRICING ESTABLISHED PRODUCTS 216 PRICING STRATEGIES 218 EMPIRICAL PRICING EVIDENCE 225 SUMMARY AND CONCLUSIONS 227 APPLICATION 9 229 Introduction Pricing is a decision area which draws together contributions from the theories of demand, cost and market structure. The pricing decision has been the major focus of economic theory in the analysis of resource allocation, but its position in managerial economics is more limited. In the analysis of business decision-making, pricing is just one element in a comprehensive competitive strategy. More-over, the pricing decision is a means to an end, and not the end in itself, so that decisions about price must be considered in the context of overall business objectives. As we shall see, price is a strategic as well as an operational variable, so that Pricing Decisions can have a profound effect on future as well as present performance. Because of this time dimension, pricing objectives need to be carefully defined. For example, setting a low current price may be an optimal decision if the consequent establishment of a dominant market position leads to long-run profits sufficient to outweigh any short-run profit sacrifice. The purpose of this chapter is to derive a pricing policy, in the 208 Pricing Decisions 209 form of some general pricing rules, which can be used to govern pricing behaviour. In doing so, we shall consider pricing only from the seller's viewpoint, which means leaving the implications of pricing behaviour from the consumer's or society's point of view to that body of theory known as welfare economics. Merely to consider the determination of a pricing policy is to assume that the seller has some discretion over price, i.e. that the market situation is not perfectly competitive.

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  MKTG

  • Charles Lamb, Joe Hair, Carl McDaniel, , Charles Lamb, Charles Lamb, Joe Hair, Carl McDaniel(Authors)
  • 2020(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  346 346 PART SIX: Pricing Decisions LEARNING OUTCOMES After studying this chapter, you will be able to . . . 19-1 Discuss the importance of Pricing Decisions to the economy and to the individual firm 19-2 List and explain a variety of pricing objectives 19-3 Explain the role of demand in price determination 19-4 Understand the concepts of dynamic pricing and yield management systems 19-5 Describe cost-oriented pricing strategies 19-6 Demonstrate how the product life cycle, competition, distribution and promotion strategies, customer demands, the Internet and extranets, and perceptions of quality can affect price 19-7 Describe the procedure for setting the right price 19-8 Explain how discounts, geographic pricing, and other pricing tactics can be used to fine-tune a base price 19-9 Identify the legal constraints on Pricing Decisions Monkey Business Images/Shutterstock.com 19 Pricing Concepts Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 19-1a What Is Price? Price is that which is given up in an exchange to acquire a good or service. Price also plays two roles in the evalua- tion of product alternatives: as a measure of sacrifice and as an information cue. To some degree, these two effects are opposing. THE SACRIFICE EFFECT OF PRICE Price is, again, “that which is given up,” which means what is sacrificed to get a good or service. In the United States, the sacrifice is usu- ally money, but it can be other things as well. It may also be time lost while waiting to acquire the good or service.

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  Marketing (RLE Marketing)

  The Management Way

  • Arnold K. Weinstein(Author)
  • 2014(Publication Date)
  • Routledge

    (Publisher)

  Price decisions are particularly vulnerable to the effects of outside forces. In his pricing decision, the marketing manager must include estimates of payoff under all possible conditions and states of nature. Avoiding analysis of an unpredictable variable can only lead to disaster.

  Time Requirements

  The pressure of time can often cause a decision to be made on an emotional basis, rather than as a rational evaluation of the alternatives. When faced with a lack of information and time, the marketing manager only hopes his intuitive decision is correct. Adequate planning in the form of contingency strategies can avoid many time-pressure problems.

  Ethical and Social Problems in Pricing The decision to raise or lower price has far-reaching political, economic, psychological and sociological implications.

  Should factors outside the immediate profit situation created by a price decision be allowed to influence the decision? Are there moral implications in the selling of drugs that are not present in the selling of clothing? Should business accept a self-policing role or should all economic policing be done by the government? There are no sure answers to these questions, but the pricing executive would benefit by spending many hours thinking about his answers.

  Perception and the Pricing Decision

  “The field of pricing, no less than most other aspects of marketing, presents opportunities to influence customer perception. Psychological pricing, for example, is a virtual marketing speciality devoted to finding prices that seem lower than they really are. ‘Sales’ are almost always accompanied by a change in physical appearance of the seller’s premises to create the feeling in customers that they are attending a carnival at which prizes are given away. Under such circumstances, customers apparently see different things when they look at the same price tag than they would perceive without the carnival atmosphere.”2

  Perception and perceptual bias enter the pricing picture from two avenues. First, the price-setter has his particular perception of reality. Secondly, the perceptual biases of customers determine, to a large extent, the success of any pricing decision.

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  Marketing

  • William Pride, O. C. Ferrell(Authors)
  • 2019(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  20-4c Competition-Based Pricing With competition-based pricing, an organization consid- ers costs to be secondary to competitors’ prices. This is a common method among producers of relatively homoge- neous products, particularly when the target market con- siders price to be an important purchase consideration. A firm that uses competition-based pricing may choose to set their prices below competitors’ or at the same level. Consider the advertisement for Walgreens, which has long engaged in a price war with CVS and others. As shown in the ad, Walgreens has taken some steps to differentiate itself from its rivals, such as highlighting its charitable giv- ing, after years of competing for market share on the basis of price. Likewise, competitors believe that Amazon’s competition-based pricing model in industry after industry has been an attempt to gain monopoly control of many retail markets. Amazon uses highly sophisticated analytics to gauge consumer demand and compare its prices to com- petitors. To stay ahead of the competition, Amazon adjusts its prices millions of times each day, to ensure that it undercuts competitors on the most popular items. 10 20-5 SELECTION OF A PRICING STRATEGY A pricing strategy is a course of action designed to achieve pricing objectives, which are set to help marketers solve the practical problems of setting prices. The extent to which a business uses any of the following strategies depends on its pricing and marketing objectives, the markets for its products, the degree of product differentiation, the product’s life-cycle stage, and other factors. Generally, pricing strategies help marketers solve the practical problems of establishing prices. Table 20.3 lists the most common pricing strategies, which we discuss in this section. 20-5a Differential Pricing An important issue in Pricing Decisions is whether to use a single price or different prices for the same product.

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  Business-to-Business Brand Management

  • Mark S. Glynn, Arch G. Woodside, Mark S. Glynn, Arch G. Woodside(Authors)
  • 2009(Publication Date)
  • Emerald Group Publishing Limited

    (Publisher)

  CHAPTER 9 PRICING THEORY AND PRACTICE IN MANAGING BUSINESS-TO-BUSINESS BRANDS Gerald E. Smith and Arch G. Woodside ABSTRACT This paper includes an examination of two key issues on price decisions: (1) how should price decisions be made (the strategic and normative issue) within market contexts, and (2) how are price decisions actually made (the execution and implementation of price decisions). The paper closes with some observations useful for applied research and strategies for making effective Pricing Decisions. The propositions and literature review show that one pricing strategy does not fit a brand in all market contexts that brand executives experience annually in managing brands. Setting specific price points requires continuing deliberate management responses to dynamic market contexts. This paper provides useful sense-making conjunctive steps to accomplish such deliberate thinking effectively relevant for different market contexts. Pricing Decisions are usually challenging but are especially vexing in periods of rapidly changing costs and market uncertainty. For example, manufac-turers and service providers wrestle frequently with how to pass on dramatic Business-to-Business Brand Management: Theory, Research and Executive Case Study Exercises Advances in Business Marketing and Purchasing, Volume 15, 429–486 Copyright r 2009 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 1069-0964/doi: 10.1108/S1069-0964(2009)0000015013 429 increases in raw material and commodity prices such as fuel, metals, and petrochemicals ( Stundza, 2008 ). Marketing strategists recognize that Pricing Decisions are particularly important and difficult to make because price changes may cause changes directly in multiple goals such as (1) customer retention, (2) profit, (3) sales, and (4) market share. The specific forms of the relationships for price and these goal variables are difficult to estimate accurately.

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  Prices

  Issues in Theory, Practice, and Public Policy

  • Almarin Phillips, Oliver E. Williamson, Almarin Phillips, Oliver E. Williamson(Authors)
  • 2016(Publication Date)
  • University of Pennsylvania Press Anniversary Collection

    (Publisher)

  The approach adopted here has as a corollary purpose the setting down of normative principles for businessmen. That is, we should seek heuristics and principles that will guide businessmen's Pricing Decisions so that they perform as well as circumstances permit. Accordingly, we will not simply evaluate present Pricing Decisions but will attempt to prescribe methods for approaching price problems. PRICE-SETTING VIEWED AS DECISION-MAKING A variety of procedures is prescribed for decision-making, but all have certain features in common; they call for specification of objectives, iden-tification of feasible attractive alternatives, estimates of the outcomes of the selected alternative, and designation of the alternative that promises to achieve the decision-maker's objectives best. Accordingly, we shall assess any pricing method according to the validity or wisdom with which it deals with objectives, alternatives, estimates of outcomes, and the selection among alternatives. In so doing, we will hopefully isolate pitfalls to which business-men are exposed and uncover guides for their actions. Before assessing the rationality of three types of price decisions, we shall explore what would be involved in rational pricing. PRICING OBJECTIVES : A firm sets prices in order to achieve its total objectives; it would not have pricing objectives in isolation. We need not cover the well-traveled ground which leads to the conclusions: businesses pursue multiple and conflicting goals; their goals are partly nonmonetary in the short run and the long run. Also, these goals probably vary over time and are not clearly understood by all decision-makers in each firm, while the goals of the individual decision-makers may conflict with those of the firm.

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  Pricing in Business

  • Douglas Hague(Author)
  • 2018(Publication Date)
  • Taylor & Francis

    (Publisher)

  We argued that, in an ideal world, conflicts between objectives would be identified and different objectives given appropriate weights. We went on to suggest that the firm was unlikely to go so far as to establish a ‘goal index’ which would give precise weight to different objectives and so provide a basis for Pricing Decisions. However, this is a future possibility that should not be forgotten. We argued that at present all one could do was to rank pricing objectives in a way that would allow the firm to give roughly the intended weight to each of them in Pricing Decisions. Finally, we suggested that the firm should ensure that each individual responsible for Pricing Decisions, at whatever level in the firm, needed to be absolutely clear what objective(s) he was expected to pursue. Only in this way could sub-optimization (or indeed non-optimization) be kept to a minimum.

  The first step in any pricing decision is therefore to go through the steps set out in Sections A and B of the check list. The person responsible should ensure that the product to be priced and the nature of the pricing decision are identified, and the objectives clearly understood by everyone concerned with the decision. The second step is to obtain the optimal amount of relevant information, as suggested in Sections C and D of the check list, and to analyse it on the lines we discussed in Chapters 7 and 8 .

  9.2 THE ALTERNATIVES

  We now move on to the decision itself and things become more complicated still. We are no longer concerned separately with the way in which, say, costs alter with changes in output, or in output per man; or by how much the amount sold is increased by reducing price. We are concerned with cost and demand factors at the same time. We have to look at the effects which a change in price has on both demand and output, and so on costs and profits. If advertising, or other sales promotion activities alter too, even more variables have to be watched. We are concerned with relationships between a number (perhaps a large number) of interrelated variables.

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  Principles of Marketing

  A Value-Based Approach

  • Ayantunji Gbadamosi, Ian Bathgate, Sonny Nwankwo(Authors)
  • 2013(Publication Date)
  • Bloomsbury Academic

    (Publisher)

  Other important considerations include: the quality of the item, its brand image, purpose, usage and overall appeal, along with the consumer’s previous experiences of the product. They may also consider certain tangibles such as interest-free credit and warranties. All or some of these factors may dictate the consumer’s view of the value for money. 216 pricing strategies Customer costs Customer values Affordability Alternatives Cost of use Installation Life span of product Monetary price Service costs Time needed to search for purchase Transportation Acceptability Aesthetics – look, feel, sound, taste, smell Conformance to standards Credit and terms Dependability Durability Economy of purchase Image perception Performance and features Safety and security Serviceability Variety What Table 7.2 suggests is that buyers’ perception of price is not static in the sense that price has different associations in the minds of different buyers. However, in determining price, marketing managers must understand the cost involved, the alternatives available and the response of the different customer groups and the value they place on the product or service. Market structure, demand and competition After marketers establish pricing objectives, they must set specific prices to achieve those objectives. The price adopted is influenced by factors such as production costs, the nature and strength of demand, and competitors’ prices. Very often the price arrived at has a combination of all three elements. Market structure The structure of the markets will affect the ability of the organization to set and control the price (see Table 7.3). Demand Demand is the amount of a particular good or service that a consumer or group of consumers will want to purchase at a given price. The demand curve is usually downward sloping, since consumers will want to buy more as price decreases.

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  Accounting for Managers

  Interpreting Accounting Information for Decision Making

  • Paul M. Collier, Sandy M. Kizan, Eckhard Schumann(Authors)
  • 2013(Publication Date)
  • Wiley

    (Publisher)

  CHAPTER 8 Marketing Decisions LEARNING OBJECTIVES After reading this chapter, you should be able to answer the following questions: ■ Why is it important to understand cost behaviour in pricing and marketing decisions? ■ How can cost–volume–profit (CVP) analysis be used to help answer “what if” questions related to sales volume and pricing? ■ How is cost information used in setting prices? ■ How can a company determine an optimal price for its products by considering demand volumes? ■ What costs must a company include when setting a price for a one-time special order? ■ How does a company determine a minimum transfer price between intercompany divisions? ■ What cost information needs to be considered when a company is in the process of deciding to keep or drop a product line? This chapter considers the use of accounting information in making marketing decisions. It begins with an overview of some of the key elements of marketing theory and introduces cost behaviour: the distinction between fixed and variable costs. Decisions involving the relationship between price and volume are covered through the technique of cost–volume– profit (CVP) analysis. Different approaches to pricing are covered, including cost-plus, target rate of return, market, special order and transfer pricing. The chapter concludes by looking at the process of making decisions to keep or drop a product line. 178 PART II USING ACCOUNTING INFORMATION FOR DECISION MAKING, PLANNING, AND CONTROL Marketing Strategy Marketing is the business function that aims to understand customer needs and satisfy those needs more effectively than competitors. Marketing can be accomplished through a focus on selling prod- ucts and services or through building lasting relationships with customers (customer relationship management). Marketing textbooks emphasize the importance of adding value through marketing activity.

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  Problems in Marketing

  Applying Key Concepts and Techniques

  • Luiz Moutinho, Charles S Chien(Authors)
  • 2007(Publication Date)
  • SAGE Publications Ltd

    (Publisher)

  It is often difficult to predict how customers and competitors will react to a price change. (M) Problem 6.1 Determining price levels Introductory comments Whatever the pricing strategy and structure a company adopts, it ultimately has to arrive at price levels for specific items, target markets and periods. Such prices may be unilaterally specified by the company (fixed price levels), or may result from interac-tions between buyers and sellers. In this chapter we discuss methods for assessing fixed price levels, the basic principles of price negotiations, competitive bidding and then leasing. FIXED LEVELS To determine price levels, companies often make use of simple decision procedures that focus on one dimension of the pricing problem. We first discuss these simplified methods, and then touch on complex optimisation, simulation methods and price adjustments. Simplified decision methods Among the simplified decision procedures, cost-based methods are the most widely used approaches to pricing. Cost-based methods have a common denominator: they start out from information on unit costs for the product, and take this as a ‘floor’ above which a pre-specified Pricing 163 remuneration is charged by the company. In mark-up (MU) pricing , the company sets a price per unit equal to the cost per unit plus a pre-specified ‘MU’. MUs are often specified as a percentage of unit cost, and vary widely between sectors and product categories. An alternative cost-based method is target return pricing . Here, the company starts out from a desired return on investment (ROI), and then calculates the premium to be charged over unit cost to realise this ROI. In break-even pricing , finally, the company computes the minimum price needed to cover fixed and variable costs (and, eventually, a pre-specified ROI) in view of the forecast demand level. Cost-plus pricing is used in a wide range of consumer and industrial settings, and is adopted by almost all retailers.

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