Chapter 12

Price Determination
 Definition of PRICE
► Price
is the amount of money and/or other
items with utility needed to acquire a
product.
 Importance of Price
Price is significant;

► In the Economy
► In the customer’s mind
► In the Individual firm
 In the Economy
► Price influences wages, rent, interest and
profits e.g. high wages attract labor and
high interest attract capital
► It influences the allocation of the factors of
production.
► It influences demand and supply.
► Before setting price government and
customer response should also be
considered
 In the Customer’s Mind
► Itinfluences customer’s perception towards
quality of goods and services.
► Some customers are quality conscious and
others are quality or service conscious
► Segments of Shoppers
 Brand Loyal (uninterested in price)
 System Beaters (prefer brands but at a reduced price)
 Deal Shoppers (Driven by low prices)
 Uninvolved (no brand preference and no low price)
Price is a component of value (Ratio of perceived benefits to
price and other cost e.g. time spent, gas spent etc)
 In the Individual Firm
► Price affects a firm’s competitive position,
revenues and net profits.
► Some businesses convey superior quality by
charging high prices but it appeals to quality
conscious or those who cant judge quality
► Some other factors limit the effect of price
on marketing program i.e. differentiated
features, favorite brand, high quality etc
 Pricing Objectives
Pricing objectives should be compatible with
overall organizational goals

Pricing objectives are following;

► Profit-Oriented Goals
► Sales-Oriented Goals
► Status quo-Oriented Goals
 Profit-Oriented Objectives
Two objectives are;
1-Achieve a Target Return
2-Maximize Profits
 1-Achieve a Target Return
► The objective of the company is to achieve
a specified percentage return on its sales or
on its investment.
► Add an amount to the cost of the product
called as “markup “ to cover anticipated
operating expenses and provide a desired
profit for a period
 Maximize Profits
► The objective of the company is to earn as
much profit as possible but people might
feel it as profiteering, high prices and
monopoly resulting in public criticism
► Profiteering don't exist for a long time
period due to substitute products,
postponing purchases and competition
 Sales-Oriented Goals
Two objectives are;
► 1-Increase sales volume
► 2-Maintain or Increase Market Share
 1-Increase Sales Volume
► The objective of the company is to achieve
rapid growth or to discourage other firms
entering a market.
► Initially companies may incur losses in short
run to expand sales volume or meet sales
objectives
2-Maintain or Increase Market Share
► Companies try to maintain their market
shares in order reduce production costs
and/or project a dominant appearance to
consumers
► The price setting objective can be to retain
the old customers or to attract the new
customers.
 Status Quo Goals
► Least aggressive goal; firms try to maintain
current position
► Two objectives are Stabilizing prices and
Meeting competition
► They maintain firm’s current situation
► Avoid price competition and go for
prevailing market price.
 Factors Influencing Price
Determination
Factors that influence price determination are;

► Estimated Demand
► Competitive Reactions
► Other Marketing-Mix Elements
► Cost of Product
 Estimated Demand
►A company must estimate the total demand
for the product.
Steps in estimating demand are;
1- Find whether there is a price the market
expects and
2- Estimate what the sales volume might be
at different prices.
► Middleman reaction is also important
► Setting tow low prices disturbs the sales and
reduce it
 Competitive Reactions
► Reasons for competitor entry are;
 Field is easy to enter
 Profit prospects are encouraging
► When one company reduces its price, others
have to follow
► Types of competitors include
 Directly Similar products
 Available substitutes
 Unrelated Products
 Other Marketing-Mix Elements

1-Product
2-Distribution Channels
3-Promotion
 1-Product
►A product’s price is affected by;
► Either it is a new item or An established
product
► Product is purchased on lease or bought out
rightly
► A trade is involved
► Return policy of company
 2-Distribution Channels
► Channels influence producer’s pricing.
► Price to wholesalers is lower because they
have to perform producer’s services like;
 Storage
 Granting credit
 Selling to retailers
 3-Promotion
► Promotional activities also influence price
setting.
► If these activities are done by producer he
will charge more price from retailers.
 Cost of a Product
► Cost also influences price
► More cost more price Low cost low price.
► Total Cost of a product is made up of
several types of costs, each reacting
differently to changes in quantity produced
► Various kinds of costs are
 Fixed Cost (total and average fixed costs)
 Variable Cost (total and average variable costs)
 Total Cost (Average total cost)
 Marginal Cost
 Cost-Plus Pricing
► Adding a standard markup (additional amount) to
the cost of the product.
 9% use Guesstimate, 37% watch competitors,
50% what market bear and 52% cost + profit
(total more than 100% as companies go for
more than one approach)
► Setting the price of one unit of a product equal to
the total cost of the unit plus the desired profit on
the unit.
► Drawbacks are; costs differ with changes in output
and Company looses chances of earning additional
revenue
 Prices Based on Marginal Costs
► To set prices based on marginal costs only,
not total costs.
► Under this approach company can sell at a
price lower than total cost price as it covers
variable cost at this price
► It is used when management wants
employees working in off season or one
product is expected to attract business for
another.
 Evaluation of Cost-Plus Pricing
► Itis straightforward, easy to explain and
used by numerous firms.
► This is a weak and unrealistic method in
terms of ignoring market conditions,
competition and demand
 Break-Even Analysis
► Itis used to calculate break-even points.
► Quantity of output at which total revenue
equals total costs (TR=TC)
► The more sales are above the break-even
point, the larger the total and unit profits
will be.
 Determining the Break-Even Point
► Break-Even Point in units=Total fixed
costs/unit contribution to overhead
OR
► Break-Even Point in units=Total Fixed
Costs/Selling Price-Average variable cost
 Evaluation of Break-Even Analysis
► It cannot tell us whether or not we can
actually sell at the break-even amount.
► It is helpful because in the short run many
firms experience reasonably stable cost and
demand structures.
 Prices based on Marginal
Analysis
► Ittakes into account both demand and
costs to determine the best price for profit
maximization.
 Determining the Price
► The price setter must understand the
concepts of average and marginal revenue
as well as average and marginal costs
► Marginal revenue is the income derived from
the sale of last unit.
► Average revenue is the unit price at a given
level of unit sales.
 Evaluation of Marginal Analysis
Pricing
► It has been used as a basis for price setting.
► It can be helpful in studying past price
movements.
► It cannot serve as a practical basis for
setting prices unless accurate, reliable data
can be obtained for plotting the curves.
 Prices set in Relation to
Market alone
► The seller’s price may be set right at the
market price to meet the competition, or it
may be set above or below the market
price.
 Pricing to Meet Competition
► It is simple to carry out.
► In a situation with multiple suppliers, a firm
should ascertain what the prevailing market
price is and after allowing for customary
markups for middlemen, should arrive at its
own selling price.
► This is suitable in case of perfect competition
i.e. no/less product differentiation, open
competition and well informed buyers
 Pricing Below Competition
► It is done by discount retailers which stress
low markup, high volume and few customer
services.
► They price heavily advertised, well-known
brands 10% to 30% below the suggested
price.
 Pricing above Competition
► It works only when the product is distinctive
or when the seller has acquired prestige in
its field.