Copyright © 2001 by Harcourt, Inc. All rights reserved. 18-1 CHAPTER EIGHTEEN PRICE DETERMINATION...

18-1

Copyright © 2001 by Harcourt, Inc. All rights reserved.

CHAPTER EIGHTEENCHAPTER EIGHTEEN

PRICE DETERMINATIONPRICE DETERMINATION

CHAPTER EIGHTEENCHAPTER EIGHTEEN

PRICE DETERMINATIONPRICE DETERMINATION

Text by Profs. Gene Boone & David KurtzText by Profs. Gene Boone & David KurtzMultimedia Presentation byMultimedia Presentation byProf. Milton PressleyProf. Milton PressleyThe University of New OrleansThe University of New Orleans

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CHAPTER OBJECTIVESCHAPTER OBJECTIVESCHAPTER OBJECTIVESCHAPTER OBJECTIVES• Outline the legal constraints on pricing• Identify the major categories of pricing

objectives• Explain the concept of price elasticity

and its determinants• List the practical problems involved in

applying price theory concepts to actual pricing decisions

• Explain the major cost-plus approaches to price setting

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CHAPTER OBJECTIVESCHAPTER OBJECTIVESCHAPTER OBJECTIVESCHAPTER OBJECTIVES• List the major advantages and

shortcomings of using breakeven analysis in pricing decisions

• Explain the superiority of modified breakeven analysis over the basic breakeven model and the role of yield management in pricing decisions

• Identify the major pricing challenges facing online and international marketers

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IntroductionIntroductionIntroductionIntroduction• Price: the exchange value

of a good or service

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Legal Constraints On Legal Constraints On PricingPricingLegal Constraints On Legal Constraints On PricingPricing

• Federal legislation prohibiting price discrimination that is not based on a cost differential

• Also prohibits selling at unreasonably low prices to eliminate competition

Robinson- Patman Act

Unfair Trade Laws

Fair Trade Laws

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• State laws enacted in the 1930’s which require sellers to maintain minimum prices for comparable merchandise

• Designed to protect small stores and businesses from the predatory pricing practices of larger chain stores


Unfair Trade Laws

Fair Trade Laws

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• Allow manufacturers to stipulate minimum prices for their products and force retailers to adhere to them

• Enable companies to establish and maintain product images


Unfair Trade Laws

Fair Trade Laws

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Figure 18.1: Figure 18.1: Protecting Image Protecting Image by Avoiding Price by Avoiding Price DiscountingDiscounting

Figure 18.1: Figure 18.1: Protecting Image Protecting Image by Avoiding Price by Avoiding Price DiscountingDiscounting

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California California AvocadosAvocados

Legal Restrictions Legal Restrictions Result in Higher Prices Result in Higher Prices for California for California AvocadosAvocados

California California AvocadosAvocados

Legal Restrictions Legal Restrictions Result in Higher Prices Result in Higher Prices for California for California AvocadosAvocados


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THE ROLE OF PRICE IN THE THE ROLE OF PRICE IN THE MARKETING MIXMARKETING MIXTHE ROLE OF PRICE IN THE THE ROLE OF PRICE IN THE MARKETING MIXMARKETING MIX• Prices, and the resulting sales, determine how

much revenue a company receives• Prices thus influence a firm’s profits• Prices also influence the firm’s employment of

the factors of production:• Natural resources• Capital• Human Resources• Entrepreneurship

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Table 18.1Table 18.1: : Pricing ObjectivesPricing Objectives

Objective Purpose Example

Profitability Objectives

Profit MaximizationTarget Return

Low introductory interest rates on credit cards with high standard rates after 6 months.

Volume Objectives

Sales MaximizationMarket Share

Compaq’s low-priced PCs increase market share and sales of services.

Competition Objectives

Value Pricing Price wars among major airlines.

Prestige Objectives LifestyleImage

High-priced luxury autos such as Ferrari and watches by Rolex.

Not-for-Profit Objectives

Profit MaximizationCost RecoveryMarket IncentivesMarket Suppression

High prices for tobacco and alcohol to reduce consumption.

Pricing ObjectivesPricing ObjectivesPricing ObjectivesPricing Objectives

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ProfitabilityProfitability• For-profit firms must set prices

with profitability in mind• Profit Maximization: point at

which the additional revenue gained by increasing the price of a product equals the increase in total costs

• Target-Return Objectives: Short-run or long-run pricing objectives of achieving a specified return on either sales or investment

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ProfitabilityProfitability• Profit Maximization: point at

which the additional revenue gained by increasing the price of a product equals the increase in total costs

• Target-Return Objectives: Short-run or long-run pricing objectives of achieving a specified return on either sales or investment

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Profitability

VolumeVolume

• Sales maximization: A minimum profit level is set and firms seek to maximizes sales

• Market-share objectives: the goal set for controlling a portion of the market for a firm’s good or service

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Figure 18.2: Figure 18.2: Price as a Tool to Price as a Tool to Achieve Volume Achieve Volume ObjectivesObjectives

Figure 18.2: Figure 18.2: Price as a Tool to Price as a Tool to Achieve Volume Achieve Volume ObjectivesObjectives

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Glad GladWare Glad GladWare ContainersContainers

Using Price to Achieve Using Price to Achieve a Market Share a Market Share ObjectiveObjective

Glad GladWare Glad GladWare ContainersContainers

Using Price to Achieve Using Price to Achieve a Market Share a Market Share ObjectiveObjective


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Profitability

VolumeVolume

• The Product Impact of Market Strategies (PIMS) Project: Research that discovered a strong positive relationship between a firm’s market share and its return on investment

• Firms with larger shares accumulate greater operating experience and lower overall costs relative to competitors with smaller market shares

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Figure 18.3: Figure 18.3: Clorox – Clorox – Increasing Increasing Profitability Profitability through Product through Product Quality and Quality and Market Share Market Share

Figure 18.3: Figure 18.3: Clorox – Clorox – Increasing Increasing Profitability Profitability through Product through Product Quality and Quality and Market Share Market Share

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Cesar Cesar Select DinnersSelect Dinners

Another Product That Another Product That Attempts to Increase Attempts to Increase Profitability Through Profitability Through Product Quality and Product Quality and Market ShareMarket Share

Cesar Cesar Select DinnersSelect Dinners

Another Product That Another Product That Attempts to Increase Attempts to Increase Profitability Through Profitability Through Product Quality and Product Quality and Market ShareMarket Share


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Meeting Competition

Meeting Competition

• Seeks simply to meet competitor’s prices

• Value Pricing: Pricing strategy that emphasizes the benefits derived from a product in comparison to the price and quality levels of competing offerings

Profitability

Volume

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Figure 18.4: Ford Escort – Meeting Competition Objectives in Pricing Figure 18.4: Ford Escort – Meeting Competition Objectives in Pricing

Figure 18.4: Ford Escort – Meeting Competition Objectives in Pricing Figure 18.4: Ford Escort – Meeting Competition Objectives in Pricing

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Dodge’s Neon: Another Example of MeetingDodge’s Neon: Another Example of MeetingCompetition Objectives in PricingCompetition Objectives in Pricing

Dodge’s Neon: Another Example of MeetingDodge’s Neon: Another Example of MeetingCompetition Objectives in PricingCompetition Objectives in Pricing


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Kellogg’s Watched Market Share Drop Drastically Kellogg’s Watched Market Share Drop Drastically Before It Began Implementing Strategies Before It Began Implementing Strategies

Based on Price & Value (Value Pricing)Based on Price & Value (Value Pricing)

Kellogg’s Watched Market Share Drop Drastically Kellogg’s Watched Market Share Drop Drastically Before It Began Implementing Strategies Before It Began Implementing Strategies

Based on Price & Value (Value Pricing)Based on Price & Value (Value Pricing)


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Meeting Competition

PrestigePrestige

• Prestige Objectives: Prices are set at a relatively high level in order to develop and maintain an image of quality and exclusiveness that appeals to status-conscious consumers

Profitability

Volume

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Does Amazon.com Employ Primarily a Does Amazon.com Employ Primarily a Volume, Meeting the Competition or Volume, Meeting the Competition or Prestige Pricing Strategy?Prestige Pricing Strategy?

Does Amazon.com Employ Primarily a Does Amazon.com Employ Primarily a Volume, Meeting the Competition or Volume, Meeting the Competition or Prestige Pricing Strategy?Prestige Pricing Strategy?


Discussion QuestionDiscussion Question

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Figure 18.5: Figure 18.5: Royal Secret Royal Secret Marketers Marketers Emphasize Emphasize Prestige Prestige

Figure 18.5: Figure 18.5: Royal Secret Royal Secret Marketers Marketers Emphasize Emphasize Prestige Prestige

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WaterfordWaterford

Prestige Pricing Prestige Pricing Maintains a High-Maintains a High-Quality ImageQuality Image

WaterfordWaterford

Prestige Pricing Prestige Pricing Maintains a High-Maintains a High-Quality ImageQuality Image


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Rolex Establishes an Image of Prestige and Exclusiveness Rolex Establishes an Image of Prestige and Exclusiveness Through Higher Prices Than Competing Brands Through Higher Prices Than Competing Brands

Rolex Establishes an Image of Prestige and Exclusiveness Rolex Establishes an Image of Prestige and Exclusiveness Through Higher Prices Than Competing Brands Through Higher Prices Than Competing Brands


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Flight Options, Attempting to Satisfy the Demand for Business Flight Options, Attempting to Satisfy the Demand for Business Jets Among Those Who Are Prestige and Price Conscious, Jets Among Those Who Are Prestige and Price Conscious,

Broke the Price Barrier With Pre-Owned AircraftBroke the Price Barrier With Pre-Owned Aircraft

Flight Options, Attempting to Satisfy the Demand for Business Flight Options, Attempting to Satisfy the Demand for Business Jets Among Those Who Are Prestige and Price Conscious, Jets Among Those Who Are Prestige and Price Conscious,

Broke the Price Barrier With Pre-Owned AircraftBroke the Price Barrier With Pre-Owned Aircraft


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Pricing Objectives Of Not-Pricing Objectives Of Not-For-Profit OrganizationsFor-Profit OrganizationsPricing Objectives Of Not-Pricing Objectives Of Not-For-Profit OrganizationsFor-Profit Organizations• Profit maximization• Cost recovery• Provide market incentives• Market suppression

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Non-Profit Organizations Such as the American Non-Profit Organizations Such as the American Diabetes Association Share Similar Pricing Diabetes Association Share Similar Pricing

Objectives as Commercial FirmsObjectives as Commercial Firms

Non-Profit Organizations Such as the American Non-Profit Organizations Such as the American Diabetes Association Share Similar Pricing Diabetes Association Share Similar Pricing

Objectives as Commercial FirmsObjectives as Commercial Firms


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METHODS FOR METHODS FOR DETERMINING PRICESDETERMINING PRICESMETHODS FOR METHODS FOR DETERMINING PRICESDETERMINING PRICES• Customary Prices: traditional prices

that consumers expect to pay for a good or service

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Figure 18.6: Studio 6 – Enhancing Value Figure 18.6: Studio 6 – Enhancing Value through Customary Prices through Customary Prices

Figure 18.6: Studio 6 – Enhancing Value Figure 18.6: Studio 6 – Enhancing Value through Customary Prices through Customary Prices

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In a Successful Strategy, Wrigley Gum Maintained In a Successful Strategy, Wrigley Gum Maintained the Traditional Price by Reducing the Number of the Traditional Price by Reducing the Number of

Pieces of Gum in Each Pack from 7 to 5Pieces of Gum in Each Pack from 7 to 5

In a Successful Strategy, Wrigley Gum Maintained In a Successful Strategy, Wrigley Gum Maintained the Traditional Price by Reducing the Number of the Traditional Price by Reducing the Number of

Pieces of Gum in Each Pack from 7 to 5Pieces of Gum in Each Pack from 7 to 5


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PRICE DETERMINATION IN PRICE DETERMINATION IN ECONOMIC THEORYECONOMIC THEORYPRICE DETERMINATION IN PRICE DETERMINATION IN ECONOMIC THEORYECONOMIC THEORY• Demand: schedule of the amounts of a

firm’s good or service that consumers purchase at different prices during a specified period

• Supply: schedule of the amounts of a good or service that firms will offer for sale at different prices during a specified time period

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Four Market StructuresFour Market Structures

• Market structure characterized by homogeneous products in which there are so many buyers and sellers that none has a significant influence on price

• The agricultural sector is the closest example

PureCompetition

PureCompetition

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Another Example of Pure Competition Are the Another Example of Pure Competition Are the Stocks Sold on the New York Stock ExchangeStocks Sold on the New York Stock ExchangeAnother Example of Pure Competition Are the Another Example of Pure Competition Are the Stocks Sold on the New York Stock ExchangeStocks Sold on the New York Stock Exchange


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eBay Auction Also Operates a Market Which eBay Auction Also Operates a Market Which Often Fits the Criteria of Pure Competition Often Fits the Criteria of Pure Competition

eBay Auction Also Operates a Market Which eBay Auction Also Operates a Market Which Often Fits the Criteria of Pure Competition Often Fits the Criteria of Pure Competition


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Four Market StructuresFour Market Structures• Market structure involving

a heterogeneous product and product differentiation among competing suppliers, allowing the marketer some degree of control over prices

• Typical retailer is an example

PureCompetition

MonopolisticCompetition


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Retailer Bugle Boy Operates in a Market Which Fits Retailer Bugle Boy Operates in a Market Which Fits the Criteria of Monopolistic Competition the Criteria of Monopolistic Competition

Retailer Bugle Boy Operates in a Market Which Fits Retailer Bugle Boy Operates in a Market Which Fits the Criteria of Monopolistic Competition the Criteria of Monopolistic Competition


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Retailer Dillards Also Operates in a Market Which Retailer Dillards Also Operates in a Market Which Fits the Criteria of Monopolistic Competition Fits the Criteria of Monopolistic Competition

Retailer Dillards Also Operates in a Market Which Retailer Dillards Also Operates in a Market Which Fits the Criteria of Monopolistic Competition Fits the Criteria of Monopolistic Competition


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• Market structure involving relatively few sellers and barriers to new competitors due to high start-up costs

• The automobile and petroleum industries are examples

PureCompetition


OligopolyOligopoly

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Southwest Southwest AirlinesAirlines

Operating in the Operating in the Oligopolistic Market Oligopolistic Market StructureStructure

Southwest Southwest AirlinesAirlines

Operating in the Operating in the Oligopolistic Market Oligopolistic Market StructureStructure


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On This Page of Its Web Site, Oligopolistic On This Page of Its Web Site, Oligopolistic Texaco Attempts to Differentiate Its Fuels Texaco Attempts to Differentiate Its Fuels

From the CompetitionFrom the Competition

On This Page of Its Web Site, Oligopolistic On This Page of Its Web Site, Oligopolistic Texaco Attempts to Differentiate Its Fuels Texaco Attempts to Differentiate Its Fuels

From the CompetitionFrom the Competition


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PureCompetition


Oligopoly

MonopolyMonopoly

• Market structure involving only one seller of a good or service for which no close substitutes exist

• Anti-trust legislation has eliminated nearly all monopolies

• Government regulated monopolies do exist in certain areas, such as public utilities

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Entergy, a Major Supplier of Electric Energy in the Entergy, a Major Supplier of Electric Energy in the South and Southwest, Operates As a MonopolySouth and Southwest, Operates As a Monopoly

Entergy, a Major Supplier of Electric Energy in the Entergy, a Major Supplier of Electric Energy in the South and Southwest, Operates As a MonopolySouth and Southwest, Operates As a Monopoly


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Table 18.2: Distinguishing Features of the Four Market StructuresTable 18.2: Distinguishing Features of the Four Market Structures

CharacteristicsPure

CompetitionMonopolistic Competition Oligopoly Monopoly

Number of competitors

Many Few to many Few No direct competitors

Ease of entry into industry by new firms

Easy Somewhat Difficult

Difficult Regulated by government

Similarity of goods or services offered by competing firms

Similar Different Can be either similar or different

No directly competing goods or service

Control over prices by individual firms

None Some Some Considerable

Demand curves facing individual firms

Totally elastic Can be either elastic or inelastic

Kinked; inelastic below

kink; more elastic above

Can be either elastic or inelastic

Examples 200-acre ranch

Gap stores Texaco Commonwealth Edison

Type of Market Structure

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Cost and Revenue CurvesCost and Revenue CurvesCost and Revenue CurvesCost and Revenue Curves• Price is often determined by

analyzing the cost and revenue curves

• The cost and revenue curves are based on:• Average total costs• Marginal cost• Average revenue• Marginal Revenue

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Cost and Revenue CurvesCost and Revenue CurvesCost and Revenue CurvesCost and Revenue Curves• Average total cost is calculated by

dividing the total costs by the number of units produced

• Marginal cost is the change in total cost that results from producing an additional unit of output

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Cost and Revenue CurvesCost and Revenue CurvesCost and Revenue CurvesCost and Revenue Curves• Average revenue is calculated by

dividing total revenue by the quantity of goods or services sold

• Marginal revenue is the change in total revenue that results from selling an additional unit of output

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Figure 18.7: Determining Price by Relating Marginal Figure 18.7: Determining Price by Relating Marginal Revenue to Marginal CostRevenue to Marginal Cost

Figure 18.7: Determining Price by Relating Marginal Figure 18.7: Determining Price by Relating Marginal Revenue to Marginal CostRevenue to Marginal Cost

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Table 18.3: Price Determination Using Marginal AnalysisTable 18.3: Price Determination Using Marginal Analysis

PriceNumber

SoldTotal

RevenueMarginalRevenue

Total Costs

Marginal Costs

Profits(Total

Revenue – Total Costs)

($50)

$34 1 $34 $34 57 $7 (23)

32 2 64 30 62 5 2

30 3 90 26 66 4 24

28 4 112 22 69 3 43

26 5 130 18 73 4 57

24 6 144 14 78 5 66

22 7 154 10 84 6 7020 8 160 6 91 7 69

18 9 162 2 100 9 62

16 10 160 (2) 110 11 50

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The Concept Of Elasticity In The Concept Of Elasticity In Pricing StrategyPricing StrategyThe Concept Of Elasticity In The Concept Of Elasticity In Pricing StrategyPricing Strategy

• Elasticity: measure of responsiveness of purchasers and suppliers to changes in price

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Determinants Of ElasticityDeterminants Of ElasticityDeterminants Of ElasticityDeterminants Of Elasticity

• Demand tends to be elastic if consumers can easily find substitutes

• If the price of Coca-Cola rises, consumers can switch to Pepsi or another substitute

Availabilityof Substitutes


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As an Internet Service Provider, America Online, As an Internet Service Provider, America Online, Operates in an Elastic Market with Many SubstitutesOperates in an Elastic Market with Many Substitutes

As an Internet Service Provider, America Online, As an Internet Service Provider, America Online, Operates in an Elastic Market with Many SubstitutesOperates in an Elastic Market with Many Substitutes


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Red Roof Inns – Operates in a Market With Relatively Red Roof Inns – Operates in a Market With Relatively Elastic Demand Given the Many Substitutes AvailableElastic Demand Given the Many Substitutes AvailableRed Roof Inns – Operates in a Market With Relatively Red Roof Inns – Operates in a Market With Relatively Elastic Demand Given the Many Substitutes AvailableElastic Demand Given the Many Substitutes Available


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• Demand for luxuries exhibit elastic demand, while demand for necessities tend to be inelastic

• Insulin, a necessity for Diabetics, must be purchased regardless of the price


Luxury orNecessity

Luxury orNecessity

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Figure 18.8: Four Seasons Hotels – Inelastic Demand for a Service Figure 18.8: Four Seasons Hotels – Inelastic Demand for a Service Viewed as a Necessity for Upscale Travelers Viewed as a Necessity for Upscale Travelers

Figure 18.8: Four Seasons Hotels – Inelastic Demand for a Service Figure 18.8: Four Seasons Hotels – Inelastic Demand for a Service Viewed as a Necessity for Upscale Travelers Viewed as a Necessity for Upscale Travelers

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Morton SaltMorton Salt

Inelastic Demand for a Inelastic Demand for a Product with Few Product with Few SubstitutesSubstitutes

Morton SaltMorton Salt

Inelastic Demand for a Inelastic Demand for a Product with Few Product with Few SubstitutesSubstitutes


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• The larger the portion of a budget an item consumes, the higher the elasticity

• Elasticity is greater for products such as cars and suits, than for matches or ice


Luxury orNecessity

Portion ofBudget

Portion ofBudget

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Edmunds.Com Provides Information to Car Buyers Edmunds.Com Provides Information to Car Buyers Who Typically Consider the Purchase of a Car to Who Typically Consider the Purchase of a Car to

Consume a Major Portion of Their BudgetConsume a Major Portion of Their Budget

Edmunds.Com Provides Information to Car Buyers Edmunds.Com Provides Information to Car Buyers Who Typically Consider the Purchase of a Car to Who Typically Consider the Purchase of a Car to

Consume a Major Portion of Their BudgetConsume a Major Portion of Their Budget


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Luxury orNecessity

Portion ofBudget

• Demand often shows less elasticity in the short run than in the long run

• For example, people prefer to pay more for a few months out of the year than to explore options to reduce energy costs. Over time, with global warming becoming a real and present danger, they may search for ways to economize.

Time Perspective

Time Perspective

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Elasticity and RevenueElasticity and RevenueElasticity and RevenueElasticity and Revenue• Elasticity of demand exerts an important influence

on total revenue as a result in the changes in the price of a good or service

• For example, should a city’s transit authority raise or lower price for public transportation?

• The answer, of course, lies in the elasticity of demand for public transportation

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Practical Problems of Practical Problems of Price TheoryPrice TheoryPractical Problems of Practical Problems of Price TheoryPrice Theory• Marketers may thoroughly understand price theory

concepts but still encounter difficulty in applying them in practice.

• Practical limitations interfering with price setting include the facts that:• Many firms don’t attempt to maximize profits• Estimating demand curves is a difficult process

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PRICE DETERMINATION IN PRICE DETERMINATION IN PRACTICEPRACTICEPRICE DETERMINATION IN PRICE DETERMINATION IN PRACTICEPRACTICE• Cost-plus pricing: practice of adding a

percentage of a specified dollar amount (markup) to the base cost of a product to cover unassigned costs and provide a profit

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Alternative Pricing Alternative Pricing ProceduresProceduresAlternative Pricing Alternative Pricing ProceduresProcedures• Full-cost pricing uses all relevant variable costs

and allocates fixed costs that cannot be directly attributed to the production of the specific item in setting a product’s price

• Full-cost pricing has two weaknesses:• There is no consideration for demand or

competition• Allocation of overhead costs is arbitrary and

often unrealistic

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Alternative Pricing Alternative Pricing ProceduresProceduresAlternative Pricing Alternative Pricing ProceduresProcedures• Incremental-cost pricing attempts to

overcome arbitrary allocation of fixed costs by only considering costs directly attributable to the product itself when setting prices

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Breakeven AnalysisBreakeven AnalysisBreakeven AnalysisBreakeven Analysis

• Breakeven analysis: pricing technique used to determine the number of products that must be sold at a specified price in order to generate sufficient revenue to cover total cost

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Figure 18.9: Figure 18.9: Breakeven Breakeven ChartChart

Figure 18.9: Figure 18.9: Breakeven Breakeven ChartChart

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Target ReturnsTarget ReturnsTarget ReturnsTarget Returns• Although breakeven analysis indicates the

sales level at which the firm will incur neither profits nor losses, most firms include some target return or target profit in their analysis.

• The target return may be set as:• A desired dollar return• A percentage of sales

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Evaluation of Breakeven Evaluation of Breakeven AnalysisAnalysisEvaluation of Breakeven Evaluation of Breakeven AnalysisAnalysis• Effective tool in assessing the

sales required for covering costs and achieving specified levels of profit

• Easily understood

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Evaluation of Breakeven Evaluation of Breakeven AnalysisAnalysisEvaluation of Breakeven Evaluation of Breakeven AnalysisAnalysis• Shortcomings of breakeven

analysis:• Assumes that costs can easily

be classified as fixed or variable

• Assumes stability of per-unit costs at different levels of production

• Does not consider demand or competition

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TOWARD REALISTIC TOWARD REALISTIC PRICINGPRICINGTOWARD REALISTIC TOWARD REALISTIC PRICINGPRICING• In actual practice, most pricing

approaches are largely cost oriented• They thus violate the marketing

concept• New approaches being developed

are incorporating the element of consumer demand

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Modified Breakeven Modified Breakeven AnalysisAnalysisModified Breakeven Modified Breakeven AnalysisAnalysis• Modified breakeven analysis: pricing technique

used to evaluate consumer demand by comparing the number of products that must be sold at a variety of prices in order to cover total cost with estimates of expected sales at the various prices

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Figure 18.10: Modified Breakeven Charts - Parts A and BFigure 18.10: Modified Breakeven Charts - Parts A and BFigure 18.10: Modified Breakeven Charts - Parts A and BFigure 18.10: Modified Breakeven Charts - Parts A and B

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Table 18.4: Revenue and Cost Data for Table 18.4: Revenue and Cost Data for Modified Breakeven AnalysisModified Breakeven Analysis

PriceQuantity

DemandedTotal

Revenue

Total Fixed Cost

Total Variable

CostTotal Cost

Breakeven Point -No. of Sales

Required to Break Even

Total Profit (or Loss)

$15 2,500 $37,500 $40,000 $12,500 $52,500 4,000 $(15,000)

10 10,000 100,000 40,000 50,000 90,000 8,000 10,000

9 13,000 117,000 40,000 65,000 105,000 110,000 12,000

8 14,000 112,000 40,000 70,000 110,000 13,334 2,000

7 15,000 105,000 40,000 75,000 115,000 20,000 (10,000)

Revenues Costs

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Yield ManagementYield ManagementYield ManagementYield Management• Yield Management: pricing strategy

designed to maximize sales in situations such as airfares, lodging, auto rentals, and theater tickets where costs are fixed

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American Airlines Utilizes a Yield ManagementAmerican Airlines Utilizes a Yield ManagementStrategy to Maximize Profits and Revenues Strategy to Maximize Profits and Revenues

as Shown on the Next Slideas Shown on the Next Slide

American Airlines Utilizes a Yield ManagementAmerican Airlines Utilizes a Yield ManagementStrategy to Maximize Profits and Revenues Strategy to Maximize Profits and Revenues

as Shown on the Next Slideas Shown on the Next Slide


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American Airlines Prices for a Round-Trip Flight Between New York American Airlines Prices for a Round-Trip Flight Between New York City and Miami, Florida (Including a Saturday Night Stopover) VariedCity and Miami, Florida (Including a Saturday Night Stopover) Varied in the Chart Below From $190 to $739 in Coach on the Date Checked in the Chart Below From $190 to $739 in Coach on the Date Checked

American Airlines Prices for a Round-Trip Flight Between New York American Airlines Prices for a Round-Trip Flight Between New York City and Miami, Florida (Including a Saturday Night Stopover) VariedCity and Miami, Florida (Including a Saturday Night Stopover) Varied in the Chart Below From $190 to $739 in Coach on the Date Checked in the Chart Below From $190 to $739 in Coach on the Date Checked


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Example of a Firm Offering Yield Management Example of a Firm Offering Yield Management Consulting for the Hospitality IndustryConsulting for the Hospitality Industry

Example of a Firm Offering Yield Management Example of a Firm Offering Yield Management Consulting for the Hospitality IndustryConsulting for the Hospitality Industry


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GLOBAL ISSUES IN PRICE GLOBAL ISSUES IN PRICE DETERMINATIONDETERMINATIONGLOBAL ISSUES IN PRICE GLOBAL ISSUES IN PRICE DETERMINATIONDETERMINATION• Global Prices must support the firm’s

broader goals including:• Product development• Advertising and sales• Customer support• Competitive plans• Financial objectives

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GLOBAL ISSUES IN PRICE GLOBAL ISSUES IN PRICE DETERMINATIONDETERMINATIONGLOBAL ISSUES IN PRICE GLOBAL ISSUES IN PRICE DETERMINATIONDETERMINATION• In General, there are five pricing objectives that

firms can use to set prices in global marketing• Four, profitability, volume, meeting

competition, and prestige, are the same as those discussed earlier

• In addition international marketers work to achieve price stability

• Price stability is the ability to maintain consistent prices during major economic fluctuations and periods of political change

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STRATEGIC IMPLICATIONS OF STRATEGIC IMPLICATIONS OF PRICING IN THE 21ST CENTURYPRICING IN THE 21ST CENTURYSTRATEGIC IMPLICATIONS OF STRATEGIC IMPLICATIONS OF PRICING IN THE 21ST CENTURYPRICING IN THE 21ST CENTURY

• The evolution of the internet and E-commerce will continue to empower the customer

• Competing products and suppliers will only be a mouse-click away

• Product customization and internet auctions will spur transactions on the net

• Electronic delivery of music, games and books will lead to further price reductions

© PhotoDisc

Copyright © 2001 by Harcourt, Inc. All rights reserved. 18-1 CHAPTER EIGHTEEN PRICE DETERMINATION...

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