The Meaning of Price & Pricing Objectives

The Meaning of Price

• Price is the money, good, or service exchanged for the ownership or use of a good or service
• Tuition refers to education
• Interest refers to the use of money
• Taxes refer to government services
• Subscription refers to regular receipt of periodicals
• Royalty refers to the use of copyright
• Rent refers to the use of an asset
• Fare refers to taxi or bus ride
• Professional Fee refers to services of a physician
• Retainer refers to lawyer's services over a period of time
• Toll refers to long-distance calls or travel to highways
• Salary refers to executives/ white-collar commodity purchased
• Wages refer to the blue-collar commodity purchased
• Commission refers to salespersons services
• Honorarium refers to guest speaker's services
• Dues refer to memberships

Pricing Defined

• Pricing includes activities involved in determining the price at which products are offered for sale

Pricing Objectives

• Pricing objectives include profit-oriented objectives, sales-oriented objectives, and status quo-oriented objectives
• Target return objective refers to the pricing objective, requiring a certain level of profit
• Profit maximization objective refers to the pricing objective of seeking as much profit as possible
• Sales-oriented objective refers to strategies that will provide higher sales volume
• Status quo-oriented objective requires maintaining the same prices for a company's products

The Pricing Procedure

• Involves a series of steps adapted in the determination of price
• The steps include:
  • Determining the realistic range of choice
  • Selection of pricing strategy
  • Evaluation of economic feasibility
  • Setting of the price

Pricing Approaches

• Three approaches:
  • Cost-based approach
  • Buyer-based approach
  • Competition-based approach

Cost Based Approach

• This involves setting prices based on costs
• Two types are identified:
  • Cost-plus pricing
  • Target rate of return pricing

Cost Plus Pricing

• Adding a percentage of cost on top of the total cost
• Calculation:
  • Price = direct costs + overhead costs + profit margin
    • Direct costs are materials + labor
    • Overhead costs are a share of fixed indirect costs
    • Profit margin is a fair amount of return

Target Rate of Return Pricing

• Enables a company to establish the level of profits that it feels will yield a satisfactory return
• Calculation:
  • P = DVC + F/X + RK/X
    • P = selling price using the target rate of return method
    • DVC = direct unit variable costs
    • F = fixed costs
    • X = standard unit volume
    • R = rate of return desired
    • K = capital (total operating assets) employed

Buyer Based Approach

• Focuses on consumer perceptions or behavior to determine the selling price of a product or service
• Methods:
  • Perceived value pricing
  • Price-quality relationship pricing
  • Loss-leader pricing
  • Odd-numbered pricing
  • Price lining pricing
• Perceived value pricing establishes the price based on the buyer's perceptions of the value
• Price-quality relationship pricing hinges on the observation that consumers associate high prices with high quality and vice versa
• Loss-leader pricing refers to setting low prices on selected products
• Odd-numbered pricing refers to setting prices even below peso amounts
• Price lining pricing refers to selling merchandise at a limited number of predetermined price levels

Competition Based Approach

• Setting prices based on what prices are being charged by competitors
• Kinds of pricing are:
  • Going-rate pricing
  • Sealed-bid pricing
• Going-rate pricing involves adapting a price based on the competitor's prices, possibly a bit higher or lower
• Sealed-bid pricing involves setting a price thought to be a little lower than the competitor's

Price Adaptation Strategies

• Strategies to address variations in geographical demand, costs, market segments, purchase timing, and other factors
• Strategies:
  • Geographical pricing
  • Price discounts and allowances
  • Promotional pricing
  • Discriminatory pricing
• Geographical pricing relates to pricing decisions for products intended for customers in different locations, considering shipping costs
• Price discounts and allowances are price modifications to reward customers for early payment, volume purchase, and offseason buying
• Promotional pricing is the temporary reduction of prices of a company's products
• Discriminatory pricing is modifications of the basic price to accommodate differences in customers, products, and locations

Pricing Under Various Market Conditions

• Pure monopoly has one seller with very high control over prices and no influence from buyers
• Oligopoly has few sellers, many buyers, high seller control, and very slight buyer influence
• Pure competition has many sellers and buyers with no control over prices
• Oligopsony has many sellers, few buyers, very slight seller control, and high buyer influence
• Monopsony has many sellers, one buyer, no seller control, and very high buyer influence