Chapter 11 - Pricing Strategy
limited to the consideration of price changes, whereas the latter is often expensive and there is
some question as to the validity of subjects’ responses.
II. Supply Influences on Pricing Decisions
Supply influences on pricing decisions can be discussed in terms of three basic factors. These
factors relate to the objectives, costs, and nature of the product.
A. Pricing Objectives
Pricing objectives should be derived from overall marketing objectives, which in turn should
be derived from corporate objectives.
Since it is traditionally assumed that business firms operate to maximize profits in the long
run, it is often thought that the basic pricing objective is solely concerned with long-run
However, the profit maximization norm does not provide the operating marketing manager
with a single, unequivocal guideline for selecting prices.
Research has found that the most common pricing objectives are:
oPricing to achieve a target return on investment
oStabilization of price and margin
oPricing to achieve a target market share
oPricing to meet or prevent competition
B. Cost Consideration in Pricing
The price of a product usually must cover costs of production, promotion, and distribution.
Cost-oriented pricing is the most common approach in practice, and there are at least three
basic variations: markup pricing, cost-plus pricing, and rate-of-return pricing.
Markup pricing is commonly used in retailing: A percentage is added to the retailer’s invoice
price to determine the final selling price.
Closely related to markup pricing is cost-plus pricing, in which the costs of producing a
product or completing a project are totaled and a profit amount or percentage is added on.
Rate-of-return pricing is commonly used by manufacturers. With this method, price is
determined by adding a desired rate of return on investment to total costs.
Cost-oriented approaches to pricing have the advantage of simplicity, and many practitioners
believe that they generally yield a good price decision. However, such approaches have been
criticized for two basic reasons.
oThey give little or no consideration to demand factors.
oThey fail to reflect competition adequately.
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