PRODUCT PRICING

Company Products & Services

PRODUCT PRICING

CONTENTS

PRODUCT PRICING OBJECTIVES

In spite of the increased role of non-price factors in the modern marketing process, price remains an important element and especially challenging in certain situations.

In setting a price, the industry can draw guidance from the theoretical pricing model. The model suggests how one can find the short-run profit-maximizing price when estimates of demand and cost are available. The model, however, leaves out several factors that have to be considered in actual pricing situations, such as the presence of other objectives, multiple parties, marketing-mix interactions, and uncertainties surrounding the estimates of demand and cost. In practice, firms tend to orient their pricing toward cost (as in markup pricing and target pricing), or demand (as in price discrimination), or competition (as in going rate pricing and bidding).

When a firm considers changing its established price, it must carefully consider customers' and competitors' reactions. The probable reaction of customers is summarized in the concept of price elasticity of demand. There are several ways to estimate price elasticity and some problems in interpreting it, but it is a key input in the determination of how much would be gained by the price change. Competitors' reactions also must be taken into account, and they depend very much on the nature of the market structure and the degree of product homogeneity. Competitors' reactions may be studied on the assumption either that they flow from a set reaction policy or that they flow from a fresh appraisal of the challenge each time. The firm initiating the price change must also consider the probable reactions of suppliers, distribution and others.

The firm that witnesses a price change must try to understand the competitor's intent and the likely duration of the change. If swiftness of reaction is desirable, the firm should pre-plan its reactions to different possible pricing developments.

Pricing is complicated when it is realized that various products in a line typically have important demand and/or cost inter-relationships. Then the objective is to develop a set of mutual prices that maximize the profits on the whole line. Most firms develop tentative prices for the products in the line by marking up full costs, or incremental costs, or conversion costs and then modifying these prices by individual demand and competitive factors.

All organizations face the task of setting a price on their products or services. Price goes by many names: fees, charges, fares, tuitions, interest, rents, assessments, et cetera. Historically, price had been the single most important decision of the company, for it determined the value of the product in the customer's eyes relative to competitors' products. Over time, non-price factors grow in importance until the point is reached where over half the managers state that they "did not select pricing as one of the five most important policy areas in their firm's marketing success". More recently because of worldwide inflation, price is again attracting considerable attention.

Pricing is a problem in four general types of situations. It is a problem when a firm must set a price for the first time. This happens when the firm develops or acquires a new product, when it introduces its regular product into a new distribution channel or geographical area, or when it regularly enters bids on new contract work. Pricing is a problem when circumstances lead a firm to consider initiating a price change. This happens when a firm begins to doubt whether its price is right in relation to its demand and costs. It can be triggered by inflation or shortages. It also happens on a more regular basis in firms that periodically introduce temporary price deals to stimulate the trade or final buyers. Pricing is a problem when competition initiates a price change. The firm has to decide whether to change its own price, and if so, by how much. Finally pricing is a problem when the company produces several products that have interrelated demands and/or costs. The problem is one of determining optimal price relationships for the products in the line.

PRICE BASIS

1. Theoretical pricing model

Researchers have developed a simple yet elegant model of how to set a price. The model has the properties of logical consistency and optimization and there is value in examining it because it provides some fundamental insights into the pricing problem and because its very limitations help bring out the complex issues involved in pricing.

The model assumes a profit-maximizing firm has knowledge of its demand and cost functions for the product in question. The demand function describes the expected quantity ( Q ) demanded per period at various prices ( P ) that might be charged. Suppose the firm is able to determine through statistical demand analysis that its demand equation is

            Q = 1000 - 4P

This equation expresses the law of demand, that less will be bought at higher prices.

The cost function describes the expected total cost ( C ) for alternative quantities per period ( Q ) that might be produced. It is customary to distinguish between total fixed costs and total variable costs. In the simplest case, the total-cost function can be described by the linear equation C = F + cQ  where  F  is total fixed cost and  c i s unit variable cost. Suppose the company derived the following cost equation for its product:

            C = 6000 + 50Q

With the preceding demand and cost equations, one is almost in a position to determine the best price and only needs two more equations, both definitional in nature.

First, total revenue ( R ) is defined as equal to price times quantity sold - that is,

            R = PQ

Second, total profits ( Z ) are defined as the difference between total revenue and total cost - i.e.,

            Z = R - C

With these four equations, one is in a position to solve for the profit-maximizing price.

One is essentially trying to determine the relationship between profits ( Z ) and price ( P ). One must solve the four equations simultaneously in order to find the single relationship between Z and P. It is best to start with the profit equation.

The derivation is as follows:

            Z = R-C
            Z = PQ-C
            Z = PQ-(6000 + 50Q)
            Z = P(1000-4P) 6000-50(1000-4P)
            Z = 1000p-4P² -6000-50000+2000P
            Z = 56000+12000p -4P²

Total profits turn out to be a quadratic function of price. It is a parabola figure and profits reach their highest point 29.6 ( Z ) at a price of 1 ( P ).

	PRICING OBJECTIVES
	Market Penetration Objectives
	Market-Skimming Objectives
	Early Cash Recovery Objectives
	Satisfying Objectives
	Product-Line Promotion Objectives

H73      Grid Definition

2. The problem of Pricing objectives

The theoretical pricing model assumes a single product for which the seller is trying to determine the price that would maximize current profits. Current profits rather than long-run profits are at issue because of the use of stable demand and cost assumptions. In reality, demand can be expected to change over time (as a result of changes in tastes, population, and income), and cost can be expected to change over time (as a result of changes in technology and input prices). Pricing to maximize long-run profits would have to utilize projections of the likely long-run course of demand and cost. A more sophisticated model would be required to solve the problem of pricing optimally over the product's life cycle.

Another limitation is that the company often pursues a more specific objective in setting its price. At least five different objectives of a more concrete sort can be found in practice:

i. Market-penetration objective
Some companies set a relatively low price in order to stimulate the growth of the market and to capture a large share of it. Any of several conditions might favor setting a low price:

   1)   The market appears to be highly price sensitive.
   2)   The unit cost of production and distribution fall with cumulated output.
   3)   A low price would discourage actual and potential competition.


ii- Market-skimming objective
Some firms want to take advantage of the fact that some buyers stand ready to pay a much higher price than others because the product has high present value to them. The objective of skimming pricing is to gain a premium from these buyers and only gradually reduce the price to draw in the more price elastic segments of the market. It is a form of price discrimination over time rather than over space.

It makes good sense when any of the following conditions are present:

1)	There are enough buyers whose demand is relatively inelastic.
2)	The unit production and distribution costs of producing a smaller volume are not so much higher that they cancel the advantage of charging what some of the traffic will bear.
3)	There is little danger that the high price will stimulate the emergence of rival firms.
4)	The high price creates an impression of a superior product.

iii. Early-cash-recovery objective
Some firms seek to set a price that will lead to a rapid recovery of cash. They may either be strapped for funds or regard the future as too uncertain to justify patient market cultivation.

iv. Satisfying objective
Some companies describe their pricing objective as the achievement of a satisfactory rate of return. The implication is that although another price might produce an even larger return over the long run, the firm is satisfied with a return that is conventional for the given level of investment and risk. Target pricing is an example of this.

v. Product-line promotion objective
Some firms seek to set a price that will enhance the sales of the entire line rather than yield a profit on the product by itself. An example is loss-leader pricing, in which a popular product is priced low to attract a large number of buyers who can be expected to buy the other products of the vendor.

3. The Problem of Multiple parties

The theoretical pricing model assumes that the only significant group to consider in the pricing of a product is the firm's customers. But in reality, several parties have to be considered simultaneously.

i. Intermediate customers
The firm must think through its pricing not only for ultimate customers but also for intermediate customers. Some companies set a price for distributors and allow them to set whatever final price they wish. This is done where it is thought that each distributor is in the best position to determine the price suited to local conditions and to set it high enough to provide sufficient selling incentive. The disadvantage is that the supplier relinquishes control over the final price. The other approach is for the supplier to determine the final price and how much of a distributor's margin is necessary to provide sufficient distributor incentive. The distributors must recognize that the important incentive variable is not the difference between the distributor's and final price (the margin) but rather the margin times the sales volume stimulated by the particular final price.

ii. Rivals
The theoretical pricing model does not explicitly consider competitive reactions and can be incorporated in the shape of the demand function, but this treatment of competitive reaction is too implicit and static. The price set by the supplier influences the rate of entry of new rivals and the pricing policies of existing rivals. The traditional demand curve is too restricted or simple a way to represent the dynamic reactions and counter-reactions occasioned by a pricing policy.

iii. Suppliers
The company's suppliers of materials, funds and labor also must be considered. Many suppliers interpret the product's price as indicating the level of the firm's revenues (and profits) from the product. Labor unions will act as if a high price, or price increase, constitutes grounds for higher wages. Thus the firm may have to consider various supplier groups insetting a price.

iv. Government
Another price-interested party is the government. Under the rules of competition in many countries, the seller cannot charge different prices to comparable customers unless the price differences are based strictly on cost differences. Under other legislation, the seller may or may not be able to require retailers to sell his branded product at a uniform list price, depending upon the national laws. Public utilities must justify their rates before regulatory commissions. At various times, pricing in many industries has been subject to government pressure. The prices of agricultural goods and of imported goods are affected by agricultural and tariff legislation, respectively. Various state and local governmental units pass legislation and rulings affecting the prices that can be set by sellers.

v. Other company executives
Price is a concern of different parties within the company. The sales manager wants a low price so that his salesmen can "talk price" to customers. The financial director likes to see a price leading to an early payout. The price makes an important difference in copy and media tactics to the advertising manager. The process scheduling manager is interested because the price will affect the rate of sales. These and other executives in the organization can be expected to have strong views on where to set the price.

	MULTIPLE PARTY PRICING
	Intermediate Customer Considerations
	Rivals Considerations
	Suppliers Consideration
	Government Considerations
	In-House Considerations

H74      Grid Definition

4. The problem of marketing-mix interaction

The theoretical pricing model assumes that other marketing variables are held at some constant level while the effect of price on sales is being examined. This is evident in the usual treatment of the demand function as a relationship only between quantity demanded ( Q ) and price ( P ). But this begs the whole question of how optimal values can be set on advertising, personal selling, product quality, and other marketing variables before price is set. As emphasized throughout this manual, the several marketing variables have to all be considered simultaneously to arrive at the optimal mix. This task is missing or assumed away in the theoretical pricing model.


5. The problem of estimating demand and cost functions

Significant statistical problems handicap the determination of actual demand and cost functions. In the case of a new product, there is no experience upon which to base these estimates. Unless data is available on a similar, established product, estimates are likely to take the form of soft facts and guesses rather than hard facts. Data on established products are usually not much more satisfactory.

One researcher has described the major econometric techniques for estimating cost functions from existing data. Demand functions are more difficult to determine because several of the variables are not quantifiable; they are typically highly inter-correlated; both demand and cost have been shifting during the period; and the random errors tend to be large. Because some of the independent variables are also dependent (sales depends on advertising, and advertising depends upon sales), a system of simultaneous equations rather than a single equation estimate of demand seems to be required. Finally, even were these hurdles to be overcome, there are always lingering doubts about whether the relationships measured from historical data apply to today's situation.

Since the demand and cost equations are estimated with an unknown degree of error, the criterion of maximizing profits may have to be replaced with the criterion of maximizing expected profits (where probability distributions are put on the estimated functions) or the criterion of maximizing the minimum possible gain. In any situation of risk and uncertainty, one will want to see how sensitive the theoretically calculated price is to revisions in the estimated data.

PRICING DECISIONS

The fault with the basic pricing model is not one of illogic but of oversimplification. The pricing models used in practice also for the most part tend to be based on a limited view of the pricing problem. They tend to emphasize one of the factors, nevertheless they meet some of the more practical requirements for price determination in the presence of imperfect information and multiple parties. One can examine cost-oriented, demand-oriented, and competition-oriented pricing.


1. Cost-oriented pricing

A great number of firms set their prices largely or even wholly on the basis of their costs. Typically, all costs are included, including a usually arbitrary allocation of overhead made on the basis of expected operating levels.

i. Markup pricing
The most elementary examples of this are markup pricing and cost-plus pricing. They are similar in that the price is determined by adding some fixed percentage to the unit cost. Markup pricing is most commonly found in the distribution and service trades where the outlet adds predetermined but different markups to various products or services carried. Cost-plus pricing is most often used to describe the pricing of jobs that are non-routine and difficult to "cost" in advance, such as construction and high technology development.

Markups vary considerably among different products and in addition, quite a lot of dispersion is found around the averages.

Many hypotheses have been advanced to explain the variations in markups within selected product groups. One researcher conducted a detailed study to examine how much of the markup variance within common basic product groups could be explained by three commonly used rules of thumb:

    a) Markups should vary inversely with unit costs.
    b) Markups should vary inversely with turnover.
    c) Markups should be higher and prices lower on reseller's own brands than on supplier's brands.

In one product group a single rule helped explain 61 percent of the variance in percentage markups, and in two groups a combination of two rules helped explain over 60 percent of the variance in percentage markups and in two groups a combination of two rules helped explain over 60 percent. Yet the principal finding was that a large amount of variation remained unexplained in most product categories and was probably due to erratic decisions, random factors and frequently better adaptations to the current market than could be provided by the rules.

Does the use of a rigid customary markup over cost make logical sense in the pricing of products? Generally, No! Any model that ignores current demand elasticity in setting prices is not likely to lead, except by chance, to the achievement of maximum profits, either in the long run or in the short run. As demand elasticity changes, as it is likely to do seasonally, cyclically, or over the product life cycle, the optimum markup should also change. If markup remains a rigid percentage of cost, then under ordinary conditions it would not lead to maximum profits.

Under special conditions, however, a rigid markup at the right level may lead to optimum profits. The two conditions are that average (unit) costs must be fairly constant over the range of likely outputs and price elasticity must fairly constant for different points on the demand curve and over time. Both conditions are apt to characterize many retailing situations. This may explain why fairly rigid markups are in widespread use in retailing and why this may not be inconsistent with optimal pricing requirements. In manufacturing, however, it is less likely that two special conditions obtain, and here fixed markup pricing is more difficult to justify on logical grounds.

Still, markup pricing remains popular for a number of reasons. First, there is generally less uncertainty about costs than about demand. By pinning the price to unit costs, the seller simplifies his own pricing task considerably; he does not have to make frequent adjustments as demand conditions change. Second, where all firms in the industry use this pricing approach, their prices are likely to be similar if their costs and markups are similar. Price competition is therefore minimized, which would not be the case if firms paid attention to demand variations when they priced. Third, there is the feeling that cost markup pricing is socially fairer to both the buyer and the seller. The seller does not take advantage of the buyer when his demand becomes acute; yet the seller earns a fair return on his investment. Thus the popularity of a cost-oriented approach to pricing rests on considerations of administrative simplicity, competitive harmony, and social fairness.

ii. Target pricing
A common cost-oriented approach used by suppliers is known as target pricing, in which the firm tries to determine the price that would give it a specified target rate of return on its total costs at an estimated standard volume. This pricing approach has been most closely associated with certain firms, which have stated that they price their products so as to achieve a long-run average rate of return of 15 to 20 percent on their investment. It is also closely associated with the pricing policies of public utilities, which have a large investment and are constrained by regulatory commissions in view of their monopoly position to seek a fair rate of return on their costs.

The pricing procedures used in target pricing can be illustrated in terms of a break-even chart. Management's first task is to estimate its total costs at various levels of output. The total-cost curve is shown rising at a constant rate until capacity is approached. Management's next task is to estimate the percentage of capacity at which it is likely to operate in the coming period. Management's third task is to specify a target rate of return. Another point on the total-revenue curve will be $0 at a volume of zero percent of capacity. The rest of the total-revenue curve can be drawn between these two points.

Where does price come in? The slope of the total-revenue curve is price and if at a specific price the company manages to sell its estimated output it will attain the target rate of return.

Target pricing, however, has a major conceptual flaw. The company uses an estimate of sales volume to derive the price, but price is a factor that influences sales volume! What is missing from the analysis is a demand function, showing how many units the firm could expect to sell at different prices. With an estimate of the demand curve and with the requirement to earn 20 percent on costs, the firm could solve for those prices and volumes that could be compatible with each other. In this way, the firm would avoid setting a price that failed to generate the estimated level of output.

2. Demand-oriented pricing

Cost-oriented approaches rely on the idea of a standard markup over costs and/or a conventional level of profits. Demand-oriented approaches look instead at the intensity of demand. A high price is charged when or where demand is intense, and a low price is charged when or where demand is weak, even though unit costs may be the same in both cases.

Some pricing experts believe that demand should be the only factor in setting the price. They believe that price should be set not on cost but on the customer's perceived value for the product. The customer's perceived value is based on the total performance, psychological, and service characteristics of the seller's offer. The customer's perceived value is estimated, and then a price is set that would leave the customer with a slightly higher perceived value-to-price ratio than with any competing offer. This is felt to be a customer-oriented approach to pricing. Cost only comes in if it is too high to leave a profit in selling the product at that price.

Price discrimination
A common form of demand-oriented pricing is price discrimination, in which a particular commodity is sold at two or more prices that do not reflect a proportional difference in marginal costs. Price discrimination takes various forms, according to whether the basis is the customer, the product version, the place, or the time.

Pricing that discriminates on a customer basis is illustrated in the selling of high price durable products where discounting or negotiated pricing may be available to customers. The product may be identical in both cases, and the marginal cost of the transaction may be identical; yet the seller has managed to extract a higher price from one buyer than from the other. The occurrence of price discrimination among customers may indicate different intensities of demand or variation in consumer knowledge. Charging different prices to different customers raises strong ethical questions and is potentially disruptive of customer goodwill.

Pricing that discriminates on a product-version basis occurs when slightly different versions of a product are priced differently but not proportionately to their respective marginal costs. Suppliers, however, do not always mark up the more up-market and costly version at a disproportionately higher price. In many cases the price discrimination is reversed to encourage the buyer to trade up, thereby increasing total sales value.

Pricing that discriminates on a place basis is also quite common, since place is a form of utility. Different prices are charged so that each customer pays close to the maximum of what he is willing to pay.

Pricing that discriminates on a time basis also takes many forms. The demand for a product is likely to vary in intensity over the business cycle, over the seasons by the day, and sometimes by the hour. Public utilities, in their pricing to commercial users, typically vary their prices according to the day (weekend versus weekday) and even the time of day. Generally speaking, the firm whose costs are largely fixed can gain by varying prices according to temporal variations in demand.

For price discrimination to work, certain conditions must exist:

a)	First, the market must be segmentable, and the segments must show different intensities of demand.
b)	Second, there should be no chance that the members of the segment paying the lower price could turn around and resell the product to the segment paying the higher price.
c)	Third, there should be little chance that competitors will undersell the firm in the segment being charged the higher price.
d)	Fourth, the cost of segmenting and policing the market should not exceed the extra revenue derived from price discrimination.
e)	Fifth, the practice should not breed customer resentment and turning away.

3. Competition-oriented pricing

When a company sets its prices chiefly on the basis of what its competitors are charging, its pricing policy can be described as competition-oriented. It is not necessary to charge the same price as competition, although this is a major example of this policy. The competition oriented pricing firm may seek to keep its prices lower or higher than competition by a certain percentage. The distinguishing characteristic is that it does not seek to maintain a rigid relation between its price and its own costs or demand. Its own costs or demand may change, but the firm maintains its price because competitors maintain their prices. Conversely, the same firm will change its prices when competitors change theirs, even if its own costs or demand have not altered.

i. Going-rate pricing
The most popular type of competition oriented pricing is where a firm tries to keep its price at the average level charged by the industry. Called going-rate pricing, it is popular for several reasons. Where costs are difficult to measure, it is felt that the going price represents the collective wisdom of the industry concerning the price that would yield a fair return. It is also felt that conforming to a going price would be least disruptive of industry harmony. The difficulty of knowing how buyers and competitors would react to price differentials is still another reason for this pricing.

Going-rate pricing primarily characterizes pricing practice in homogeneous product markets, although the market structure itself may vary from pure competition to pure oligopoly. The firm selling a homogeneous product in a highly competitive market has actually very little choice about the setting of its price as there is apt to be a market-determined price for the product, which is not established by any single firm or clique of firms but through the collective interaction of a multitude of knowledgeable buyers and sellers. The firm daring to charge more than the going rate would attract virtually no customers, furthermore the firm need not charge less because it can dispose of its entire output at the going rate. Under highly competitive conditions in a homogeneous product market (such as consumer staples, industrial supplies, and services), the firm really has no pricing decision to make, albeit in fact, it hardly has any significant marketing decisions to make. The major challenge facing such a firm is good cost control, since promotion and personal selling are small elements, the major marketing costs arise in physical distribution, and here is where cost efficiency may be critical.

In a pure oligopoly, where a few large firms dominate the industry, the firm also tends to charge the same price as competition, although for different reasons since there are only a few firms, each firm is aware of the others' prices, and so are the buyers. Thus the slightest price difference would favor the lower-price firm unless service or contractual relationships are sufficient to overcome this. The observed lack of price competition in these markets has been explained on the basis of the individual oligopolist's demand curve's having a kink in it at the level of the present prices. The demand curve tends to be elastic above the kink because other firms are not likely to follow a price cut. An oligopolist can gain little by raising his price when demand is elastic or lowering his price when demand is inelastic, and this is held to explain much of the price timidity in these markets.

This does not mean that the going price in an oligopoly market will be perpetuated indefinitely, indeed it cannot, since industry costs and demand change over time. Usually, the industry takes collective action to raise the price, or in rarer cases, to lower the price. Apparently this is not done through corporate official channels, for that would be illegal; yet typically, one firm assumes the role of price leader.

In markets characterized by product differentiation, the individual firm has more latitude in its price decision. Product and service differences serve to desensitize the buyer to existing price differentials. Firms try to establish themselves in a pricing zone with respect to their competitors, assuming the role of a high-price firm or a medium-price firm or a low-price firm. Their product and marketing programme are made compatible with this chosen pricing zone or vice versa and thus they respond to competitive changes in price to maintain their pricing zone.

ii. Sealed-bid pricing
Competitive-oriented pricing also dominates in those situations where firms compete for jobs on the basis of bids, such as equipment suppliers and contractors of various types. The bid is the firm's offer price, and it is a prime example of pricing based on expectations of how competitors will price rather than on a rigid relation based on the firm's own costs or demand. The objective of the firm in the bidding situation is to get the contract, and this means that it hopes to set by any of the other bidding firms.

Yet the firm does not ordinarily set its price below a certain level. Even when it is anxious to get a contract in order to keep the capacity up, it cannot quote a price below marginal cost without worsening its position. On the other hand, as it raises its price above marginal cost, it increases its potential profit but reduces its chance of getting the contract.

The use of the expected-profit criterion makes sense for the large firm that makes many bids and is not dependent on winning any particular contract. In playing the odds, it should achieve maximum profits in the long run. The firm that bids only occasionally and/or may need a particular contract badly will probably not find it advantageous to the expected-profit criterion. The criterion, for example, does not distinguish between a $1,000 profit with a .10 probability and a $125 profit with an .80 probability. Yet the firm that wants to keep production going is likely to prefer the second contract to the first. In other words, the dollar value of expected profits may not reflect the utility value.

The chief obstacle to the use of formal bidding theory is guessing the probability of getting the contract at various bidding levels. This estimate requires information about what the competitors are likely to bid. Here lies the problem, because competitors keep their intentions as secret as possible. Therefore the company has to rely on conjecture, trade gossip, or past bidding history.

The theory of competitive bidding has received considerable refinement in the hands of applied mathematicians. Not only the standard situation but also special situations have been explored, such as that of a company that wants to bid simultaneously on a number of contracts and yet cannot afford to win them all. The major problem remains that of obtaining reliable data to insert into the model.

	PRICING MODELS
	Cost Oriented : Mark-up Pricing
	Cost Oriented : Target Pricing
	Demand Oriented : Price Discrimination
	Competition Oriented : Going-Rate Pricing
	Competition Oriented : Sealed or Bid Pricing

H75      Grid Definition

PRICE CHANGES

Pricing is a challenging decision not only when a price is being set for the first time but also when the firm is about to initiate a price change. The firm may be considering a price reduction in order to stimulate demand, to take advantage of lower costs, or to shake out weaker competitors. Or it may be considering a price increase in order to take advantage of tight demand or to pass on higher costs. Whether the price is to be moved up or down, the action is sure to affect buyers, competitors, distributors, and suppliers, and may interest government as well. The success of the move depends critically on how the parties respond.


1. Buyers' reactions to price change

The traditional analysis of buyers' reactions to price change is based on assuming that all buyers learn of the price change and take it at face value and the magnitude of their response to the price change is described by the concept of price elasticity of demand.

i. Price elasticity of demand
This term refers to the ratio of the percentage change in demand (quantity sold per period) caused by a percentage change in price. A price elasticity of -1 means that sales rise (fall) by the same percentage as price falls (rises). In this case, total revenue is left unaffected. A price elasticity greater than -1 means that sales rise (fall) by less than price falls (rises) in percentage terms; in this case, total revenue falls.

Price elasticity of demand gives more precision to the question of whether the firm's price is too high or too low. From the point of view of maximizing revenue, price is too high if demand is elastic and too low if demand is inelastic.

Whether this is also true for maximizing profits depends on the behavior of costs.

In practice, price elasticity is extremely difficult to measure. There are definitional as well as statistical hurdles. In definition, price elasticity is not an absolute characteristic of the demand facing a seller but rather a conditional one. Price elasticity depends on the magnitude of the contemplated price change. It may be negligible with a small price change (one below the threshold level) and substantial with a large price change. Price elasticity also varies with the original price level. A 5 percent increase over current prices of $1 and $1.20, respectively, may exhibit a quite different elasticity. Finally, long-run price elasticity is apt to be different from short-run elasticity. Buyers may have to continue with the present supplier takes time, but they may eventually stop purchasing from him. In this case, demand is more elastic in the long run than in the short increases prices but return to him later. The significance of this distinction between short-run and long-run elasticity is that the seller will not know for a while how wise is his price change.

Major statistical estimation problems face the firm wishing to evaluate price elasticity and whilst different techniques have evolved, yet none completely appropriate or satisfactory in all circumstances.

Certain companies would not have any competitive reactions to worry about in contemplating a price change and thus could proceed directly to the task of estimating the likely reactions of the ultimate customers, using one of four methods:

a) DIRECT ATTITUDE SURVEY
The Company could interview a sample of actual or potential customers to study reactions.

b) STATISTICAL ANALYSIS OF RELATIONSHIP OF PRICE -v- QUANTITY
This could take the form of either a historical or a cross-sectional analysis. A historical analysis consists in observing how sales were affected in the past by price changes. A cross-sectional analysis consists in observing sales varies with the price charged by different companies in the marketplace.

c) MARKET TEST
The Company could offer a representative sample of customers the proposed new price and analyze the results on sales.

d) ANALYTIC INFERENCE
The Company could conjecture how many sales would react to price changes. The company could segment the market into customer units of different sizes and different expenditure levels and thereafter estimate the numbers of customers in that market segment. The company would then apply the probability of their reaction to the price change. This could be done for all the segments to build an aggregate estimate of the final effect.

These different approaches to estimating demand elasticity work with different degrees of success in different circumstances, and sometimes two or more of them may be undertaken simultaneously for additional confirmation. In practical situations, the task is not one of estimating the absolute level of elasticity so much as whether it differs substantially from the break-even level where nothing would be gained through a price change. This level is an elasticity of 1 if costs are constant. The break-even level of elasticity can be translated into the actual sales versus gain or loss in revenue.

ii. Perceptual factors in buyers' response
Although economists have tended to ignore perceptual factors, they constitute an important intervening variable in explaining market response to price changes.

Customers may not always put the most straightforward interpretation on a price change when it occurs. A price reduction may symbolize any number of things:

a)	The item is about to be superseded by a better product.
b)	The item has some fault and is not selling well.
c)	The firm is in financial trouble and may not stay in business to supply future parts.
d)	The price will come down even further and it pays to wait.
e)	The quality has been reduced.

A price increase may also be interpreted in several ways:

a)	The item is very "hot" and may be unobtainable unless it is bought soon.
b)	The item represents an unusually good value and could not yield a profit at the old price.
c)	The seller is greedy and is charging what the traffic will bear.

In a period of rapidly rising prices, the seller is particularly vulnerable to the charge of taking advantage of buyers. Domestic customers suspect "price pyramiding" where the seller raises his prices by more than his cost increases. The seller risks spoiling the goodwill he has built and driving customers to find substitutes for his product when they feel that his prices have risen too much. It is incumbent on the seller to gain credibility for his price increases, even to the point of showing how much his costs have increased. Alternatively, he may try to keep his prices down by reducing his services or charging for them, and by constantly searching for ways to improve productivity.

2. Competitors' reactions to price changes

A firm contemplating a price change has to worry about competitors' as well as customers' reactions. Competitors' reactions are important where the number of firms is small, the product offering is homogeneous, and the buyers are discriminating and informed.

How can the firm estimate the likely reaction of its competitors? Let us assume at first that the firm faces only one large competitor. The likely behavior of this competitor can be approached from two quite different starting points. One is to assume that the competitor treats each price change as a unique challenge and considers afresh his self-interest. Each assumption has quite different research implications.

If the competitor has a set price-reaction policy, there are at least two different ways to fathom it - through inside information and through statistical analysis. Inside information can be obtained in many ways, some quite acceptable and others verging on the cloak-and-dagger. One of the more respectable methods is hiring an executive away from a competitor. In this way the firm acquires a rich source of information on the competitor's thought processes and patterns of reaction. It may even pay to set up a unit of former employees whose job is to think like the competitor. Information on the thinking of a competitor can also come through other sources, such as customers, the financial community, suppliers, dealers and the business community at large.

A set policy toward meeting price changes may be discerned through a statistical analysis of the competitor's past price reactions. One can employ the concept "conjectural price variation" ( V ), defined as the ratio of the competitor's reactive price change to the company's previous price change. In symbols:

where,

      V_A,t = the change in Competitor B's price during period  t  as a proportion of Company A's price change during period t

      P_B,t - P_B,t-1  = the change in competitor B's price during period t

      P_A,t - P_A,t-1  = the change in company A's price during period t

The last-observed V_A,t  can be used by the company as an estimate of the probable reaction of the competitor.
       If  V_A,t  = 0,  then the competitor did not react last time.
       If  V_A,t  = 1,  then the competitor fully matched the company's price change.
       If  V_A,t  = .5,  then the competitor only matched half of the company's price change.

However, it could be misleading to base the analysis only on the last price reaction. It would be better to average several of the past V terms, giving more weight to the more recent ones because they are reflections of more current policy.

A possible estimate of future competitive price reaction  (V_{A,t + 1})  might be

       V_{A,t + 1}  =  .5V_A,t + .3V_{A,t - 1} + .2V_{A,t - 2}

where three past conjectural price-variation terms are combined in a weighted average.

The statistical method makes sense only on the assumption that the competitor has a fairly consistent price-reaction policy. Otherwise it would be better to base the analysis on a quite different assumption, that the competitor decides afresh on each occasion of a price increase, what reaction would be in his best interest. If this is so, an analysis must be made of how the competitor perceives his self-interest. His current financial situation should be researched, along with his recent sales and capacity, the basis of his customer appeal, and his corporate objectives. If evidence points to a market-share objective, then the competitor is likely to match the price change. If evidence points to a profit-maximization objective, the competitor may react on some other policy front, such as increasing his advertising or improving his product's quality. The job is to get into the mind of the competitor through inside and outside sources of information.

The problem is complicated because each price change occurs under unique circumstances, and the competitor is capable of putting different interpretations on it. His reaction to a price reduction will depend on whether he interprets it to mean:

a)	The company is trying to steal the market from him.
b)	The company is not doing well and is trying to improve its sales.
c)	The company is hoping that the whole industry will reduce its prices in the interests of stimulating total demand.

When there is more than one competitor, the company must estimate each competitor's likely reaction. If all competitors are likely to behave alike, this amounts to analyzing only a typical competitor. If the competitors cannot be expected to react uniformly because of critical differences in size, market shares, or policies, then separate analyses are necessary. If it appears that a few competitors will match the price change, there is good reason to expect the rest will also match it.

3. Using decision theory for price changes

The following illustrates how a major company can integrate various uncertain factors to analyze a contemplated price reduction.

A large company had been selling a product to industrial users for several years and enjoyed 40 percent of the market. The management became worried about whether its current price could be maintained for much longer. The main source of concern was the rapid build-up of capacity by its three competitors and the possible attraction of further-competitors by the present price. Management saw the key to the problem of possible oversupply in further market expansion. The key area for market expansion lay in an important segment of the market that was closely held by a substitute product produced by a number of firms. This substitute product was not as good, but it was priced lower. Management saw a possible solution in displacing the substitute product in the recalcitrant segment through a price reduction. If it could penetrate this segment, there was a good chance it could also penetrate other segments which had resisted the displacement.

The first task was to develop a decision structure for the problem in which all components would be related. This meant defining the objectives, policy alternatives, and key uncertainties.

It was decided that the objective would be to maximize the present value of future profits over the next five years. Management decided to consider the four alternatives of maintaining the price or reducing the price.

The following were considered among the key uncertainties that had to be evaluated:

a)	How much penetration in the key segment would take place without a price reduction?
b)	How would the firms producing the substitute product react to each possible price reduction?
c)	How much penetration in the key segment would take place for every possible price reaction of the suppliers of the substitute product?
d)	How much would penetration into the key segment speed up penetration into the other segments?
e)	If the key segment were not penetrated, what was the probability that the company's competitors would initiate price reductions soon?
f)	What would be the impact of a price reduction on the decision of existing competitors to expand their capacity and/or potential competitors to enter the industry?

The data-gathering phase consisted mainly in asking key sales personnel to place subjective probabilities on the various possible states of the key uncertainties. Meetings were held with the sales personnel to explain the concept of expressing judgments in the form of probabilities. The probabilities were filled out on a long questionnaire. For example, one question asked for the probability that the producers of the substitute product would retaliate if the company reduced its price. On the average, the sales personnel felt that there was only a 5 percent probability of a full match, a 60 percent probability of a half match, and a 35 percent probability of no retaliation. They were also asked for probabilities if price were reduced still further. The sales personnel indicated, as expected, that the probability of retaliation increased with an increase in price reduction.

The next step was to estimate the likely payoffs of different courses of action. A decision-tree analysis revealed that there were over four hundred possible outcomes. For this reason, the estimation of expected payoffs was computerized. The computer indicated that in all cases a price reduction had a higher expected payoff than status quo pricing, and, in fact, a specific price level reduction had the highest expected payoff. To check the sensitivity of these results to the original assumptions, the results were recomputed for alternative assumptions about the rate of market growth and the appropriate cost of capital. It was found that the ranking of the strategies was not affected by the change in the assumptions.

The analysis clearly pointed to the desirability of some price reduction in preference to the status quo. The last step belongs to managers: to decide on the basis of this analysis, as well as other factors that may have eluded analysis, whether to initiate the price reduction and, if so, by how much.

COMPETITOR PRICE REACTION

If one reversed the previous question and asked: How can a firm that has just seen a price change by a competitor decide on its best course of action?

In some market situations the firm has no choice but to meet a competitor's price change. This is particularly true when the price is cut in a homogeneous product market. Unless the firm meets the price reduction, most buyers will shift their business to the lowest-price competitor.

When the price is raised by a firm in a homogeneous product market, the other firms may or may not meet it and they will comply if the price increase appears designed to benefit the industry as a whole. Yet if one firm does not see it that way and thinks that it or the industry would gain more by standing pat on prices, its non-compliance can make the leader and the others rescind any price increases.

In non-homogeneous product markets, a firm has more latitude in reacting to a competitor's price change. The essential fact is that buyers choose the seller on the basis of a multiplicity of considerations: service, quality, reliability, and other factors and these factors desensitize many buyers to minor price differences. The reacting firm has a number of options: doing nothing and losing few or many customers, depending upon the level of customer loyalty; meeting the price change partly or fully; countering with modifications of other elements in its marketing mix.

The firm's analysis should take the form of estimating the expected payoffs of alternative possible reactions. It should consider the following questions:

a)	Why did the competitor change his price? Is it to steal the market, to meet changing cost conditions, or to evoke a calculated market-wide price change to take advantage of total demand?
b)	Is the competitor intending to make his price change temporary or permanent?
c)	What will happen to the company's market share (and profits) if it ignores the price change? Are the other companies going to ignore the price change?
d)	What is the competitor's (and other firms') response likely to be to each possible reaction?

Consider the situation of a firm that enjoys a dominant market share whose major competitor has just cut the price in an effort to win market share. The dominant firm has two broad options:

1) Market-share maintenance. The firm may choose to lower its price to the competitor's price to avoid losing market share. It may choose this course of action because:

a)	its costs fall with volume;
b)	it believes that the market is very price-sensitive and it will lose a substantial market share; and
c)	it believes that it would be hard to rebuild its market share once it is lost.

2 Margin maintenance. The firm may choose to maintain its price and therefore its profit margin. It may believe that:
 

a)	it would lose too much profit if it reduced its price on all the units it sells;
b)	it would not lose much market share; and
c)	it would be easy to regain or hold market share by investments to increase the perceived value of its brand.

Between these extremes, the firm could also consider a partial price reduction to limit its market-share loss.

The proper course of action depends upon estimating the price elasticity of demand, the behavior of costs with volume, and the supply capabilities of the competitor. For example, margin maintenance would make good sense where there is low price elasticity (the company has built up high perceived value and has loyal customers), costs are not too sensitive to small-volume losses, and the competitor is small and cannot finance large expansions in capacity.

An extended analysis of company alternatives is not always feasible at the time of a price change. The competitor who initiated the price change may have spent considerable time in preparing for this decision, but the company that must react may have only hours or days before some decisive position must be taken. The analysis and information are necessarily below the standard usually required for determining such an important decision as a price reaction. About the only way to place such decisions on a surer footing is to anticipate their possible occurrence and to prepare and advanced programme to guide one's responses. Reaction programmes for meeting price changes are likely to find their greatest application in firms where price changes occur with some frequency and where it is important to react quickly.

PRODUCT PRICING LOGIC

The logic of setting or changing a price on an individual product has to be modified when the product is a member of a product group. In the latter case, the true quest is for a set of mutual prices that maximize the profits of the product group. This quest is made difficult because various company products are interrelated in demand and/or cost and are subject to different degrees of competition.


1. Interrelated demand

Two products are interrelated in demand when the price (or some other element of the marketing mix) of one affects the demand for the other. One uses the concept of "cross-elasticity of demand" to express the interaction. A positive cross-elasticity means that two products are substitutes, a negative cross-elasticity means that two products are complements, and a zero (or low) cross-elasticity means that two products are unrelated in demand. Before changing the price of any single item in his line, the seller should consider the various cross-elasticities to determine the overall impact of his move.


2. Interrelated cost

Two products are interrelated in cost when a change in the production of one affects the cost of the other. By-products and joint products are related in this sense as are many services. More generally, any two products using the same production facilities are interrelated on the cost side even if they are not joint products. This is largely because accounting practice requires a full allocation of costs. The significance of all this is that if the company increases the price of A, for example, and causes its sales to fall; the cost of the other products, assuming they are not complementary goods, will be higher. Thus management must examine the cost interactions before it changes the price of a single product in the line.


3. Effect of competition

Various products in a company line are exposed to different degrees of competition. The seller may have little latitude in pricing products in his line where existing or potential competition is keen, and he will have varying degrees of price discretion in the other cases. Therefore the structure of prices for the products in the line should not simply be proportional to costs, however measured, for this would overlook profit opportunities that are associated with taking advantage of different degrees of competition.


4. Alternative product-line pricing principles

In practice, costs have provided the usual starting point for determining the prices of interrelated products in the line. Even here there seems to be considerable disagreement over which costs should be used. The three most popular cost bases are full costs, incremental costs and conversion costs.

The first pricing principle calls for pricing proportionately to the full costs. The chief criticism against using the full cost is that the allocation of overhead unavoidably involves some arbitrariness. Therefore the resulting prices take on a partly arbitrary character. As a result, the company may be blind to profit opportunities that would exist if the prices of the products were not geared so tightly to the recovery of a somewhat arbitrary overhead burden.

The second pricing principle calls for setting prices that are proportional to incremental costs. The underling theory is that the company should charge customers proportionately to the extra costs it has to bear in supplying additional units of the two soaps. The net effect of pricing on an incremental cost basis is to shift sales toward the soap that absorbs more company overhead.

The third pricing principle calls for setting prices that are proportional to conversion costs. Conversion costs are defined as the labor and company overhead required to convert purchased materials into finished products. Conversion costs thus amount to the "value added" by the firm in the production process; it can be found by subtracting purchased material costs form the allocated full costs. The argument that has been advanced for using conversion costs is that the firm's profits should be based on the value its own operations add to each product. The net effect of pricing on a conversion cost basis is to shift sales toward the product that has more material cost. This pricing principle economies on the use of scarce company resources, such as labor and machines. Other than this, there is no particular economic justification for choosing certain elements of cost to bear the profit markup rather than others; furthermore, this basis again involves arbitrary allocations of overheads.

Costs represent a starting point for developing the pricing structure, but they hardly represent sufficient criteria. Incremental costs provide the lower limit to individual product pricing (except in special circumstances, such as loss leading). But a uniform markup over incremental or any other costs is fallacious in that it ignores the different demand intensities, cross-elasticities, competitive conditions, and life-cycle characteristics of each product. Pricing theory still has to progress to a stage where the cost, demand, and competitive conditions, and life-cycle characteristics of each product can be blended to produce a set of determinate prices.

	PRICE CHANGE DECIDERS
	Buyers Reaction : Elasticity of Demand
	Buyers Reaction : Perceptual Factors
	Competitors Reaction : Price Reduction
	Competitors Reaction : No Reaction
	Competitors Reaction : Product Re-positioning

H76

	PRODUCT PRICING
	Interrelated Demand Based
	Interrelated Cost Based
	Competition Based
	Product-Line Pricing Based
	Model or Price Theory Based

H77      Grid Definition

HISTORIC FINANCIAL DATA

PRODUCT PRICING FINANCIAL ISSUES

F_H - FIN_HIST.HTM  HISTORIC FINANCIAL DATA

 Financial Definitions

PRODUCT PRICING FINANCIAL SCENARIOS

FINANCIAL DATA FORECAST

 

PRODUCT PRICING FINANCIAL SCENARIOS BASED BALANCE SHEET FORECASTS

The PRODUCT PRICING FINANCIAL SCENARIOS BALANCE SHEET FORECASTS section gives a series of Balance Sheet Forecasts for the industry using a number of assumptions relating to the pricing decisions available to the marketing management of the industry.

The Balance sheet forecast given shows the effects of pricing improvements which Financial Management is likely to recommend:


PRODUCT PRICING FINANCIAL SCENARIOS

Base Forecast : Median Market Scenario

- Short-Term Price Cutting Effect
- Short-Term Price Increase Effect
- Promotional & Pricing Cost Objectives
- Research & Product Cost Objectives
- Market Share Building Objectives
- Market Share Holding Objectives
- Market Share Harvesting Objectives
- Long-Term Product Price Reduction
- Long Term Product Price Increase
- Product Positioning

Managers in the industry will, in both the short-term and the long-term, have vital decisions to make regarding the pricing improvements, margins and profitability and these decisions will need to be evaluated in light of the customers, markets, competitors, products, industry and internal factors. The scenarios given isolate a number of the most important factors and provide balance sheet forecasts for each of the scenarios.

The data provides a short and medium term forecast covering the next 6 years for each of the Forecast Financial and Operational items. The Financial and Operational Data sections show each of the items listed below in terms of forecast data and covers a period of the next 6 years.

Base Forecast : Median Market Scenario

F0M|     MEDIAN  FORECAST : Financials

G0M|     MEDIAN  FORECAST : Margins & Ratios

Short-Term Price Cutting Effect

F08 |     SHORT-TERM PRICE CUTTING EFFECT : Financials

G08 |     SHORT-TERM PRICE CUTTING EFFECT : Margins & Ratios

Short-Term Price Increase Effect

F09 |     SHORT-TERM PRICE INCREASE EFFECT : Financials

G09 |     SHORT-TERM PRICE INCREASE EFFECT : Margins & Ratios

Promotional & Pricing Cost Objectives

F32 |     PROMOTIONAL & PRICING COST OBJECTIVES : Financials

G32 |     PROMOTIONAL & PRICING COST OBJECTIVES : Margins & Ratios

Research & Product Cost Objectives

F33 |     RESEARCH & PRODUCT COST OBJECTIVES : Financials

G33 |     RESEARCH & PRODUCT COST OBJECTIVES : Margins & Ratios

Market Share Building Objectives

F34 |     MARKET SHARE BUILDING OBJECTIVES : Financials

G34 |     MARKET SHARE BUILDING OBJECTIVES : Margins & Ratios

Market Share Holding Objectives

F35 |     MARKET SHARE HOLDING OBJECTIVES : Financials

G35 |     MARKET SHARE HOLDING OBJECTIVES : Margins & Ratios

Market Share Harvesting Objectives

F36 |     MARKET SHARE HARVESTING OBJECTIVES : Financials

G36 |     MARKET SHARE HARVESTING OBJECTIVES : Margins & Ratios

Long-Term Product Price Reduction

F38 |     LONG-TERM PRODUCT PRICE CUTTING : Financials

G38 |     LONG-TERM PRODUCT PRICE CUTTING : Margins & Ratios

Long-Term Product Price Increase

F39 |     LONG-TERM PRODUCT PRICE INCREASE : Financials

G39 |     LONG-TERM PRODUCT PRICE INCREASE : Margins & Ratios

Product Positioning

F43 |     PRODUCT POSITIONING : Financials

G43 |     PRODUCT POSITIONING : Margins & Ratios

FIN_DEFI.HTM Financial Definitions

INDEX

Alternative product-line pricing principles, 30
ANALYTIC INFERENCE, 24

Balance Sheet Base Forecast : Median Market Scenario, 46
Balance Sheet Historic, 40
Balance Sheet Long-Term Product Price Increase, 82
Balance Sheet Long-Term Product Price Reduction, 78
Balance Sheet Market Share Building Objectives, 66
Balance Sheet Market Share Harvesting Objectives, 74
Balance Sheet Market Share Holding Objectives, 70
Balance Sheet Product Positioning, 86
Balance Sheet Promotional & Pricing Cost Objective, 58
Balance Sheet Research & Product Cost Objectives, 62
Balance Sheet Short-Term Price Cutting Effect, 50
Balance Sheet Short-Term Price Increase Effect, 54
Buyers Reaction : Elasticity of Demand, 31
Buyers Reaction : Perceptual Factors, 31
Buyers' reactions to price change, 23

Company executives, 8
Competition Based, 35
Competition Oriented : Going-Rate Pricing, 19
Competition Oriented : Sealed or Bid Pricing, 19
Competition-oriented pricing, 17
COMPETITOR PRICE REACTION, 28
Competitors Reaction : No Reaction, 31
Competitors Reaction : Price Reduction, 31
Competitors Reaction : Product Re-positioning, 31
Competitors' reactions to price changes, 25
Cost Oriented : Mark-up Pricing, 19
Cost Oriented : Target Pricing, 19
Costs & Margins Historic, 41
Cost-oriented pricing, 14

Decision theory for price changes, 27
Demand Oriented : Price Discrimination, 19
Demand-oriented pricing, 16
DIRECT ATTITUDE SURVEY, 24

Early Cash Recovery Objectives, 3
Early-cash-recovery objective, 7
Effect of competition, 29

Financial data definitions, 91
Financial forecast notes, 44
Financial Ratios Base Forecast : Median Market Scenario, 48
Financial Ratios Long-Term Product Price Increase, 84
Financial Ratios Long-Term Product Price Reduction, 80
Financial Ratios Market Share Building Objectives, 68
Financial Ratios Market Share Harvesting Objective, 76
Financial Ratios Market Share Holding Objectives, 72
Financial Ratios Product Positioning, 88
Financial Ratios Promotional & Pricing Cost Objectives, 60
Financial Ratios Research & Product Cost Objective, 64
Financial Ratios Short-Term Price Cutting Effect, 52
Financial Ratios Short-Term Price Increase Effect, 56
Financial Ratios & Margins Historic, 42

Going-rate pricing, 17
Government, 8
Government Considerations, 9

HISTORIC FINANCIAL DATA, 39

Intermediate Customer Considerations, 9
Intermediate customers, 8
Interrelated cost, 29
Interrelated Cost Based, 35
Interrelated demand, 29
Interrelated Demand Based, 35
In-House Considerations, 9

Margin maintenance, 28
Market Penetration Objectives, 3
MARKET TEST, 24
Market-penetration objective, 7
Market-share maintenance, 28
Market-skimming objective, 7
Market-Skimming Objectives, 3
Markup pricing, 14
Model or Price Theory Based, 35
MULTIPLE PARTY PRICING, 9

Operational Costs Base Forecast : Median Market, 47
Operational Costs Long-Term Product Price Increase, 83
Operational Costs Long-Term Product Price Reduction, 79
Operational Costs Market Share Building Objectives, 67
Operational Costs Market Share Harvesting Objectives, 75
Operational Costs Market Share Holding Objectives, 71
Operational Costs Product Positioning, 87
Operational Costs Promotional & Pricing Cost Objectives, 59
Operational Costs Research & Product Cost Objectives, 63
Operational Costs Short-Term Price Cutting Effect, 51
Operational Costs Short-Term Price Increase Effect, 55
Operational Margins Base Forecast : Median Market, 49
Operational Margins Long-Term Product Price Increase, 85
Operational Margins Long-Term Product Price Reduction, 81
Operational Margins Market Share Building Objectives, 69
Operational Margins Market Share Harvesting Objectives, 77
Operational Margins Market Share Holding Objectives, 73
Operational Margins Product Positioning, 89
Operational Margins Promotional & Pricing Cost Obj., 61
Operational Margins Research & Product Cost Objectives, 65
Operational Margins Short-Term Price Cutting Effects, 53
Operational Margins Short-Term Price Increase Effects, 57
Operational Ratios & Margins Historic, 43

Perceptual factors in buyers' response, 24
PRICE BASIS, 2
PRICE CHANGE DECIDERS, 31
PRICE CHANGES, 23
Price discrimination, 16
Price elasticity of demand, 23
PRICING DECISIONS, 14
PRICING MODELS, 19
PRICING OBJECTIVES, 3
Problem of Pricing objectives, 7
Problems of estimating Demand and Cost functions, 13
Problems of Marketing-mix interaction, 13
Problems of Multiple parties, 8
PRODUCT PRICING, 35
PRODUCT PRICING FINANCIAL SCENARIOS FORECASTS, 45
PRODUCT PRICING LOGIC, 29
PRODUCT PRICING OBJECTIVES, 1
Product-Line Pricing Based, 35
Product-line promotion objective, 7
Product-Line Promotion Objectives, 3

RELATIONSHIP OF PRICE -v- QUANTITY, 24
Rivals, 8
Rivals Considerations, 9

Satisfying objective, 7
Satisfying Objectives, 3
Sealed-bid pricing, 18
Suppliers, 8
Suppliers Consideration, 9

Target pricing, 15
Theoretical pricing model, 2

CONTENTS

Alternative product-line pricing principles
ANALYTIC INFERENCE
Base Forecast : Median Market Scenario
Buyers Reaction : Elasticity of Demand
Buyers Reaction : Perceptual Factors
Buyers' reactions to price change
Company executives
Competition Based
Competition Oriented : Going-Rate Pricing
Competition Oriented : Sealed or Bid Pricing
Competition-oriented pricing
COMPETITOR PRICE REACTION
Competitors Reaction : No Reaction
Competitors Reaction : Price Reduction
Competitors Reaction : Product Re-positioning
Competitors' reactions to price changes
Cost Oriented : Mark-up Pricing
Cost Oriented : Target Pricing
Cost-oriented pricing
Decision theory for price changes
Demand Oriented : Price Discrimination
Demand-oriented pricing
DIRECT ATTITUDE SURVEY
Early Cash Recovery Objectives
Early-cash-recovery objective
Effect of competition
F439
G439 Theoretical pricing model
Going-rate pricing
Government Considerations
Government
HISTORIC FINANCIAL DATA
In-House Considerations
Intermediate Customer Considerations
Intermediate customers
Interrelated Cost Based
Interrelated cost
Interrelated Demand Based
Interrelated demand
Long-Term Product Price Increase
Long-Term Product Price Reduction
Margin maintenance
Market Penetration Objectives
Market Share Building Objectives
Market Share Harvesting Objectives
Market Share Holding Objectives
MARKET TEST
Market-penetration objective
Market-share maintenance
Market-skimming objective
Market-Skimming Objectives
Markup pricing
Model or Price Theory Based
MULTIPLE PARTY PRICING
Perceptual factors in buyers' response
PRICE BASIS
PRICE CHANGE DECIDERS
PRICE CHANGES
Price discrimination
Price elasticity of demand
PRICING DECISIONS
PRICING MODELS
PRICING OBJECTIVES
Problem of Pricing objectives
Problems of estimating Demand and Cost functions
Problems of Marketing-mix interaction
Problems of Multiple parties
Product Positioning
PRODUCT PRICING FINANCIAL SCENARIOS FORECASTS
PRODUCT PRICING LOGIC
PRODUCT PRICING OBJECTIVES
PRODUCT PRICING
Product-Line Pricing Based
Product-line promotion objective
Product-Line Promotion Objectives
Promotional & Pricing Cost Objectives
RELATIONSHIP OF PRICE -v- QUANTITY
Research & Product Cost Objectives
Rivals Considerations
Rivals
Satisfying objective
Satisfying Objectives
Sealed-bid pricing
Short-Term Price Cutting Effect
Short-Term Price Increase Effect
Suppliers Consideration
Suppliers
Target pricing

PRODUCT PRICING OBJECTIVES
PRICE BASIS
Theoretical pricing model
Problem of Pricing objectives
Market-penetration objective
Market-skimming objective
Early-cash-recovery objective
Satisfying objective
Product-line promotion objective
Problems of Multiple parties
Intermediate customers
Rivals
Suppliers
Government
Company executives
Problems of Marketing-mix interaction
Problems of estimating Demand and Cost functions
PRICING DECISIONS
Cost-oriented pricing
Markup pricing
Target pricing
Demand-oriented pricing
Price discrimination
Competition-oriented pricing
Going-rate pricing
Sealed-bid pricing
PRICE CHANGES
Buyers' reactions to price change
Price elasticity of demand
DIRECT ATTITUDE SURVEY
RELATIONSHIP OF PRICE -v- QUANTITY
MARKET TEST
ANALYTIC INFERENCE
Perceptual factors in buyers' response
Competitors' reactions to price changes
Decision theory for price changes
COMPETITOR PRICE REACTION
Market-share maintenance
Margin maintenance
PRODUCT PRICING LOGIC
Interrelated demand
Interrelated cost
Effect of competition
Alternative product-line pricing principles
HISTORIC FINANCIAL DATA
PRODUCT PRICING FINANCIAL SCENARIOS FORECASTS
PRICING OBJECTIVES
Market Penetration Objectives
Market-Skimming Objectives
Early Cash Recovery Objectives
Satisfying Objectives
Product-Line Promotion Objectives
MULTIPLE PARTY PRICING
Intermediate Customer Considerations
Rivals Considerations
Suppliers Consideration
Government Considerations
In-House Considerations
PRICING MODELS
Cost Oriented : Mark-up Pricing
Cost Oriented : Target Pricing
Demand Oriented : Price Discrimination
Competition Oriented : Going-Rate Pricing
Competition Oriented : Sealed or Bid Pricing
PRICE CHANGE DECIDERS
Buyers Reaction : Elasticity of Demand
Buyers Reaction : Perceptual Factors
Competitors Reaction : Price Reduction
Competitors Reaction : No Reaction
Competitors Reaction : Product Re-positioning
PRODUCT PRICING
Interrelated Demand Based
Interrelated Cost Based
Competition Based
Product-Line Pricing Based
Model or Price Theory Based
Base Forecast : Median Market Scenario
Short-Term Price Cutting Effect
Short-Term Price Increase Effect
Promotional & Pricing Cost Objectives
Research & Product Cost Objectives
Market Share Building Objectives
Market Share Holding Objectives
Market Share Harvesting Objectives
Long-Term Product Price Reduction
Long-Term Product Price Increase
Product Positioning