Pricing
| Author | Allen Truell, Michael Milbier |
| Pages | 598-602 |
Page 598
Price is perhaps the most important of the four Ps (product, promotion, and place being the others) of marketing since it is the only one that generates revenue for a company. Price is most simply described as the value exchange that occurs for a product or service. Broadly, price is the total of all values exchanged for a product or service. Price is dynamic. When establishing a price for a product or service, a company must first assess several factors regarding its potential impact. Commonly reviewed factors include legal and regulatory guidelines, pricing objectives, pricing strategies, and options for increasing sales. Advances in Internet technology have resulted in the increased use of dynamic pricing by some sellers.
The first major law influencing the price of a company's product was the Sherman Antitrust Act of 1890, passed by the U.S. Congress to prevent a company from becoming a monopoly. A monopoly occurs when one company has total control in the production and distribution of a product or service. As a monopoly, a company can charge higher than normal prices for its product or service, since no significant competition exists. The Sherman Antitrust
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Act empowers the U.S. Attorney General's Office to challenge a perceived monopoly and to petition the federal courts to break up a company in order to promote competition.
Another significant piece of legislation that has a major effect on determining price is the Clayton Antitrust Act of 1914, passed by Congress in order to prevent practices such as price discrimination and the exclusive or nearly exclusive dealing between and among only a few companies. Like the Sherman Antitrust Act, this act prevented practices that would reduce competition. The Robinson-Patman Act of 1936, which is technically an extension of the Clayton Act, further prohibits a company from selling its product at an unreasonably low price in order to eliminate its competitors. The purpose of this act was to prohibit national chain stores from unfairly using volume discounts to drive smaller firms out of business.
To defend against charges of violating the Robinson-Patman Act, a company would have to prove that price differentials were based on the competitive free market, and not an attempt to reduce or eliminate competition. Because regulations of the Robinson-Patman Act do not apply to exported products, a company can offer products for sale at significantly lower prices in foreign markets than in U.S. markets.
Another set of laws influencing the price of a company's product are referred to as the unfair-trade laws. Passed in the 1930s, these laws were designed to protect special markets, such as the dairy industry, and their main focus is to set minimum retail prices for a product (e.g., milk), allowing for a slight markup. Theoretically, these laws would protect a specialty business from larger businesses that could sell the same products below cost and drive smaller, specialty stores out of business.
Fair-trade laws are a different set of statutes that were enacted by many state legislatures in the early 1930s. These laws allow a producer to set a minimum price for its product; hence, retailers signing pricing agreements with manufacturers are required to list the minimum price for which a product can be sold. These acts prevent the use of interstate pricing agreements between manufacturers and retailers, grounded in the belief that this would promote more competition and, as a result, lower prices. An important aspect of these acts is that they do not apply to intrastate product prices.
A critical part of a company's overall strategic planning includes the establishment of pricing objectives for the products it sells. A company has several pricing objectives from which to choose, and the objective chosen will depend on the goals and type of product sold by a company. Four pricing objectives are competitive, prestige, profitability, and volume pricing.
The concept behind this frequently used pricing objective is to simply match the price established by an industry leader for a particular product. Since price difference is minimized with this strategy, a company focuses its efforts on other ways to attract new customers. Some examples of what a company might do in order to obtain new customers include producing high-quality and reliable products, providing superior customer service, and engaging in creative marketing.
A company may chose to promote, maintain, and enhance the image of its product through the use of prestige pricing, which involves pricing a product high so as to make it available only to the higher-end consumer. This limited availability enhances the product's...
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