Basic Marketing: A Global−Managerial Approach Chapter 17 pdf

Peo- ple may call it different things, but almost every business transaction in our modern The something can be a physical product in various stages of completion,with or without support

Chapter Seventeen Pricing Objectives and Policies

482

You Should

1.Understand how

pricing objectives

should guide strategy

planning for pricing

decisions

2.Understand

choices the marketing

manager must make

about price flexibility

3.Know what a

marketing manager

should consider when

setting the price level

for a product in the

early stages of the

product life cycle

value pricing concept

and its role in

obtain-ing a competitive

advantage and

offer-ing target customers

superior value

6.Understand the

legality of price level

and price flexibility

new price policies were a crucialaspect of the strategy

In the early 1990s, luxury carsales to the high-income, baby-boomer crowd were growing fast

BMW, Lexus, and Mercedessedans seemed to be the ultimateyuppie status symbol and the lead-ers in customer satisfaction Yetsales of luxury sedans slowed asaffluent consumers looked forother ways to meet their needs

One clear sign of this shift wasthe growth in demand for fancyutility vehicles like the JeepGrand Cherokee

As consumer preferenceschanged, marketing man-agers for the Chevy Suburbanchanged their strategy Theyturned the Suburban into anupscale utility vehicle targeted at

options_like leather interiorsand power everything Theyalso significantly raised thesuggested list price; a fullyequipped Suburban costabout $40,000 In 1996, Sub-

urbans could command thatprice because no other modelwas as big, plush, and power-ful If a consumer reallywanted jumbo-sized luxury,Suburban was the only choice

Even at its steep price,demand for the Suburban was

so hot that supply couldn’tkeep up Yet GM managersdidn’t want to build a new fac-tory They realized that otherfirms were scrambling to

develop competing modelsthat would cut into Suburban’ssales and lofty prices If a newfactory turned into excesscapacity and high overheadcosts, it would be hard to cutSuburban prices and still make

a profit That risk didn’t seemworth it when the profit oneach Suburban was about

$8,000_much higher than formost cars

Dealers couldn’t get all theSuburbans they could sell, somany sold the ones they couldget at a premium of $1,000 ormore above the suggested listprice This jacking up of pricesirritated buyers_and manyswitched to Ford Explorers orother vehicles Yet GM’s mar-keting managers couldn’t

make dealers charge the

sug-gested list price_and it’s notlegal to charge uncooperativedealers a higher price for theSuburbans that they buy

In 1997, two new jumbo ury haulers_the LincolnNavigator and the Ford Expedi-tion_hit the market They wereinstant successes Theyattracted a lot of the peoplewho had walked away whenSuburban dealers tried to

lux-Price is one of the four major variables a marketing manager controls lux-Price-leveldecisions are especially important because they affect both the number of sales afirm makes and how much money it earns From a customer’s perspective, Price iswhat must be given up to get the benefits offered by the rest of a firm’s marketingmix, so it plays a direct role in shaping customer value.

extract an unreasonable price

Other customers just liked the

smoother ride It also didn’t hurt

that gasoline prices were at a

25-year low That pulled new

consumers into the market who

earlier had thought that the high

operating cost of a gas guzzler

made it a bad value, no matter

how useful it might be

By 2001, more competitors

had come on the scene Toyota

redesigned its Land Cruiser for

more interior space and luxury

in 1998 and then hit even

harder with a new Sequoia

model The exchange rate of

the Japanese yen against the

dollar gave Toyota a priceadvantage as the economywas shifting into lower gear

And Mercedes introduced itsML320 luxury sport-ute It issmaller than the Suburban, butmany consumers think that itsstyling, safety features, and lowprice make it a better value

Suburban sales were even nibalized by other brands in the

can-GM product line_includingCadillac’s Escalade, whichgave GM an offering at the nextprice line up from Suburban

The economy, high gasprices, and competitioncooled the demand for

Suburbans A special website(www.chevrolet.com/suburban)promotion offered Suburbanbuyers in the West (where theeconomic and competitive sit-uation was the worst)

financing at a 1.9 percentannual interest rate However,some buyers from otherregions saw the website andcomplained to dealers that thelow financing rate wasn’t avail-able to them In the end, tomove inventory, many of thesedealers just took a price cut orthrew in free options.1

Price Has Many Strategy Dimensions

Ragged Mountain wants its

customers to know that its price

is a good value compared to

what they get at other ski

resorts.

Guided by the company’s objectives, marketing managers must develop a set ofpricing objectives and policies They must spell out what price situations the firm willface and how it will handle them These policies should explain (1) how flexible priceswill be, (2) at what level they will be set over the product life cycle, (3) to whomand when discounts and allowances will be given, and (4) how transportation costswill be handled See Exhibit 17-1 These Price-related strategy decision areas are thefocus of this chapter After we’ve looked at specific decision areas, we will discuss howthey combine to impact customer value as well as laws that are relevant In the nextchapter, we will discuss how specific prices are set—consistent with the firm’s pricingobjectives and policies and its whole marketing strategy.

It’s not easy to define price in real-life situations because prices reflect manydimensions People who don’t realize this can make big mistakes

Suppose you’ve been saving to buy a new car and you see in an ad that the baseprice for the new-year model has dropped to $16,494—5 percent lower than theprevious year At first this might seem like a real bargain However, your view ofthis deal might change if you found out you also had to pay a $400 transportationcharge and an extra $480 for an extended service warranty The price might lookeven less attractive if you discovered the options you wanted—a CD player, sideairbags, and a moonroof—cost $1,200 more than the previous year The sales tax

on all of this might come as an unpleasant surprise too Further, how would you feel

if you bought the car anyway and then learned that a friend who just bought theexact same model got a much lower price from the dealer by using a broker he found

on the Internet?2

This example emphasizes that when a seller quotes a price, it is related to some

assortment of goods and services So Priceis the amount of money that is chargedfor “something” of value Of course, price may be called different things in differ-ent settings Colleges charge tuition Landlords collect rent Motels post a room rate.Country clubs get dues Banks ask for interest when they loan money Airlines havefares Doctors, lawyers, and Internet providers set fees Employees want a wage Peo-

ple may call it different things, but almost every business transaction in our modern

The something can be a physical product in various stages of completion,with or without supporting services, with or without quality guarantees, and so

Geographic term—

who pays transportation and how

Discounts and allowances—

to whom and when

Price levels over product life cycle

Price flexibility

Target market

Pricing objectives

Exhibit 17-1

Strategy Planning for Price

The price equation:

price equals something

of value

on Or it could be a pure service—dry cleaning, a lawyer’s advice, or insurance

on your car

The nature and extent of this something determines the amount of moneyexchanged Some customers pay list price Others obtain large discounts or

allowances because something is not provided Exhibit 17-2 summarizes some

possi-ble variations for consumers or users, and Exhibit 17-3 does the same for channelmembers These variations are discussed more fully below, and then we’ll considerthe customer value concept more fully—in terms of competitive advantage Buthere it should be clear that Price has many dimensions How each of these dimen-sions is handled affects customer value If a customer sees greater value in spendingmoney in some other way, no exchange will occur

Pricing objectives should flow from, and fit in with, company-level and

market-ing objectives Pricmarket-ing objectives should be explicitly stated because they have a direct

effect on pricing policies as well as the methods used to set prices Exhibit 17-4shows the various types of pricing objectives we’ll discuss

Objectives Should Guide Strategy Planning for Price

Less: Allowances

Damaged goods Advertising Push money Stocking

Plus: Taxes and tariffs

Product

Guaranteed Warranted

Convenient packaging for handling

Place

Price

Price-level guarantee Sufficient margin to allow chance for profit

Less: Allowances

Trade-ins Damaged goods

Less: Rebate and coupon value Plus: Taxes

Product

Physical good Service Assurance of quality Repair facilities Packaging Credit Warranty

Place of delivery or when available

A target return objectivesets a specific level of profit as an objective Often thisamount is stated as a percentage of sales or of capital investment A large manu-facturer like Motorola might aim for a 15 percent return on investment The targetfor Safeway and other grocery chains might be a 1 percent return on sales.

A target return objective has administrative advantages in a large company formance can be compared against the target Some companies eliminate divisions,

Per-or drop products, that aren’t yielding the target rate of return FPer-or example, eral Electric sold its small appliance division to Black & Decker because it felt itcould earn higher returns in other product-markets

Gen-Some managers aim for only satisfactory returns They just want returns that ensurethe firm’s survival and convince stockholders they’re doing a good job Similarly, somesmall family-run businesses aim for a profit that will provide a comfortable lifestyle.3Many private and public nonprofit organizations set a price level that will justrecover costs In other words, their target return figure is zero For example, a gov-ernment agency may charge motorists a toll for using a bridge but then drop thetoll when the cost of the bridge is paid

Companies that are leaders in their industries—like Lockheed Martin space) and Blue Cross and Blue Shield (health insurance)—sometimes pursue onlysatisfactory long-run targets They are well aware that their activities are in publicview The public and government officials expect them to follow policies that are

(aero-in the public (aero-interest when they play the role of price leader or wage setter Toolarge a return might invite government action Similarly, firms that provide criticalpublic services—including many utility and insurance companies, transportationfirms, and defense contractors—face public or government agencies that review andapprove prices.4

This kind of situation can lead to decisions that are not in the public interest.For example, some critics argue that some power companies that serve Californiawere not motivated to keep costs low or expand capacity After deregulation, there

Some just want

Growth in market share

Meeting competition

Nonprice competition

Pricing objectives

Sales oriented

Profit oriented

Status quo oriented

Exhibit 17-4

Possible Pricing Objectives

Target returns provide

specific guidelines

were big shortages, and even price gouging by some firms, because it takes a longtime to add new power systems.

A profit maximization objectiveseeks to get as much profit as possible It might

be stated as a desire to earn a rapid return on investment—or, more bluntly, tocharge all the traffic will bear

Some people believe that anyone seeking a profit maximization objective willcharge high prices—prices that are not in the public interest However, pricing toachieve profit maximization doesn’t always lead to high prices Low prices mayexpand the size of the market and result in greater sales and profits For example,when prices of VCRs were very high, only innovators and wealthy people boughtthem When producers lowered prices, nearly everyone bought one

If a firm is earning a very large profit, other firms will try to copy or improve onwhat the company offers Frequently, this leads to lower prices IBM sold its origi-nal personal computer for about $4,500 in 1981 As Compaq, Dell, and othercompetitors started to copy IBM, it added more power and features and cut prices

By 2001, customers could buy a personal computer with more than 50 times thepower, speed, and data storage for about $600, and prices continue to drop.5

We saw this process at work in Chapter 10—in the rise and fall of profits ing the product life cycle Contrary to the popular myth, a profit maximizationobjective is often socially desirable

dur-Profit maximization can

be socially responsible

Sales-Oriented Objectives

Sales growth doesn’t

necessarily mean big

profits

Some politicians want to control

the prices of drugs, but that may

not be in the public interest if it

reduces the incentive for firms to

make the big investment required

to develop innovative new

medicines that people need.

That, in turn, would reduce

in spite of growth in sales At the extreme, many dot-coms kept lowering prices to

increase market share but never earned any profits Pets.com had growing sales until

it burned through investors’ money and went bankrupt Generally, however, ness managers now pay more attention to profits, not just sales.6

busi-Managers of some nonprofit organizations set prices to increase market share—

precisely because they are not trying to earn a profit For example, many cities set

low fares to fill up their buses Buses cost the same to run empty or full, and there’smore benefit when they’re full even if the total revenue is no greater

Many firms seek to gain a specified share (percent) of a market If a company has

a large market share, it may have better economies of scale than its competitors Inaddition, it’s usually easier to measure a firm’s market share than to determine ifprofits are being maximized

A company with a longer-run view may decide that increasing market share is asensible objective when the overall market is growing The hope is that larger futurevolume will justify sacrificing some profit in the short run In the early days of theInternet, Netscape took this approach with its browser software And companies asdiverse as 3M, Coca-Cola, and IBM look at opportunities in Eastern Europe this way

Of course, objectives aimed at increasing market share have the same limitations

as straight sales growth objectives A larger market share, if gained at too low aprice, may lead to profitless “success.” As simple as this point is, it’s missed by manyexecutives It’s a too-common symptom of death-wish marketing

Managers satisfied with their current market share and profits sometimes adopt

status quo objectives—don’t-rock-the-pricing-boat objectives Managers may say

that they want to stabilize prices, or meet competition, or even avoid competition.This don’t-rock-the-boat thinking is most common when the total market is not

Status Quo Pricing Objectives

Market share

objectives are popular

Don’t-rock-the-boat

objectives

PeoplePC uses a young spokesman in its TV ad to explain that the PeoplePC price—at an affordable $.82 a day—includes

not only a computer but also unlimited Internet access, in-home service, and shopping discounts.

growing Maintaining stable prices may discourage price competition and avoid theneed for hard decisions.

A status quo pricing objective may be part of an aggressive overall marketingstrategy focusing on nonprice competition—aggressive action on one or more of the

Ps other than Price Fast-food chains like McDonald’s, Wendy’s, and Burger Kingexperienced very profitable growth by sticking to nonprice competition for manyyears However, when Taco Bell and others started to take away customers withprice-cutting, the other chains also turned to price competition.7

Most Firms Set Specific Pricing Policies —To Reach Objectives

Or stress nonprice

competition instead

Administered prices

help achieve objectives

Marketing managers for Hydra

Pools consciously set prices so

that consumers receive a good

value at a price that will yield

attractive profits for both the

producer and the retailer.

Price policies usually lead to administered prices—consciously set prices Inother words, instead of letting daily market forces (or auctions) decide their prices,most firms set their own prices They may hold prices steady for long periods of time

or change them more frequently if that’s what’s required to meet objectives

If a firm doesn’t sell directly to final customers, it usually wants to administer boththe price it receives from middlemen and the price final customers pay After all, theprice final customers pay will ultimately affect the quantity it sells

Yet it is often difficult to administer prices throughout the channel Other nel members may also wish to administer prices to achieve their own objectives This

chan-is what happened to Alcoa, one of the largest aluminum producers To reduce itsexcess inventory, Alcoa offered its wholesalers a 30 percent discount off its normalprice Alcoa expected the wholesalers to pass most of the discount along to their cus-

tomers to stimulate sales throughout the channel Instead, wholesalers bought their

aluminum at the lower price but passed on only a small discount to customers As aresult, the quantity Alcoa sold didn’t increase much, and it still had excess inven-tories, while the wholesalers made more profit on the aluminum they did sell.8Some firms don’t even try to administer prices They just meet competition—orworse, mark up their costs with little thought to demand They act as if they have

no choice in selecting a price policy

Remember that Price has many dimensions Managers usually do have many choices They should administer their prices And they should do it carefully because,

ultimately, customers must be willing to pay these prices before a whole marketingmix succeeds In the rest of this chapter, we’ll talk about policies a marketing man-ager must set to do an effective job of administering Price.9

Price Flexibility Policies

same price for

Salespeople can adjust

prices to the situation

One of the first decisions a marketing manager has to make is about priceflexibility Should the firm use a one-price or a flexible-price policy?

A one-price policymeans offering the same price to all customers who purchaseproducts under essentially the same conditions and in the same quantities Themajority of U.S firms use a one-price policy—mainly for administrative conve-nience and to maintain goodwill among customers

A one-price policy makes pricing easier But a marketing manager must be ful to avoid a rigid one-price policy This can amount to broadcasting a price thatcompetitors can undercut—especially if the price is somewhat high One reason forthe growth of mass-merchandisers is that conventional retailers rigidly applied tra-ditional margins and stuck to them

care-A flexible-price policymeans offering the same product and quantities to ent customers at different prices When computers are used to implement flexiblepricing, the decisions focus more on what type of customer will get a price break.Various forms of flexible pricing are more common now that most prices aremaintained in a computer database Frequent changes are easier You see this whengrocery chains give frequent-shopper club members reduced prices on weekly spe-cials They simply change the database in the central office The checkout scannerreads the code on the package, then the computer looks up the club price or theregular price depending on whether a club card has been scanned

differ-Another twist on this is more recent Some marketing managers have set up tionships with Internet companies whose ads invite customers to “set your ownprice.” For example, Priceline operates a website at www.priceline.com Visitors tothe website specify the desired schedule for an airline flight and what price they’rewilling to pay Priceline electronically forwards the information to airlines and ifone accepts the offer the consumer is notified Priceline has a similar service fornew cars and other products such as home mortgages, hotel rooms, rental cars, andlong-distance rates

rela-It may appear that these marketing managers have given up on administeringprices Just the opposite is true They are carefully administering a flexible price Mostairlines, for example, set a very high list price Not many people pay it Travelerswho plan ahead or who accept nonpeak flights get a discount Business travelers whowant high-demand flights on short notice pay the higher prices However, it doesn’tmake sense to stick to a high price and fly the plane half empty So the airline con-tinuously adjusts the price on the basis of how many seats are left to fill If seats arestill empty at the last minute, the website offers a rock-bottom fare Other firms,especially service businesses, use this approach when they have excess capacity.10Flexible pricing is most common in the channels, in direct sales of businessproducts, and at retail for expensive items and homogeneous shopping products.Retail shopkeepers in less-developed economies typically use flexible pricing These

situations usually involve personal selling, not mass selling The advantage offlexible pricing is that the salesperson can make price adjustments—consideringprices charged by competitors, the relationship with the customer, and the cus-

tomer’s bargaining ability Flexible-price policies often specify a range in which the

actual price charged must fall.11

Most auto dealers use flexible pricing The ducer suggests a list price, but the dealers bargainfor what they can get Their salespeople negotiateprices every day Inexperienced consumers, reluc-tant to bargain, often pay hundreds of dollars morethan the dealer is willing to accept By contrast, however, Saturn dealers haveearned high customer-satisfaction ratings by offering haggle-weary consumers a one-price policy CarMax has adopted the same approach with used vehicles

pro-Flexible pricing does have disadvantages A customer who finds that others paidlower prices for the same marketing mix will be unhappy This can cause real con-flict in channels For example, the Winn-Dixie supermarket chain stopped carryingproducts of some suppliers who refused to give Winn-Dixie the same prices avail-able to chains in other regions of the country Similarly, companies that postdifferent prices for different segments on a website that all can see often getcomplaints.12

If buyers learn that negotiating can be in their interest, the time needed forbargaining will increase This can increase selling costs and reduce profits.Some sales reps let price-cutting become a habit This reduces the role of price

as a competitive tool and leads to a lower price level It can also have a major effect

on profit A small price cut may not seem like much; but keep in mind that all ofthe revenue that is lost would go to profit If salespeople for a producer that usuallyearns profits equal to 15 percent of its sales cut prices by an average of about 5 per-cent, profits would drop by a third!

Too much price-cutting

erodes profits

To reach its objectives, Carnival

uses flexible pricing—including

discounts for retired people By

contrast, Professional Carwashing

& Detailing, a trade magazine,

wants advertisers to know that it

charges everyone the same price

for ad space.

When marketing managers administer prices, as most do, they must consciouslyset a price-level policy As they enter the market, they have to set introductoryprices that may have long-run effects They must consider where the product lifecycle is and how fast it’s moving And they must decide if their prices should beabove, below, or somewhere in between relative to the market.

Let’s look for a moment at a new product in the market introduction stage ofits product life cycle There are few (or no) direct substitute marketing mixes Sothe price-level decision should focus first on the nature of market demand A highprice may lead to higher profit from each sale but also to fewer units sold A lowerprice might appeal to more potential customers With this in mind, should the firmset a high or low price?

A skimming price policytries to sell the top (skim the cream) of a market—thetop of the demand curve—at a high price before aiming at more price-sensitive cus-tomers A skimming policy is more attractive if demand is quite inelastic—at least

at the upper price ranges

Skimming may maximize profits in the market introduction stage for an tion, especially if there is little competition Competitor analysis may help clarifywhether barriers will prevent or discourage competitors from entering

innova-Some critics argue that firms should not try to maximize profits by using a ming policy on new products that have important social consequences Apatent-protected, life-saving drug or a genetic technique that increases crop yields,for example, is likely to have an inelastic demand curve Yet many of those whoneed the product may not have the money to buy it This is a serious concern How-ever, it’s also a serious problem if firms don’t have any incentive to take the risksrequired to develop breakthroughs in the first place.13

feeling out demand at a

high price

Skimming has critics

Price-Level Policies —Over the Product Life Cycle

Firm tries to sell

at a high price before aiming at more price- sensitive consumers

Quantity

Penetration price

Firm tries to sell the whole market at one low price

Exhibit 17-5 Alternative Introductory Pricing Policies

A skimming policy usually involves a slow reduction in price over time SeeExhibit 17-5 Note that as price is reduced, new target markets are probably beingsought So as the price level steps down the demand curve, new Place, Product, andPromotion policies may be needed too.

When McCaw Cellular Communications—the firm that pioneered cellularphone service and was later bought out by AT&T—first came on the market, itset a high price A wireless minute cost about a $1 (with average monthly bills ofabout $100) Customers also had to pay about $675 for a phone McCaw used deal-ers to sell the premium-priced packages mainly to companies who gave them totheir on-the-go executives and salespeople The dealers could explain the value ofthe system and get orders For many of these customers no good substitute wasavailable As other cellular providers came on the market, McCaw bought largequantities of phones from Motorola at low cost and packaged them with a servicecontract at a high discount As the market grew, economies of scale kicked in.McCaw did more advertising and started to sell cellular services through a variety

of retail outlets, including mass-merchandisers These changes cut costs and helpedreach the growing number of families who were in the market for cell phone ser-vices Prices on phones had come down enough so that the dealer-retailers gaveaway the phone with a one-year service contract Now the competition for cellularservices is even more intense So AT&T has continued to cut prices and is offer-ing a variety of new services, ranging from Internet messaging and call forwarding

to unlimited calls on weekends By 2000, a wireless minute was down to about 15cents and monthly plans were about $40 Now AT&T is relying more heavily ontelevision advertising that encourages customers to call in and sign up or subscribe

at its website

Skimming is also useful when you don’t know very much about the shape of thedemand curve It’s sometimes safer to start with a high price that customers canrefuse and then reduce it if necessary.14

A penetration pricing policytries to sell the whole market at one low price Such

an approach might be wise when the elite market—those willing to pay a highprice—is small This is the case when the whole demand curve is fairly elastic SeeExhibit 17-5 A penetration policy is even more attractive if selling larger quanti-ties results in lower costs because of economies of scale Penetration pricing may bewise if the firm expects strong competition very soon after introduction

get volume at a low

price

Marketing managers used

penetration pricing and sold a

million units of the innovative

PalmPilot within 20 months of its

introduction Now, Palm’s

reputation for good value and a

large base of satisfied customers

help defend against formidable

new rivals, like Sony and

Handspring, who are introducing

new features.

Price moves down the

demand curve

When the first version of the PalmPilot was introduced, competitors were closebehind In addition, Apple had failed when it tried to introduce the Newtonpersonal information manager at a skimming price of $1,000 Most customers justdidn’t think it was worth it So the focus for Palm was on a combination of fea-tures and price that would be a good value and help penetrate the market quickly.The initial price of about $250 resulted in sales of a million units in 24 months.Once Palm had a large base of users it worked at keeping them For example, cur-rent owners could get $75 for trading in their old units on a new model, or theycould upgrade for $129.15

Palm certainly faces competition in this market now, but its initial price bly kept some firms from jumping into the fray That’s why a low penetration price

proba-is sometimes called a stay-out price It dproba-iscourages competitors from entering themarket

Low prices do attract customers Therefore, marketers often use introductory price dealing—temporary price cuts—to speed new products into a market Introductoryprice dealing may be used to get customers to try a new product concept as part ofthe pioneering effort or to attract customers to a new brand entry later in the life

cycle However, don’t confuse these temporary price cuts with low penetration prices.

The plan here is to raise prices as soon as the introductory offer is over By then,hopefully, target customers will have tried the product and decided it was worthbuying again at the regular price

Established competitors often choose not to meet introductory price dealing—aslong as the introductory period is not too long or too successful However, somecompetitors quickly match introductory price deals with their own short-term saleprices; they want to discourage their established customers from shopping around.When a product is sold to channel members instead of final consumers, the priceshould be set so that the channel members can cover costs and make a profit Toachieve its objectives, a manufacturer may set different price-level policies for differ-ent levels in the channel For example, a producer of a slightly better product mightset a price level that is low relative to competitors when selling to retailers, while sug-gesting an above-the-market retail price This encourages retailers to carry theproduct, and to emphasize it in their marketing mix, because it yields higher profits

Introductory price

price cuts

Marketers often use introductory

price dealing—in the form of

temporary price cuts or

introductory coupons—to speed

new products into a market.

Different price-level

policies through the

channel

We’ve been talking about the price level of a firm’s product But a nation’s moneyalso has a price level—what it is worth in some other currency For example, onApril 16, 2001, one U.S dollar was worth 0.70 British pounds In other words, theexchange rate for the British pound against the U.S dollar was 0.70 Exhibit 17-6lists exchange rates for money from several countries over a number of years Fromthis exhibit you can see that exchange rates change over time—and sometimes thechanges are significant For example, during 1995, a U.S dollar was worth, on aver-age, 24.92 Thai bhat; in April 2001 it was worth 45.65 Thai bhat That exchangerate moved up rapidly starting in 1997 because of economic problems that hit Thai-land and the rest of Asia.

Exchange rate changes can have a significant effect on international trade From

a manager’s viewpoint, they also affect whether or not a price level has the expectedresult As the following example shows, this can be an important factor even for asmall firm that sells only in its own local market

In 1995 the marketing manager for EControl, Inc.—a small firm that produceselectronic controllers for producers of satellite TV receiving dishes—set a meeting-competition wholesale price of about $100 for a carton of the controllers The profitmargin on the controllers at that price was about $10 per carton The wholesalerswho distribute the controllers also carried a product by a British firm Its wholesaleprice was also $100, which means that the British firm got about 67 British pounds($100  0.67 pounds per dollar) per carton Prices were stable for some time How-ever, when the exchange rate for the pound against the dollar fell from 0.67 to 0.61,the British producer got 6 fewer pounds for each $100 carton of controllers(67 pounds 61 pounds
6 pounds)

Because EControl’s marketing manager was only selling controllers in thedomestic market, she didn’t pay any attention to the drop in the exchange rate atfirst However, she did pay attention when the British producer decided to raise itswholesale price to $110 a carton At the $110 price, the British firm got about67.1 pounds per carton ($110 0.61 pounds per dollar)—about the same as it wasgetting before the exchange rate change EControl’s market share and salesincreased substantially—at the British competitor’s expense—because EControl’sprice was $10 lower than its British competitor EControl’s marketing manager con-cluded that it would probably take a while for the British firm to lower its price,even if the exchange rate went up again So she decided that she could safely raiseher price level by 5 percent—up to $105—and still have a solid price advantageover the British supplier At a price of $105 per carton, EControl’s profit per cartonjumped from $10 to $15, a 50 percent increase in profit

The price of money

may affect the price

level

Exhibit 17-6 Exchange Rates for Various Currencies against the U.S Dollar over Time

Number of Units of Base Currency per U.S Dollar*