Markup Pricing Technology

The development of pricing practices to profitably segment markets has reached a fine art with the Internet and use of high-speed computer technology. Why do Business Week, Forbes, Fortune, and The Wall Street Journal offer bargain rates to students but not to business executives? It is surely not because it costs less to deliver the Journal to students, and it is not out of benevolence; it is because students are not willing or able to pay the standard rate. Even at 50 percent off regular prices, student bargain rates more than cover marginal costs and make a significant profit contribution. Similarly, senior citizens who eat at Holiday Inns enjoy a 10 to 15 percent discount and make a meaningful contribution to profits. Conversely, relatively high prices for popcorn at movie theaters, peanuts at the ball park, and clothing at the height of the season reflect the fact that customers can be insensitive to price changes at different places and at different times of the year. Regular prices, discounts, rebates, and coupon promotions are all pricing mechanisms used to probe the breadth and depth of customer demand and to maximize profitability.

Although profit maximization requires that prices be set so that marginal revenues equal marginal cost, it is not necessary to calculate both to set optimal prices. Just using information on marginal costs and the point price elasticity of demand, the calculation of profit-maximizing prices is quick and easy. Many firms derive an optimal pricing policy using prices set to cover direct costs plus a percentage markup for profit contribution. Flexible markup pricing practices that reflect differences in marginal costs and demand elasticities constitute an efficient method for ensuring that MR = MC for each line of products sold. Similarly, peak and off-peak pricing, price discrimination, and joint product pricing practices are efficient means for operating so that MR = MC for each customer or customer group and product class.

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