© 2003 mcgraw-hill companies, inc., mcgraw-hill/irwin arriving at the final price 14 c hapter
TRANSCRIPT
© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
ARRIVING AT THE FINAL PRICE1414
CHAPTER
© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
• Understand how to establish the initial “approximate price level” using demand-oriented, cost-oriented, profit-oriented, and competition-oriented approaches.
• Identify the major factors considered in deriving a final list or quoted price from the approximate price level.
AFTER READING THIS CHAPTERYOU SHOULD BE ABLE TO:
© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
• Describe adjustments made to the approximate price level on the basis of geography, discounts, and allowances.
• Prepare basic financial analyses useful in evaluating alternative prices and arriving at the final sales price.
AFTER READING THIS CHAPTERYOU SHOULD BE ABLE TO:
© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
• Describe the principle laws and regulations affecting pricing practices.
AFTER READING THIS CHAPTERYOU SHOULD BE ABLE TO:
© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
DURACELL KNOWS THE VALUEOF PORTABLE POWER
ARRIVING AT THE FINAL PRICE
© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
• Demand-Oriented Approaches• Skimming Pricing
• Penetration Pricing
• Prestige Pricing
• Price Lining
STEP 4: SELECT AN APPROXIMATE PRICE LEVEL
© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
• Demand-Oriented Approaches(cont)• Odd-Even Pricing
• Target Pricing
• Bundle Pricing
• Yield Management Pricing
STEP 4: SELECT AN APPROXIMATE PRICE LEVEL
© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
Concept Check
1. What are the circumstances in pricing a new product that might support skimming or penetration pricing?
A: Circumstances supporting a skimming strategy include: (1) Enough prospective customers are willing to buy the product immediately at the initial high price to make these sales profitable, (2) The high initial price will not attract competitors, (3) Lowering price has only a minor effect on increasing the sales volume and reducing the unit cost, and (4) Customers interpret the high price as signifying high quality.
Conditions supporting a penetration strategy include: (1) Many segments of the market are price sensitive, (2) A low initial price discourages competitors from entering the market, and (3) Unit production and marketing costs fall dramatically as production volumes increase.
© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
Concept Check
2. What is odd-even pricing?A: Odd-even pricing involves setting prices with
a few dollars or cents under an even number, with the assumption that demand might drop off dramatically if the price were raised to the even number.
© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
• Cost-Oriented Approaches• Standard Markup Pricing
• Cost-Plus Pricing
• Experience Curve Pricing
STEP 4: SELECT AN APPROXIMATE PRICE LEVEL
© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
• Profit-Oriented Approaches• Target Profit Pricing
• Target Return-on-Sales Pricing
• Target Return-on-Investment Pricing
STEP 4: SELECT AN APPROXIMATE PRICE LEVEL
© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
• Competition-Oriented Approaches• Customary Pricing
• Above-, At-, or Below-Market Pricing
• Loss-Leader Pricing
STEP 4: SELECT AN APPROXIMATE PRICE LEVEL
© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
Concept Check
1. What is standard markup pricing?
A: Standard markup pricing entails adding a fixed percentage to the cost of all items in a specific product class.
© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
Concept Check
2. What profit-based pricing approach should a manager use if he or she wants to reflect the percentage of the firm’s resources used in obtaining the profit?
A: Target-return-on-investment pricing.
© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
Concept Check
3. What is the purpose of loss-leader pricing when used by a retail firm?
A: Loss-leader pricing is used to attract customers in hopes they will buy other products as well.
© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
• One-Price versus Flexible-Price Policy
• Company, Customer, and Competitive Effects• Company Effects
Product-line pricing
• Customer Effects
STEP 5: SET THE LIST OR QUOTED PRICE
© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
• Company, Customer, and Competitive Effects (cont)• Competitive Effects
Price war
• Balancing Incremental Costs and Revenues
STEP 5: SET THE LIST OR QUOTED PRICE
© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
• Discounts• Quantity Discounts
• Seasonal Discounts
• Trade (Functional) Discounts
• Cash Discounts
STEP 6: MAKE SPECIAL ADJUSTMENTS TO THE LIST OR QUOTED PRICE
© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
• Allowances• Trade-In Allowances
• Promotional Allowances Everyday low pricing
• Geographical Adjustments• FOB Origin Pricing
• Uniform Delivered Pricing
• Basing Point Pricing
STEP 6: MAKE SPECIAL ADJUSTMENTS TO THE LIST OR QUOTED PRICE
© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
• Legal and Regulatory Aspects of Pricing• Price Fixing
• Price Discrimination
• Deceptive Pricing
• Geographical Pricing
• Predatory Pricing
STEP 6: MAKE SPECIAL ADJUSTMENTS TO THE LIST OR QUOTED PRICE
© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
Concept Check
1. Why would a seller choose a flexible-price policy?
A: Flexible-price policies give sellers greater discretion in setting the final price in light of demand, cost, and competitive factors.
© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
Concept Check
2. If a firm wished to encourage repeat purchases by a buyer throughout a year, would a cumulative or noncumulative quantity discount be a better strategy?
A: Cumulative
© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
Concept Check
3. Which pricing practices are covered by the Sherman Act?
A: Price-fixing, geographical pricing, and predatory pricing.