chapter 18copyright ©2009 cengage learning inc. all rights reserved 1 mktg designed by amy mcguire,...

Chapter 18 Copyright ©2009 Cengage Learning Inc. All rights reserved 1

MKTG

Designed byAmy McGuire, B-books, Ltd.

Prepared byDeborah Baker, Texas Christian University

Lamb, Hair, McDaniel 2008-2009

Setting the Right Price

18

CHAPTER


Learning Outcomes

Describe the procedure for settingthe right price

Identify the legal and ethical constraints on pricing decisions

Explain how discounts, geographic pricing, and other special pricing tactics can be used to fine-tune the base price

LO1

LO2

LO3


Learning Outcomes

Discuss product line pricing

Describe the role of pricing during periods of inflation and recessionLO5

LO4


How to Set a Price on aProduct or Service

LO1

Fine tune with pricing tacticsFine tune with pricing tactics

Choose a price strategyChoose a price strategy

Estimate demand, costs, and profitsEstimate demand, costs, and profits

Establish pricing goalsEstablish pricing goals

Results lead to the right price


Establish Pricing Goals

LO1

Profit-Oriented

Sales-Oriented

Status Quo


Choose a Price Strategy

LO1

A basic, long-term pricing

framework, which establishes

the initial price for a product and

the intended direction for

price movements over the

product life cycle.

Price StrategyPrice Strategy


Choose a Price Strategy

LO1

Status Quo Pricing

Status Quo Pricing

Price Skimming

Price Skimming

Penetration Pricing

Penetration Pricing

Charging a price identical to or very close to the competition’s price.Charging a price identical to or very close to the competition’s price.

A firm charges a high introductory price, often coupled with heavy promotion.

A firm charges a high introductory price, often coupled with heavy promotion.

A firm charges a relatively low price for a product initially as a way to reach the mass market.

A firm charges a relatively low price for a product initially as a way to reach the mass market.


Price Skimming

LO1

SituationsWhenPrice

SkimmingIs

Successful

SituationsWhenPrice

SkimmingIs

Successful

Unique Advantages/Superior

Legal Protection of Product

Blocked Entry to Competitors

Technological Breakthrough

Inelastic Demand


Penetration Pricing

LO1

AdvantagesAdvantages DisadvantagesDisadvantages

Discourages or blocks competition from market entry

Boosts sales and provides large profit increases

Can justify production expansion

Requires gear up for mass production

Selling large volumes at low prices

Strategy to gain market share may fail

Online

http://www.iflyswa.com


Status Quo Pricing

LO1

AdvantagesAdvantages DisadvantagesDisadvantages

Simplicity

Safest route to long-term survival for small firms

Strategy may ignore demand and/or cost


REVIEW LEARNING OUTCOMELO1

Setting the Right PriceEstablish

price goals

Establishprice goals

Estimate demand,costs, and profits

Estimate demand,costs, and profits

Choose aprice strategy

Choose aprice strategy

Fine-tunebase price

Fine-tunebase price

Set price$x.yy

Set price$x.yy

Evaluateresults

Evaluateresults

Skimming

Status quo

Penetration

Low $

High $


The Legality and Ethics ofPrice Strategy

LO2

Unfair Trade PracticesUnfair Trade Practices

Price FixingPrice Fixing

Price DiscriminationPrice Discrimination

Predatory PricingPredatory Pricing


The Legality and Ethics ofPrice Strategy

LO2

Unfair TradePractices

Unfair TradePractices

Laws that prohibit wholesalers and retailers from selling below cost.

Laws that prohibit wholesalers and retailers from selling below cost.

PriceFixing

PriceFixing

An agreement between two or more firms on the price they will charge for a product.

An agreement between two or more firms on the price they will charge for a product.


Price Discrimination

LO2

There must be price discrimination. Transaction must occur in interstate commerce. Seller must discriminate by price among two or

more purchasers. Products sold must be commodities or tangible

goods. Products sold must be of like grade and quality. There must be significant competitive injury.

The Robinson-Patman Act of 1936:


Price Discrimination

LO2

The Robinson-Patman Act of 1936:

Seller Defenses Seller Defenses

CostCost MarketConditions

MarketConditions CompetitionCompetition


Predatory Pricing

LO2

The practice of charging a very low price for a product with the intent of driving competitors out of business or out of a market.

Predatory Pricing

Predatory Pricing


Tactics for Fine-Tuning the Base Price

LO3

Special pricing tactics Special pricing tactics

DiscountsDiscounts

Geographic pricingGeographic pricing


Discounts, Allowances, Rebates, and Value-Based Pricing

LO3

Quantity DiscountsQuantity Discounts

Cash DiscountsCash Discounts

Functional DiscountsFunctional Discounts

Seasonal DiscountsSeasonal Discounts

Promotional AllowancesPromotional Allowances

RebatesRebates

Zero Percent FinancingZero Percent Financing

Value-Based PricingValue-Based Pricing


Value-Based PricingLO3

Value-BasedPricing

Value-BasedPricing

Setting the price at a level that

seems to the customer to be a

good price compared to the

prices of other options.


Pricing Products Too LowLO3

1. Managers attempt to buy market share through aggressive pricing.

2. Managers tend to make pricing decisions based on current costs, current competitor prices, and short-term share gains rather than on long-term profitability.


Geographic PricingLO3

Basing-point pricing

Basing-point pricing

Freight absorptionpricing

Freight absorptionpricing

Zone pricingZone pricing

Uniform delivered pricing

Uniform delivered pricing

FOB origin pricingFOB origin pricing

Online

http://www.ups.com


Geographic PricingLO3

FOB OriginPricing

UniformDelivered

Pricing

Zone Pricing

FreightAbsorption

Pricing

Basing-PointPricing

The buyer absorbs the freight costs from the shipping point

(“free on board”).

The seller pays the freight charges and bills the purchaser an

identical, flat freight charge.

The U.S. is divided into zones, and a flat freight rate is charged to

customers in a given zone.

The seller pays for all or part of the freight charges and does not

pass them on to the buyer.

The seller designates a location as a basing point and charges all buyers

the freight costs from that point.


Other Pricing TacticsLO3

Single-Price Tactic All goods offered at the same price

Flexible Pricing Different customers pay different price

Professional Services Pricing

Used by professionals with experience,training or certification

Price Lining Several line items at specific price points

Leader Pricing Sell product at near or below cost

Bait Pricing Lure customers through false or misleading price advertising

Odd-Even Pricing Odd-number prices imply bargainEven-number prices imply quality

Price Bundling Combining two or more products in a single package

Two-Part Pricing Two separate charges to consume a single good


Consumer PenaltiesLO3

http://www.princesscruises.comhttp://www.carnival.com

Online

An irrevocable loss of revenue

is suffered

Additional transaction costs

are incurred

Businesses Impose Consumer Penalties If...



Fine-Tuning the Base

Price


LO4

Product Line Pricing

Setting prices for an entire line of products.

Online

http://www.beauty.com

Product LinePricing

Product LinePricing


LO4

Relationships among Products

ComplementaryComplementary

SubstitutesSubstitutes

NeutralNeutral


LO4

Joint Costs

Joint CostsJoint CostsCosts that are shared in the

manufacturing and marketing of

several products in a product

line.


Inflation

LO5

Cost-Oriented TacticsCost-Oriented Tactics

High InflationHigh Inflation

Demand-Oriented TacticsDemand-Oriented Tactics


Cost-Oriented Tactics

LO5

A high volume of sales on an item with a low profit margin may still make the item highly profitable.

Eliminating a product may reduce economies of scale.

Eliminating a product may affect the price-quality image of the entire line.

Problems with Cost-Oriented TacticsProblems with Cost-Oriented Tactics



LO5

Delayed-quotation

pricing

Escalator pricing

Hold prices

constant, but

add new fees



LO5

IncreasedProduction

Costs

Dec

reas

edD

eman

dPrice

IncreaseMaintaininga Fixed

Gross Margin


Demand-Oriented Tactics

LO5

The use of discounts by

salespeople to increase

demand for one or more

products in a line.

PriceShading

PriceShading


Demand-Oriented Tactics

LO5

Strategies to Make Demand More Inelastic

Strategies to Make Demand More Inelastic

Cultivate selected demandCultivate selected demand

Create unique offeringsCreate unique offerings

Change the package designChange the package design

Heighten buyer dependenceHeighten buyer dependence


Recession

LO5

Bundling or UnbundlingBundling or Unbundling

Value-Based PricingValue-Based Pricing


Supplier Strategies during Recession

LO5

Renegotiating contractsRenegotiating contracts

Offering helpOffering help

Keeping the pressure onKeeping the pressure on

Paring down suppliersParing down suppliers



Pricing During

Inflation and Recession

chapter 18copyright ©2009 cengage learning inc. all rights reserved 1 mktg designed by amy mcguire,...

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