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
Chapter 18 Copyright ©2009 Cengage Learning Inc. All rights reserved 2
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
Chapter 18 Copyright ©2009 Cengage Learning Inc. All rights reserved 3
Learning Outcomes
Discuss product line pricing
Describe the role of pricing during periods of inflation and recessionLO5
LO4
Chapter 18 Copyright ©2009 Cengage Learning Inc. All rights reserved 4
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
Chapter 18 Copyright ©2009 Cengage Learning Inc. All rights reserved 5
Establish Pricing Goals
LO1
Profit-Oriented
Sales-Oriented
Status Quo
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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
Chapter 18 Copyright ©2009 Cengage Learning Inc. All rights reserved 7
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.
Chapter 18 Copyright ©2009 Cengage Learning Inc. All rights reserved 8
Price Skimming
LO1
SituationsWhenPrice
SkimmingIs
Successful
SituationsWhenPrice
SkimmingIs
Successful
Unique Advantages/Superior
Legal Protection of Product
Blocked Entry to Competitors
Technological Breakthrough
Inelastic Demand
Chapter 18 Copyright ©2009 Cengage Learning Inc. All rights reserved 9
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
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Status Quo Pricing
LO1
AdvantagesAdvantages DisadvantagesDisadvantages
Simplicity
Safest route to long-term survival for small firms
Strategy may ignore demand and/or cost
Chapter 18 Copyright ©2009 Cengage Learning Inc. All rights reserved 11
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 $
Chapter 18 Copyright ©2009 Cengage Learning Inc. All rights reserved 12
The Legality and Ethics ofPrice Strategy
LO2
Unfair Trade PracticesUnfair Trade Practices
Price FixingPrice Fixing
Price DiscriminationPrice Discrimination
Predatory PricingPredatory Pricing
Chapter 18 Copyright ©2009 Cengage Learning Inc. All rights reserved 13
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.
Chapter 18 Copyright ©2009 Cengage Learning Inc. All rights reserved 14
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:
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Price Discrimination
LO2
The Robinson-Patman Act of 1936:
Seller Defenses Seller Defenses
CostCost MarketConditions
MarketConditions CompetitionCompetition
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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
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Tactics for Fine-Tuning the Base Price
LO3
Special pricing tactics Special pricing tactics
DiscountsDiscounts
Geographic pricingGeographic pricing
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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
Chapter 18 Copyright ©2009 Cengage Learning Inc. All rights reserved 19
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.
Chapter 18 Copyright ©2009 Cengage Learning Inc. All rights reserved 20
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.
Chapter 18 Copyright ©2009 Cengage Learning Inc. All rights reserved 21
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
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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.
Chapter 18 Copyright ©2009 Cengage Learning Inc. All rights reserved 23
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
Chapter 18 Copyright ©2009 Cengage Learning Inc. All rights reserved 24
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...
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REVIEW LEARNING OUTCOMELO3
Fine-Tuning the Base
Price
Chapter 18 Copyright ©2009 Cengage Learning Inc. All rights reserved 26
LO4
Product Line Pricing
Setting prices for an entire line of products.
Online
http://www.beauty.com
Product LinePricing
Product LinePricing
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LO4
Relationships among Products
ComplementaryComplementary
SubstitutesSubstitutes
NeutralNeutral
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LO4
Joint Costs
Joint CostsJoint CostsCosts that are shared in the
manufacturing and marketing of
several products in a product
line.
Chapter 18 Copyright ©2009 Cengage Learning Inc. All rights reserved 29
Inflation
LO5
Cost-Oriented TacticsCost-Oriented Tactics
High InflationHigh Inflation
Demand-Oriented TacticsDemand-Oriented Tactics
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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
Chapter 18 Copyright ©2009 Cengage Learning Inc. All rights reserved 31
Cost-Oriented Tactics
LO5
Delayed-quotation
pricing
Escalator pricing
Hold prices
constant, but
add new fees
Chapter 18 Copyright ©2009 Cengage Learning Inc. All rights reserved 32
Cost-Oriented Tactics
LO5
IncreasedProduction
Costs
Dec
reas
edD
eman
dPrice
IncreaseMaintaininga Fixed
Gross Margin
Chapter 18 Copyright ©2009 Cengage Learning Inc. All rights reserved 33
Demand-Oriented Tactics
LO5
The use of discounts by
salespeople to increase
demand for one or more
products in a line.
PriceShading
PriceShading
Chapter 18 Copyright ©2009 Cengage Learning Inc. All rights reserved 34
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
Chapter 18 Copyright ©2009 Cengage Learning Inc. All rights reserved 35
Recession
LO5
Bundling or UnbundlingBundling or Unbundling
Value-Based PricingValue-Based Pricing
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Supplier Strategies during Recession
LO5
Renegotiating contractsRenegotiating contracts
Offering helpOffering help
Keeping the pressure onKeeping the pressure on
Paring down suppliersParing down suppliers
Chapter 18 Copyright ©2009 Cengage Learning Inc. All rights reserved 37
REVIEW LEARNING OUTCOMELO5
Pricing During
Inflation and Recession