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Copyright Cengage Learning 2013All Rights Reserved

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Chapter 20: Setting the Right Price

Prepared & Designed by Laura Rush, B-books, Ltd.

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Copyright Cengage Learning 2013All Rights Reserved

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Learning Outcomes

Describe the procedure for settingthe right price

Identify the legal and ethical constraintson pricing decisions

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

Discuss product line pricingDescribe the role of pricing during periodsof inflation and recession

LO1

LO2

LO3

LO5

LO4

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Copyright 2013 by CengageLearning Inc. All Rights Reserved 3

How to Set a Price on a

Product or Service

Describe the procedure for

setting the right price.

LO1

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Copyright 2013 by Cengage Learning Inc.All Rights Reserved

4

How to Set a Price on aProduct or Service

Fine tune with pricing tactics

Choose a price strategy

Estimate demand, costs, and profits

Establish pricing goals

Results lead to the right price

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5

Establish Pricing Goals

Profit-Oriented

Sales-Oriented

Status Quo

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6

Choose a Price Strategy

Price Strategy - A basic,

long-term pricing framework,which establishes the initialprice for a product and theintended direction for pricemovements over the product

life cycle.

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Choose a Price Strategy

Price skimming - A firm charges a highintroductory price, often coupled

with heavy promotion.

Penetration Pricing - A firm charges arelatively low price for a product initially as a way

to reach the mass market.

Status Quo Pricing - Charging a price

identical to or very close to the competitions price.

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8

Price Skimming

Situations

WhenPrice

SkimmingIs

Successful

Unique Advantages/Superior

Legal Protection of Product

Blocked Entry to Competitors

Technological Breakthrough

Inelastic Demand

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Penetration Pricing

Discourages or blockscompetition frommarket entry

Boosts sales andprovides large profitincreases

Can justify production

expansion

Requires gear up formass production

Selling large volumesat low prices

Strategy to gain market

share may fail

Advantages Disadvantages

Online

http://www.iflyswa.com
http://www.iflyswa.com/http://www.iflyswa.com/

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Status Quo Pricing

Advantages Disadvantages

Simplicity

Safest route tolong-term survivalfor small firms

Strategy mayignore

demandand/or cost

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Copyright 2013 by Cengage

Learning Inc. All Rights Reserved 11

Review Learning OutcomeSetting the Right Price

LO1

Establishpricegoals

Estimate demand,costs, and profits

Choose aprice strategy

Fine-tune

base price

Set price$x.yy

Evaluate

results

Skimming

Status quo

Penetration

Low $

High $

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The Legality and Ethics of

Price Strategy

Identify the legal andethical constraints

on pricing decisions.

LO

2

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The Legality and Ethics ofPrice Strategy

Unfair Trade Practices

Price Fixing

Price Discrimination

Predatory Pricing

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The Legality and Ethics of PriceStrategy

Unfair Trade Practices- Lawsthat prohibit wholesalers and

retailers from selling belowcost.

Price Fixing- An agreementbetween two or more firms on the

price they will charge for aproduct.

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1. There must be price discrimination.

2. Transaction must occur in interstate commerce.

3. Seller must discriminate by price among two or

more purchasers.

4. Products sold must be commodities or tangible

goods.5. Products sold must be of like grade and quality.

6. There must be significant competitive injury.

The Robinson-Patman Act of 1936:

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The Robinson-Patman Act of 1936:

Seller Defenses

Cost

Market

Conditions Competition

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Predatory Pricing

The practice of charging avery low price for a product

with the intent ofdriving competitors out of

business or out of a market.

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Tactics for Fine-Tuning the

Base Price

Explain how discounts,geographic pricing, and other

special pricing tactics can

be used to fine-tunethe base price.

LO

3

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Tactics for Fine-Tuning the BasePrice

Special pricing tactics

Discounts

Geographic pricing

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Discounts, Allowances, Rebates, andValue-Based Pricing

Quantity Discounts

Cash Discounts

Functional Discounts

Seasonal Discounts

Promotional Allowances

Rebates

Zero Percent Financing

Value-Based Pricing

Markdown Money

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Value-Based Pricing

Selling the price at a level

that seems to be a good price

compared to the prices of

other options.

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Pricing Products Too Low

1. Managers attempt to buy market share through

aggressive pricing.

2. Managers tend to make pricing decisionsbased on current costs, current competitor

prices, and short-term share gains rather than

on long-term profitability.

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Geographic Pricing

Basing-pointpricing

Freight absorption

pricing

Zone pricing

Uniform deliveredpricing

FOB origin pricing

Online

http://www.ups.com
http://www.ups.com/http://www.ups.com/

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Geographic Pricing

FOB Origin

Pricing

UniformDeliveredPricing

Zone Pricing

FreightAbsorption

Pricing

Basing-PointPricing

The buyer absorbs the freight

costs from the shipping point(free on board).

The seller pays the freight chargesand bills the purchaser an

identical, flat freight charge.

The U.S. is divided into zones, anda flat freight rate is charged to customers in a

given zone.

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

pass them on to the buyer.

The seller designates a location asa basing point and charges all buyers the

freight costs from that point.

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Other Pricing Tactics

Sing le-Price Tactic All goods offered at the same price

Flexible Pr icing Different customers pay different price

Professional

Services Pricing

Used by professionals with experience,training or certification

Pr ice Lin ing Several line items at specific price points

Leader Pr icing Sell product at near or below cost

Bait Pr icingLure customers through false or misleadingprice advertising

Odd-Even PricingOdd-number prices imply bargain

Even-number prices imply qualityPr ice Bundl ing

Combining two or more products in asingle package

Two -Part Pr icing Two separate charges to consume a single good

Pay What You WantAllowing customers to pay what they think a

product is worth

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Copyright 2013 by Cengage Learning Inc.All Rights Reserved 26

Consumer Penalties

An irrevocableloss of revenue

is suffered

Additionaltransaction costs

are incurred

Businesses ImposeConsumer Penalties If...

Online

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

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Review Learning OutcomeFine-Tuning the Base Price

LO3

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Product Line Pricing

Discuss product line pricing.

LO4

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Product Line Pricing

Online

http://www.beauty.com

Setting prices for an entire lineof products.
http://www.beauty.com/http://www.beauty.com/

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Relationships Among Products

Complementary

Substitutes

Neutral

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Joint Costs

Costs that are shared in

the manufacturingand marketing of severalproducts in a product life.

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Pricing During Difficult

Economic Times

Describe the role of

pricing during periods

of inflation and recession.

LO5

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Inflation

Cost-Oriented Tactics

High Inflation

Demand-Oriented Tactics

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A high volume of sales on an item with a lowprofit margin may still make the item highly

profitable.

Eliminating a product may reduce economiesof scale.

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

Problems with Cost-Oriented Tactics

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Delayed-quotation pricing

Escalator pricing

Hold prices constant, but add

new fees

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IncreasedProduction

Costs

Maintaininga Fixed

Gross Margin

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Price ShadingThe use ofdiscounts by

salespeople to increasedemand for one or

more products in a line.

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Strategiesto MakeDemand

More Inelastic

Cultivate selected demand

Create unique offerings

Change the package design

Heighten buyer dependence

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Recession

Bundling or Unbundling

Value-Based Pricing

S li St t i D i

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Supplier Strategies DuringRecession

Renegotiating contracts

Offering help

Keeping the pressure on

Paring down suppliers

Review Learning Outcome

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Review Learning OutcomePricing During Inflation and Recession

LO

5

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Chapter 20 Company Clip

Managers from Method, ReadyMadeMag,

Sephora, and Acid+All talk about how they

set the right price on their products.

http://www.cengage.com/marketing/book_content/

9781111821647_lamb/videos/ch20.html


Learning Inc. All Rights Reserved42
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Part 6 Video: Blu Dot

Blu Dot designs modern furniture with frugal

engineering to price it well below high end

European furniture with the same aesthetic.

http://www.cengage.com/marketing/book_content/

1439039429_lamb/part_videos/part06.html

Copyright 2013 by Cengage 43
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