setting the right price
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Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved Chapter 18
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CHAPTER
18
Setting the Right Price
Prepared byDeborah Baker
Texas Christian University
Introduction to MarketingMcDaniel, Lamb, Hair
9
2Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved Chapter 18
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
LOI
LO2
LO3
3Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved Chapter 18
Learning Outcomes
Discuss product line pricing
Describe the role of pricing during periods of inflation and recession
LO5
LO4
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Describe the procedure forsetting the right price
How to Set a Price on aProduct or ServiceLOI
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LOI
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
How to Set a Price on aProduct or Service
6Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved Chapter 18LOI
Establish Pricing Goals
Profit-Oriented
Sales-Oriented
Status Quo
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Choose a Price Strategy
Price StrategyPrice StrategyA 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.
LOI
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LOI
Status Quo Pricing
Status Quo Pricing
Price Skimming
Price Skimming
Penetration Pricing
Penetration Pricing
Charging a price identical to orvery close to the competition’s price.
Charging a price identical to orvery 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.
Choose a Price Strategy
9Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved Chapter 18 LOI
Price Skimming
SituationsWhenPrice
SkimmingIs
Successful
SituationsWhenPrice
SkimmingIs
Successful
Unique Advantages/Superior
Legal Protection of Product
Blocked Entry to Competitors
Technological Breakthrough
Inelastic Demand
10Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved Chapter 18
LOI Penetration Pricing
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
AdvantagesAdvantages DisadvantagesDisadvantages
Online
http://www.iflyswa.com
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LOI Status Quo Pricing
AdvantagesAdvantages DisadvantagesDisadvantages
Simplicity
Safest route to long-term survival for small firms
Strategy may ignore demand and/or cost
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Fast Times at Ridgemont HighB
iz F
lix
LOI
13Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved Chapter 18
REVIEW LEARNING OUTCOMESetting the Right Price
LOI
Establishprice 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 $
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Identify the legal and ethical constraints
on pricing decisions
The Legality and Ethics ofPrice StrategyLO2
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LO2 The Legality and Ethics ofPrice Strategy
Unfair Trade PracticesUnfair Trade Practices
Price FixingPrice Fixing
Price DiscriminationPrice Discrimination
Predatory PricingPredatory Pricing
16Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved Chapter 18
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.
The Legality and Ethics ofPrice Strategy
17Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved
Chapter 18
Price DiscriminationLO2
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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Chapter 18
Price DiscriminationLO2
The Robinson-Patman Act of 1936:
Seller Defenses Seller Defenses
CostCost MarketConditions
MarketConditions CompetitionCompetition
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LO2
Predatory Pricing
Predatory Pricing
Predatory Pricing
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.
20Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved Chapter 18
Explain how discounts, geographic pricing, and
other special pricing tactics can be used to fine-tune
the base price
Tactics for Fine-Tuning the Base PriceLO3
21Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved Chapter 18 LO3
Special pricing tactics Special pricing tactics
DiscountsDiscounts
Geographic pricingGeographic pricing
Tactics for Fine-Tuning the Base Price
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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
Discounts, Allowances, Rebates, andValue-Based Pricing
23Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved Chapter 18
LO3
Value-BasedPricing
Value-BasedPricing
Value-Based Pricing
Setting the price at a level that
seems to the customer to be a
good price compared to the
prices of other options.
24Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved Chapter 18
LO3 Pricing Products Too Low
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.
25Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved Chapter 18 LO3
Geographic Pricing
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
Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved Chapter 18 26LO3
Geographic PricingFOB Origin
Pricing
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.
27Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved Chapter 18
LO3
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
Other Pricing Tactics
28Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved Chapter 18
LO3
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...
Consumer Penalties
29Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved Chapter 18
REVIEW LEARNING OUTCOMEFine-Tuning the Base Price
LO3
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Discuss product line pricing
Product Line PricingLO4
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Product LinePricing
Product LinePricing
LO4 Product Line Pricing
Setting prices for an entire line
of products.
Online
http://www.beauty.com
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ComplementaryComplementary
SubstitutesSubstitutes
NeutralNeutral
Relationships among Products
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Joint CostsJoint Costs
LO4 Joint Costs
Costs that are shared in the
manufacturing and marketing of
several products in a product
line.
34Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved Chapter 18
Describe the role of pricing during periods of
inflation and recession
Pricing during Difficult Economic TimesLO5
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InflationLO5
Cost-Oriented TacticsCost-Oriented Tactics
High InflationHigh Inflation
Demand-Oriented TacticsDemand-Oriented Tactics
36Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved Chapter 18LO5
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
Cost-Oriented Tactics
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Cost-Oriented TacticsLO5
Delayed-quotation pricing
Escalator pricing
Hold prices constant, but add new fees
38Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved Chapter 18
LO5
IncreasedProduction
Costs
Dec
reas
edD
eman
d
Price
IncreaseMaintaininga Fixed
Gross Margin
Cost-Oriented Tactics
39Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved Chapter 18
Demand-Oriented TacticsLO5
PriceShading
PriceShading
The use of discounts by
salespeople to increase
demand for one or more
products in a line.
40Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved Chapter 18LO5
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
Demand-Oriented Tactics
41Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved Chapter 18 LO5
Recession
Bundling or UnbundlingBundling or Unbundling
Value-Based PricingValue-Based Pricing
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LO5
Renegotiating contractsRenegotiating contracts
Offering helpOffering help
Keeping the pressure onKeeping the pressure on
Paring down suppliersParing down suppliers
Supplier Strategies during Recession
43Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved Chapter 18
REVIEW LEARNING OUTCOMEPricing During Inflation and Recession
LO5