Chapter 20: Setting the Right Price

Prepared & Designed by Laura Rush, B-books, Ltd. Copyright Cengage Learning 2013 All Rights Reserved 1

Learning Outcomes
LO1 LO2 Describe the procedure for setting the right price Identify the legal and ethical constraints on pricing decisions Explain how discounts, geographic pricing, and other pricing tactics can be used to finetune the base price Discuss product line pricing Describe the role of pricing during periods of inflation and recession
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LO3
LO4 LO5

How to Set a Price on a Product or Service

Describe the procedure for

setting the right price.

LO1

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How to Set a Price on a Product or Service

Establish pricing goals
Estimate demand, costs, and profits Choose a price strategy

Fine tune with pricing tactics

Results lead to the right price

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Establish Pricing Goals

Profit-Oriented

Sales-Oriented

Status Quo

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Choose a Price Strategy

Price Strategy - 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.

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Choose a Price Strategy

Price skimming - A firm charges a high introductory price, often coupled with heavy promotion.
Penetration Pricing - A firm charges a relatively 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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Price Skimming
Inelastic Demand

Situations When Price Skimming Is Successful

Unique Advantages/Superior Legal Protection of Product Technological Breakthrough Blocked Entry to Competitors

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Penetration Pricing
Advantages
Discourages or blocks competition from market entry
Boosts sales and provides large profit increases Can justify production expansion
Online
http://www.iflyswa.com
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Disadvantages
Requires gear up for mass production Selling large volumes at low prices Strategy to gain market share may fail

Status Quo Pricing

Advantages
Simplicity

Disadvantages
Strategy may ignore demand and/or cost

Safest route to long-term survival for small firms

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Review Learning Outcome

Setting the Right Price
Establish price goals Estimate demand, costs, and profits Choose a price strategy Skimming

High $

Status quo
Penetration

Evaluate results Set price $x.yy

Fine-tune base price

Low $

LO1

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The Legality and Ethics of Price Strategy

Identify the legal and ethical constraints on pricing decisions.

LO2

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The Legality and Ethics of Price Strategy

Unfair Trade Practices

Price Fixing
Price Discrimination Predatory Pricing

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The Legality and Ethics of Price Strategy

Unfair Trade Practices- Laws that prohibit wholesalers and retailers from selling below cost. Price Fixing- An agreement between two or more firms on the price they will charge for a product.

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Price Discrimination
The Robinson-Patman Act of 1936: 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.
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Price Discrimination
The Robinson-Patman Act of 1936:

Seller Defenses

Cost

Market Conditions

Competition

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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.

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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-tune

the base price.

LO3

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Tactics for Fine-Tuning the Base Price

Discounts

Geographic pricing

Special pricing tactics

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Discounts, Allowances, Rebates, and Value-Based Pricing

Quantity Discounts Cash Discounts Promotional Allowances Rebates

Functional Discounts Seasonal Discounts

Zero Percent Financing

Markdown Money

Value-Based Pricing
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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 decisions based on current costs, current competitor prices, and short-term share gains rather than on long-term profitability.

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Geographic Pricing
FOB origin pricing Uniform delivered pricing Zone pricing Freight absorption pricing Basing-point pricing
Online
http://www.ups.com
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Geographic Pricing
FOB Origin Pricing Uniform Delivered Pricing 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.
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Zone Pricing
Freight Absorption Pricing Basing-Point Pricing

Other Pricing Tactics

Single-Price Tactic Flexible Pricing Professional Services Pricing All goods offered at the same price Different customers pay different price Used by professionals with experience, training or certification

Price Lining
Leader Pricing Bait Pricing Odd-Even Pricing Price Bundling Two-Part Pricing Pay What You Want

Several line items at specific price points

Sell product at near or below cost Lure customers through false or misleading price advertising Odd-number prices imply bargain Even-number prices imply quality Combining two or more products in a single package
Two separate charges to consume a single good

Allowing customers to pay what they think a product is worth

Consumer Penalties
Businesses Impose Consumer Penalties If...

An irrevocable loss of revenue is suffered

Additional transaction costs are incurred

Online
http://www.princesscruises.com http://www.carnival.com
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Review Learning Outcome

Fine-Tuning the Base Price

LO3

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Product Line Pricing

Discuss product line pricing.

LO4

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Product Line Pricing

Setting prices for an entire line of products.

Online
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 manufacturing and marketing of several products 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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Cost-Oriented Tactics
Problems with Cost-Oriented Tactics
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.

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Cost-Oriented Tactics
Delayed-quotation
Escalator

pricing

pricing

Hold

prices constant, but add new fees

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Cost-Oriented Tactics

Maintaining a Fixed Gross Margin

Increased Production Costs

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Demand-Oriented Tactics

Price Shading The use of discounts by salespeople to increase demand for one or more products in a line.

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Demand-Oriented Tactics
Cultivate selected demand

Strategies to Make Demand More Inelastic

Create unique offerings

Change the package design

Heighten buyer dependence

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Recession
Value-Based Pricing

Bundling or Unbundling

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Supplier Strategies During Recession

Renegotiating contracts Offering help Keeping the pressure on

Paring down suppliers

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Review Learning Outcome

Pricing During Inflation and Recession

LO5

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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

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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

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