Setting the Right Price

1. Setting the Right Price Key Concepts

2. How to Set a Price on aProduct 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

3. Profit-Oriented Establish Pricing Goals Sales-Oriented Status Quo

4. Choose a Price Strategy Price Skimming 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. Penetration Pricing Status Quo Pricing Charging a price identical to or very close to the competition’s price.

5. Why & When Price Skimming ? Inelastic Demand Situations When Price Skimming Is Successful Unique Advantages/Superior Legal Protection of Product Technological Breakthrough Blocked Entry to Competitors

6. Penetration Pricing Advantages Disadvantages • Discourages or blocks competition from market entry PRICE AS BARRIER • Boosts sales and provides large profit increases • Can justify production expansion • Requires gear up for mass production • Have to sell large volumes at low prices • Strategy to gain market share may fail

7. Status Quo Pricing Advantages Disadvantages • Simplicity • Safest route to long-term survival for small firms Fly under the radar • Strategy may ignore demand and/or cost

8. Establishprice goals High $ Estimate demand,costs, and profits Skimming Status quo Penetration Choose aprice strategy Low $ Evaluateresults Fine-tunebase price Set price$x.yy Setting the Right Price

9. The Legality and Ethics ofPrice Strategy Unfair Trade Practices Price Fixing Price Discrimination Predatory Pricing

10. The Legality and Ethics ofPrice Strategy Unfair TradePractices 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.

11. Price Discrimination • 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:

12. Seller Defenses Cost Market Conditions Competition Price Discrimination The Robinson-Patman Act of 1936:

13. 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

14. Discounts Geographic pricing Special pricing tactics Tactics for Fine-Tuning the Base Price

15. Quantity Discounts Promotional Allowances Cash Discounts Rebates Functional Discounts Zero Percent Financing Seasonal Discounts Value-Based Pricing Discounts, Allowances, Rebates, and Value-Based Pricing

16. 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.

17. Pricing Products Too Low Managers attempt to buy market share through aggressive pricing. Managers tend to make pricing decisions based on current costs, current competitor prices, and short-term share gains rather than on long-term profitability.

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

19. FOB Origin Pricing The buyer absorbs the freightcosts from the shipping point (“free on board”). Uniform Delivered Pricing The seller pays the freight charges and bills the purchaser an identical, flat freight charge. Zone Pricing The U.S. is divided into zones, and a flat freight rate is charged to customers in a given zone. Freight Absorption Pricing The seller pays for all or part of the freight charges and does not pass them on to the buyer. Basing-Point Pricing The seller designates a location as a basing point and charges all buyers the freight costs from that point. Geographic Pricing

20. 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 bargain Even-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

21. Fine-Tuning the Base Price

22. Setting prices for an entire line of products. Product Line Pricing Product LinePricing

23. Complementary Substitutes Neutral Relationships among Products

24. Inflation High Inflation Cost-Oriented Tactics Demand-Oriented Tactics

25. Cost-Oriented Tactics Price Increase Maintaininga Fixed Gross Margin Decreased Demand Increased Production Costs

26. Cost-Oriented Tactics • Delayed-quotation pricing • Escalator pricing • Hold prices constant, but add new fees

27. 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.

28. Demand-Oriented Tactics The use of discounts by salespeople to increase demand for one or more products in a line. PriceShading

29. Demand-Oriented Tactics Cultivate selected demand Create unique offerings Strategies to Make Demand More Inelastic Change the package design Heighten buyer dependence

30. Recession Value-Based Pricing Bundling or Unbundling

31. Supplier Strategies during Recession Renegotiating contracts Offering help Keeping the pressure on Paring down suppliers

32. Pricing During Inflation and Recession