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Learning Outcomes Chapter 18 – Setting the Right Price

Learning Outcomes Chapter 18 – Setting the Right Price. 1. Describe the procedure for setting the right price 2. Identify the legal and ethical constraints on pricing decisions

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Learning Outcomes Chapter 18 – Setting the Right Price

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  1. Learning Outcomes Chapter 18 – Setting the Right Price 1. Describe the procedure for setting the right price 2. Identify the legal and ethical constraints on pricing decisions 3. Explain how discounts, geographic pricing, and other special pricing tactics can be used to fine- tune the base price 4. Discuss product line pricing 5. Describe the role of pricing during periods of inflation and recession

  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 LO1

  3. Profit-Oriented Establish Pricing Goals Sales-Oriented Status Quo LO1

  4. Choose a Price Strategy Price Skimming A firm charges a high introductory price, often coupled with heavy promotion. 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. 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. LO1 Price Strategy Pricing Strategies

  5. Price Skimming Inelastic Demand Situations When Price Skimming Is Successful Unique Advantages/Superior Legal Protection of Product Technological Breakthrough Blocked Entry to Competitors LO1

  6. Penetration Pricing Advantages Disadvantages http://www.iflyswa.com Online • 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 LO1

  7. Status Quo Pricing Advantages Disadvantages • Simplicity • Safest route to long-term survival for small firms • Strategy may ignore demand and/or cost LO1

  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 REVIEW LEARNING OUTCOME LO1 Setting the Right Price

  9. The Legality and Ethics ofPrice Strategy Unfair Trade Practices Price Fixing Price Discrimination Predatory Pricing LO2

  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. LO2

  11. Price Discrimination The Robinson-Patman Act of 1936: • 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. LO2

  12. Seller Defenses Cost Market Conditions Competition Price Discrimination The Robinson-Patman Act of 1936: LO2

  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 LO2

  14. Tactics for Fine-Tuning the Base Price Discounts Geographic pricing Special pricing tactics LO3

  15. Discounts, Allowances, Rebates, and Value-Based Pricing Quantity Discounts Promotional Allowances Cash Discounts Rebates Functional Discounts Zero Percent Financing Seasonal Discounts Value-Based Pricing LO3

  16. Pricing Products Too Low LO3 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.

  17. Geographic Pricing FOB origin pricing Uniform delivered pricing Zone pricing Freight absorption pricing Basing-point pricing http://www.ups.com Online LO3

  18. Geographic Pricing FOB Origin Pricing The buyer absorbs the freight costs 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. LO3

  19. Other Pricing Tactics 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 LO3

  20. Businesses Impose Consumer Penalties If... Consumer Penalties An irrevocable loss of revenue is suffered Additional transaction costs are incurred http://www.princesscruises.com http://www.carnival.com Online LO3

  21. Setting prices for an entire line of products. http://www.beauty.com Online Product Line Pricing Product LinePricing LO4

  22. Complementary Substitutes Neutral Relationships among Products LO4

  23. Pricing During Inflation High Inflation Cost-Oriented Tactics Demand-Oriented Tactics LO5

  24. Cost-Oriented Tactics • Implications of 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. LO5

  25. Cost-Oriented Tactics Delayed-quotation pricing Escalator pricing Hold prices constant, but add new fees LO5

  26. Demand-Oriented Tactics The use of discounts by salespeople to increase demand for one or more products in a line. PriceShading LO5

  27. Demand-Oriented Tactics Cultivate selected demand Create unique offerings Strategies to Make Demand More Inelastic Change the package design Heighten buyer dependence LO5

  28. Recession Value-Based Pricing Bundling or Unbundling LO5

  29. Supplier Strategies during Recession Renegotiating contracts Offering help Keeping the pressure on Paring down suppliers LO5

  30. Learning Outcomes Chapter 18 – Setting the Right Price – We Now Know 1. The procedure for setting the right price 2. the legal and ethical constraints on pricing decisions 3. How discounts, geographic pricing, and other special pricing tactics can be used to fine-tune the base price 4. Product line pricing 5. The role of pricing during periods of inflation and recession

  31. Go to www.mktg4me.com Review flash cards for chapter 18 Explore other aspects of this site for chapter 18 Take chapter 18 practice quiz on this site Go to WebCt and take chapter 18 quiz in t he allocated time You might also take the extra credit quiz on this chapter - ecquiz 18 article 30 Good Luck Now

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