MKTG

1. MKTG Lamb, Hair, McDaniel 2008-2009 18 CHAPTER Setting the Right Price Designed by Amy McGuire, B-books, Ltd. Prepared by Deborah Baker, Texas Christian University

2. Learning Outcomes Describe the procedure for settingthe right price Identify the legal and ethical constraints on pricing decisionsExplain how discounts, geographic pricing, and other special pricing tactics can be used to fine-tune the base price LO1 LO2 LO3

3. Learning Outcomes Discuss product line pricing Describe the role of pricing during periods of inflation and recession LO4 LO5

4. 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

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

6. Choose a Price Strategy A basic, long-term pricing framework, which establishes the initial price for a product and the intended direction for price movements over theproduct life cycle. Price Strategy LO1

7. 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. LO1

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

9. 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

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

11. 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

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

13. 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

14. 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

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

16. 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

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

18. 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

19. Value-Based Pricing Value-BasedPricing LO3 Setting the price at a level that seems to the customer to be a good price compared to the prices of other options.

20. 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.

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

22. 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

23. 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

24. 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

25. REVIEW LEARNING OUTCOME LO3 Fine-Tuning the Base Price

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

27. Complementary Substitutes Neutral Relationships among Products LO4

28. Joint Costs Costs that are shared in the manufacturing and marketing of several products in a product line. Joint Costs LO4

29. Inflation High Inflation Cost-Oriented Tactics Demand-Oriented Tactics LO5

30. 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. LO5

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

32. Cost-Oriented Tactics Price Increase Maintaininga Fixed Gross Margin Decreased Demand Increased Production Costs LO5

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

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

35. Recession Value-Based Pricing Bundling or Unbundling LO5

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

37. REVIEW LEARNING OUTCOME LO5 Pricing During Inflation and Recession