Chapter 17 Pricing Objectives and Policies

1. Chapter 17 Pricing Objectives and Policies

2. At the end of this presentation, you should be able to: Understand how pricing objectives should guide strategy planning for pricing decisions. Understand choices marketing managers must make about price flexibility. Know what a marketing manager should consider when setting the price level for a product in the early stages of the product life cycle. Understand the many possible variations of a price structure including discounts, allowances, and who pays transportation costs.

3. At the end of this presentation, you should be able to: Understand the value pricing concept and its role in obtaining a competitive advantage and offering target customers superior value. Understand the legality of price level and price flexibility policies. Understand important new terms.

4. Marketing Strategy Planning Process

5. Strategy Planning and Pricing Objectives and Policies (Exhibit 17-1) CH 18: Price Setting in the Business World CH 17: Pricing Objectives and Policies Legal issues and pricing policies Pricing objectives Pricing policies Pricing and customer value

6. Price Has Many Strategy Dimensions Price Flexibility Price Levels Over Product Life Cycle Key Pricing Policies Discounts & Allowances – To Whom & When Transportation Costs – Who Pays & How

7. Shaping Customer Value © 2011 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin

8. Price Exchanged for Something of Value – View of Consumer or User (Exhibit 17-2) Price Something of Value • List Price • Less: discounts • Quantity • Seasonal • Cash • Temporary sales • Less: allowances • Trade-ins • Damaged goods • Less: rebate and coupon value • Plus: transportation and taxes • Product • Physical good • Service • Assurance of quality • Repair facilities • Packaging • Credit Warranty • Place of delivery or when available Exchange

9. Price Exchanged for Something of Value – View of Channel Members (Exhibit 17-3) Price Something of Value • List Price • Less: discounts • Quantity • Seasonal • Cash • Trade or functional • Temporary “deals” • Less: allowances • Damaged goods • Advertising • Push money • Stocking fees • Plus: transportation, taxes, tariffs, and costs of handling or disposal • Product • Branded – well known • Guaranteed & warranted • Service – repair facilities • Convenient packaging • Place • Availability – when/where • Promotion • Promotion aimed at end-user customers • Price • Price-level guarantee • Sufficient margin & inventory turns to allow for profit Exchange

10. Objectives Should Guide Strategy Planning for Price (Exhibit 17-4)

11. Objectives Should Guide Strategy Planning for Price (Exhibit 17-4)

12. Objectives Should Guide Strategy Planning for Price (Exhibit 17-4)

13. Checking Your Knowledge An industry-leading high technology company just announced that it was cutting its prices and would price its products at whatever level was necessary to protect its market share. This is evidence of a ____________ pricing objective: target return status quo-oriented profit maximization sales-oriented non-price competition

14. Most Firms Set Specific Pricing Policies to Reach Objectives One-Price Policy Flexible Price Policy • The same for everyone • Frequently purchased items • Convenient • Low cost • Maintains goodwill • Different customers, different prices • Databases make it easier • Salespeople can adjust prices • Too much cutting can hurt profits OR

15. Too Much Price-Cutting Erodes Profits (Exhibit 17-5) $100 list price $100 10% price cut  new price = $90 $20 Cost per unit = $80 50% profit margin cut $60 $40 Profit $10 $20

16. Price-Level Policies Over the Product Life Cycle

17. Skimming vs. Penetration (Exhibit 17-6)

18. Other Price-Level Policies

19. Discount Policies: Reductions from List Prices Quantity Seasonal From List Price Sale Cash Trade

20. Allowance Policies – Off List Prices Advertising Stocking CommonTypes ofAllowances Trade-Ins Push Money

21. Checking Your Knowledge A construction company is considering purchasing a new crane from a distributor of such equipment. The distributor offers to provide the construction company with a few thousand dollars worth of credit on an old crane that the company would like to replace. This credit offered by the distributor is a: trade-in allowance. sale price. seasonal discount. trade discount. cash discount.

22. Some Customers Get Something Extra

23. Coupon Distribution © 2011 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin

24. List Price May Depend on Geographic Pricing Policies F.O.B. (free on broad—seller pays to have product loaded on a transportation vehicle at which time the title is transferred to buyer, who pays shipping and is responsible for the product at that point) Zone (delivered prices apply the average freight charge to all customers in same specified geographic area) CommonGeographicPolicies Freight Absorption (pays cost of shipping) Uniform Delivered (one price to all buyers)

25. Checking Your Knowledge Janet Eckerd wants to buy a new Volvo. She lives in Richmond, Virginia, but can’t find the exact color and model she wants at her local Volvo dealers. She searches the Web and discovers that a dealership 90 minutes away, in Alexandria, Virginia, has the car she wants. She called the dealer and found that the price of the vehicle is the same as it would be in Richmond, although the Alexandria dealer wants to charge Janet an additional $150 to have someone drive the car from Alexandria to Janet’s home in Richmond. As Janet was about to reject the offer and hang up the phone, the dealer offered to waive the extra “shipping charge” and make the price exactly equal to the price in Richmond. This geographic pricing tactic by the Alexandria dealer is a form of: F.O.B. pricing. zone pricing. uniform delivered pricing. intermediary pricing. freight absorption pricing.

26. Checking Your Knowledge The simplest geographic pricing policy for a seller to administer is: uniform delivered pricing. F.O.B. pricing. zone pricing. freight absorption pricing. life cycle pricing.

27. Pricing Policies Combine to Impact Customer Value Look at Customer’s Viewpoint Value Pricing = Customer Value Define Target Market and Competition Value Pricing Fits with Market-Oriented Strategy

28. Interactive Exercise: Pricing Policies & Discounts

29. Legality of Pricing Policies Unfair Trade Practice Acts (puts a lower limit on prices) Dumping (pricing a product sold in a foreign market below the cost of producing it in its domestic market) KeyIssues Price Fixing (competitors getting together to raise, lower, or stabilize prices) Phony List Prices (suggest that the price has been discounted from list)

30. Price Discrimination Robinson-Patman Act “Like Grade & Quality” KeyIssues “Proportionately Equal” Basis Cost Differences Meeting Competition

31. Study Question 1 _____ is what a customer must give up to get the benefits offered by the rest of a firm's marketing mix.  A. PromotionB. PriceC. ProductD. PastE. Profit

32. Study Question 2 A manufacturer spends a large amount of money on research and development leading to the introduction of a product that is likely to present the firm with a breakthrough opportunity. The manufacturer prices the product with the goal of achieving a 20 percent return on its investment. Which of the following types of pricing objectives is the company using?  A. Target return.B. Profit maximization.C. Non-price competition.D. Meeting competition.E. Dollar or unit sales growth.

33. Study Question 3 A firm that is very concerned about increases in market share should adopt a ______________ pricing objective.  A. profit-orientedB. sales-orientedC. non-price competitionD. status quoE. target return

34. Study Question 4 Pro-Edge Tech, a leading technology firm, has bluntly stated its pricing objective as: "Charge all the traffic will bear." This is an example of a  A. profit maximization objective.B. unit sales growth objective.C. growth in market share objective.D. target return objective.E. non price competition objective.

35. Study Question 5 Godiva, a maker of expensive European chocolates, does not mention price in its magazine advertising. Instead, the ad copy mentions the quality of the ingredients, the fine packaging, and the luxurious boutiques where Godiva chocolates are sold. Godiva seems to be pursuing a pricing objective of:  A. Meeting competition.B. Non-price competition.C. Target return.D. Growth in market share.E. None of the above.