Lamb, Hair, McDaniel CHAPTER 20 Setting the Right Price 2010-2011
LO 1 Describe the procedure for setting the right price LO 2 Identify the legal and ethical constraints on pricing decisions LO 3 Explain how discounts, geographic pricing, and other special pricing tactics can be used to fine-tune the base price Learning Outcomes
LO 4 Discuss product line pricing LO 5 Describe the role of pricing during periods of inflation and recession Learning Outcomes
How to Set a Price on a Product Describe the procedure for setting the right price LO 1
How to Set a Price on a Product or Service LO 1 Fine tune with pricing tactics Choose a price strategy Estimate demand, costs, and profits Establish pricing goals Results lead to the right price
Establish Pricing Goals LO 1 Profit-Oriented Sales-Oriented Status Quo
Choose a Price Strategy Price Strategy LO 1 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.
Choose a Price Strategy LO 1 Status Quo Pricing Price Skimming Penetration Pricing Charging a price identical to or very close to the competition’s price. 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.
Price Skimming LO 1 Situations When Price Skimming Is Successful Unique Advantages/Superior Legal Protection of Product Blocked Entry to Competitors Technological Breakthrough Inelastic Demand
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
LO 1 Advantages Disadvantages
Status Quo Pricing
Safest route to long-term survival for small firms
Strategy may ignore demand and/or cost
LO 1 Advantages Disadvantages
Setting the Right Price Estimate demand, costs, and profits Establish price goals Skimming Status quo Penetration LO 1 Choose a price strategy Fine-tune base price Set price $x.yy Evaluate results Low $ High $
The Legality and Ethics of Price Strategy Identify the legal and ethical constraints on pricing decisions LO 2
The Legality and Ethics of Price Strategy Unfair Trade Practices Price Fixing Price Discrimination Predatory Pricing LO 2
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. LO 2
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: LO 2
Price Discrimination The Robinson-Patman Act of 1936: LO 2 Seller Defenses Cost Market Conditions Competition
Predatory Pricing Predatory Pricing LO 2 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.
Tactics for Fine-Tuning the Base Price Explain how discounts, geographic pricing, and other pricing tactics can be used to fine-tune the base price LO 3
Tactics for Fine-Tuning the Base Price LO 3 Special pricing tactics Discounts Geographic pricing
Discounts, Allowances, Rebates, and Value-Based Pricing LO 3 Quantity Discounts Cash Discounts Functional Discounts Seasonal Discounts Promotional Allowances Rebates Zero Percent Financing Value-Based Pricing
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. LO 3 Value-Based Pricing
Value-based Pricing: Step 1
Companies that set prices using a cost-plus model—adding a predetermined percentage to a product’s cost/unit to produce a profit—may be leaving money on the table.
Instead, a company should use the cost-plus model to determine its pricing threshold and then use value-based pricing to set the best price.
Source: Elisabeth A. Sullivan, “Value Pricing: Smart Marketers Know Cost-Plus Can Be Costly,” MarketingNews, January 15, 2008. LO 3
Value-based Pricing: Step 2
How to determine value? It’s simple. Really. Ask your customers: What do they like about you? What don’t they like?
Their responses represent the perceived value of your product in the marketplace.
The attributes that will determine the perceived value of your product include product quality, on-time delivery, customer service, technical service, and price.
Value-based Pricing: Step 3
Now, ask customers what would be an acceptable price, what would be an expensive price, and what would be a prohibitively expensive price.
The best price usually falls between “expensive” and “prohibitively expensive.”
Customers want value and they’re willing to pay for it.
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.
Geographic Pricing LO 3 FOB Origin Pricing Uniform Delivered Pricing Zone Pricing Freight Absorption Pricing Basing-Point 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.
Other Pricing Tactics LO 3 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
Consumer Penalties LO 3 An irrevocable loss of revenue is suffered Additional transaction costs are incurred Businesses Impose Consumer Penalties If...
Fine-Tuning the Base Price LO 3 Discounts Geographic Other Tactics Consumer Penalties Single price Flexible Professional services Price lining Leader Bait Odd–even Bundling Unbundling Two-part Uniform delivered Zone Freight absorption Basing- point Quantity • cumulative • noncumulative Cash Functional (trade) Seasonal Promotional (trade) Rebate 0% Financing Value-based Pricing Tactics FOB origin
Product Line Pricing Discuss product line pricing LO 4
Product Line Pricing Product Line Pricing LO 4 Setting prices for an entire line of products.
Relationships among Products LO 4 Complementary Substitutes Neutral
Joint Costs LO 4 Joint Costs Costs that are shared in the manufacturing and marketing of several products in a product line.
Pricing during Difficult Economic Times Describe the role of pricing during periods of inflation and recession LO 5
Inflation LO 5 Cost-Oriented Tactics High Inflation Demand-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.
Problems with Cost-Oriented Tactics LO 5
add new fees
Cost-Oriented Tactics LO 5
Cost-Oriented Tactics LO 5 Increased Production Costs Decreased Demand Price Increase Maintaining a Fixed Gross Margin
Demand-Oriented Tactics Price Shading LO 5 The use of discounts by salespeople to increase demand for one or more products in a line.
Demand-Oriented Tactics LO 5 Strategies to Make Demand More Inelastic Cultivate selected demand Create unique offerings Change the package design Heighten buyer dependence
Recession Bundling or Unbundling Value-Based Pricing LO 5
Supplier Strategies during Recession LO 5 Renegotiating contracts Offering help Keeping the pressure on Paring down suppliers
Pricing During Inflation and Recession Delayed- quotation pricing LO 5 Recession Inflation Contract product lines Escalator pricing Select demand Unique offering Change package design Increase buyer dependence Cost-oriented tactics Demand-oriented tactics Price Product Suppliers Value-based Bundling Unbundling New products New product categories Renegotiate contracts Offer help Keep pressure on suppliers Reduce number of suppliers