Setting the Right Price

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Setting the Right Price

  1. 1. CHAPTER 18 Setting the Right Price Designed by Eric Brengle B-books, Ltd. Prepared by Deborah Baker Texas Christian University Introduction to Marketing McDaniel, Lamb, Hair 9
  2. 2. Learning Outcomes Describe the procedure for setting the right price Identify the legal and ethical constraints on pricing decisions Explain how discounts, geographic pricing, and other special pricing tactics can be used to fine-tune the base price LO I LO 2 LO 3
  3. 3. Learning Outcomes Discuss product line pricing Describe the role of pricing during periods of inflation and recession LO 5 LO 4
  4. 4. How to Set a Price on a Product or Service Describe the procedure for setting the right price LO I
  5. 5. How to Set a Price on a Product or Service LO I Fine tune with pricing tactics Choose a price strategy Estimate demand, costs, and profits Establish pricing goals Results lead to the right price
  6. 6. Establish Pricing Goals LO I Profit-Oriented Sales-Oriented Status Quo
  7. 7. 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 the product life cycle . LO I Price Strategy
  8. 8. Choose a Price Strategy LO I 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.
  9. 9. Price Skimming LO I Situations When Price Skimming Is Successful Unique Advantages/Superior Legal Protection of Product Blocked Entry to Competitors Technological Breakthrough Inelastic Demand
  10. 10. Penetration Pricing LO I <ul><li>Discourages or blocks competition from market entry </li></ul><ul><li>Boosts sales and provides large profit increases </li></ul><ul><li>Can justify production expansion </li></ul><ul><li>Requires gear up for mass production </li></ul><ul><li>Selling large volumes at low prices </li></ul><ul><li>Strategy to gain market share may fail </li></ul>Advantages Disadvantages Online http://www.iflyswa.com
  11. 11. Status Quo Pricing LO I <ul><li>Simplicity </li></ul><ul><li>Safest route to long-term survival for small firms </li></ul><ul><li>Strategy may ignore demand and/or cost </li></ul>Advantages Disadvantages
  12. 12. Fast Times at Ridgemont High Biz Flix LO I
  13. 13. REVIEW LEARNING OUTCOME Setting the Right Price LO I Establish price goals Estimate demand, costs, and profits Choose a price strategy Fine-tune base price Set price $x.yy Evaluate results Skimming Status quo Penetration Low $ High $
  14. 14. The Legality and Ethics of Price Strategy Identify the legal and ethical constraints on pricing decisions LO 2
  15. 15. The Legality and Ethics of Price Strategy LO 2 Unfair Trade Practices Price Fixing Price Discrimination Predatory Pricing
  16. 16. The Legality and Ethics of Price Strategy LO 2 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.
  17. 17. Price Discrimination <ul><li>There must be price discrimination. </li></ul><ul><li>Transaction must occur in interstate commerce. </li></ul><ul><li>Seller must discriminate by price among two or more purchasers. </li></ul><ul><li>Products sold must be commodities or tangible goods. </li></ul><ul><li>Products sold must be of like grade and quality. </li></ul><ul><li>There must be significant competitive injury. </li></ul>LO 2 The Robinson-Patman Act of 1936:
  18. 18. Price Discrimination LO 2 The Robinson-Patman Act of 1936: Seller Defenses Cost Market Conditions Competition
  19. 19. 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. Predatory Pricing
  20. 20. Tactics for Fine-Tuning the Base Price Explain how discounts, geographic pricing, and other special pricing tactics can be used to fine-tune the base price LO 3
  21. 21. Tactics for Fine-Tuning the Base Price LO 3 Special pricing tactics Discounts Geographic pricing
  22. 22. 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
  23. 23. Value-Based Pricing LO 3 Setting the price at a level that seems to the customer to be a good price compared to the prices of other options. Value-Based Pricing
  24. 24. Pricing Products Too Low LO 3 <ul><li>Managers attempt to buy market share through aggressive pricing. </li></ul><ul><li>Managers tend to make pricing decisions based on current costs, current competitor prices, and short-term share gains rather than on long-term profitability. </li></ul>
  25. 25. Geographic Pricing LO 3 Basing-point pricing Freight absorption pricing Zone pricing Uniform delivered pricing FOB origin pricing Online http://www.ups.com
  26. 26. 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.
  27. 27. 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
  28. 28. Consumer Penalties LO 3 http://www.princesscruises.com http://www.carnival.com Online An irrevocable loss of revenue is suffered Additional transaction costs are incurred Businesses Impose Consumer Penalties If...
  29. 29. REVIEW LEARNING OUTCOME Fine-Tuning the Base Price LO 3
  30. 30. Product Line Pricing Discuss product line pricing LO 4
  31. 31. Product Line Pricing LO 4 Product Line Pricing Setting prices for an entire line of products. Online http://www.beauty.com
  32. 32. Relationships among Products LO 4 Complementary Substitutes Neutral
  33. 33. Joint Costs LO 4 Joint Costs Costs that are shared in the manufacturing and marketing of several products in a product line.
  34. 34. Pricing during Difficult Economic Times Describe the role of pricing during periods of inflation and recession LO 5
  35. 35. Inflation LO 5 Cost-Oriented Tactics High Inflation Demand-Oriented Tactics
  36. 36. Cost-Oriented Tactics LO 5 <ul><li>A high volume of sales on an item with a low profit margin may still make the item highly profitable. </li></ul><ul><li>Eliminating a product may reduce economies of scale. </li></ul><ul><li>Eliminating a product may affect the price-quality image of the entire line. </li></ul>Problems with Cost-Oriented Tactics
  37. 37. Cost-Oriented Tactics <ul><li>Delayed-quotation pricing </li></ul><ul><li>Escalator pricing </li></ul><ul><li>Hold prices constant, but add new fees </li></ul>LO 5
  38. 38. Cost-Oriented Tactics LO 5 Increased Production Costs Decreased Demand Price Increase Maintaining a Fixed Gross Margin
  39. 39. Demand-Oriented Tactics LO 5 The use of discounts by salespeople to increase demand for one or more products in a line. Price Shading
  40. 40. Demand-Oriented Tactics LO 5 Strategies to Make Demand More Inelastic Cultivate selected demand Create unique offerings Change the package design Heighten buyer dependence
  41. 41. Recession LO 5 Bundling or Unbundling Value-Based Pricing
  42. 42. Supplier Strategies during Recession LO 5 Renegotiating contracts Offering help Keeping the pressure on Paring down suppliers
  43. 43. REVIEW LEARNING OUTCOME Pricing During Inflation and Recession LO 5

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