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Pricing
This document discusses several legal and ethical issues related to pricing, including: 1) Unethical pricing strategies like price fixing and predatory pricing that aim to eliminate competition. 2) The concept of price discrimination, where different prices are charged to different customer groups. 3) Factors to consider when setting new product prices, such as costs, perceived value, and competitive positioning. 4) Tactics for fine-tuning prices, including discounts, geographic pricing, and bundling products.
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Pricing
- 1. LEGAL AND ETHICALISSUES IN PRICING
- 2. "Sometimes people confusenorms with ethics — exploitation of child labour, bribery and kickbacks may be the norm, but that doesn't mean they're right." Joseph Reitz, co-director of the International Centre for Ethics in Business at the University of Kansas.
- 3. Everyday we areconfronted with pricing decisions where the ethics are complex. As individual we speak to our own conscience. But if we are a business how do we identify the ethical dimension across our target market? Ethical or Not?
- 4. Its Saturday nightand you decide to take your partner to see the latest Hollywood blockbuster movie. As you stand in the box office queue, you notice that the admission price is $7.50, plus a $2.50 surcharge for all screening on Friday and Saturday nights. You are a customer of a major bank, and have free access to their network of ATM (cash) machines, as well as those of other banks who have signed reciprocal agreements with your bank. You have just learned that your bank has sold some of their ATM machines to a third party, who will operate and maintain them. Under this new agreement, there will be a small charge for cash withdrawals (typically £1.50 / Euro 2.20 / US$2.70) at these third-party managed ATMs. TOTALLY ACCEPTABLE OR TOTALLY UNACCEPTABLE?
- 5. You’ve just readthe following story in a newspaper: "ABC Consumer Electronics Corp receives a small percentage of its goods back from customers, who argue the product is faulty, doesn’t do what they were expecting, or who have simply changed their mind. The company offers a `no questions asked`, full refund for goods returned within 2 weeks. But after cleaning and checking the goods, and if required making any repairs, the goods are the placed back in the warehouse and sold as new stock complete with a normal 12 months warranty".
- 6. You have justpurchased a new pair of leather shoes. The next day you see the very same pair of shoes advertised by the store you purchased the shoes from, at 50% off the price you paid for your shoes. Rather than renting a DVD for the evening, you decide to download a movie from the internet using your newly installed broadband connection. You pay £8 (the equivalent of Euro 12) for the movie with your credit card and enjoy it immensely. Next day, you ring your brother in France and recommend the movie to him. He tells you he’s also downloaded the movie from the French version of the same website but it only cost him Euro 10.
- 7. A beverage companyhas just launched a new brand of mineral water. The water is sourced from a major UK river, the normal public water supply in the region, and has been treated by a public utility to meet the highest standards. This costs the company almost nothing to buy. The company then subjects the water to additional filtration, adding some minerals and ozone, before marketing it with a foreign sounding name, pictures of Swiss mountains and promoting the water’s scientific and health benefits. The water sells for UK£1.00 / Euro 1.50 / US$1.80 per 500ml bottle. You have just invested in $5,000 in stocks/shares of a recently listed Internet Service Provider (ISP). The company’s prospectus said the funds were sought " to improve and expand the company’s high speed internet network ". A couple of weeks later you pick up a business newspaper and read an interview with the ISP`s CEO. A price war has just broken out and the CEO is quoted: " Thanks to the company’s recent public listing, we have a `war chest` deep enough to sustain any price war ".
- 8. The Legality andEthics of Price Strategy Unfair Trade Practices Price Fixing Price Discrimination Predatory Pricing Issues that limit pricing decisions:
- 9. The Legality andEthics of Price Strategy Laws that prohibit wholesalers and retailers from selling below cost. Unfair Trade Practices
- 10. The Legality andEthics of Price Strategy Price Fixing An agreement between business competitors to sell the same product or service at the same price.
- 11. Price DiscriminationA seller price discriminates when it charges different prices to different buyers. The Legality and Ethics of Price Strategy
- 12. First-degree price discrimination.The practice of charging each consumer the maximum amount he is willing and able to pay. Example: 1. The manager of Suez Canal charges different prices to different ships depending on their cargo, alternative routes, and other characteristics. 2. Also on the sale of both new and used cars. People will pay different prices for cars with identical features, and the salesperson must attempt to gauge the maximum price at which the car can be sold. This type of price discrimination often includes a bargaining aspect, where the consumer attempts to negotiate a lower price. Price discrimination can be separated into degrees:
- 13. Second-degree price discriminationrefers to companies charging lower prices for higher quantities. In companies where a client orders in bulk and is able to purchase a high number of the same items at once, the client may get a discounted rate. This rate would not apply to a client who only orders a few items at a time. Often exists in retail stores. Price discrimination can be separated into degrees:
- 14. Third degree pricediscrimination is based on understanding the market, and occurs with great frequency. This type takes many different forms, but in all cases attempts to derive the most sales from each segmented “group” of consumers . For example, senior citizens are considered a group, and are often offered discounts at movie theaters, for transportation, in restaurants, and even in retail stores where seniors may have a “senior day” each week that allows them to take a discount on merchandise. “Students” are another segmented group that may be offered lower prices. Both seniors and students have a higher elasticity of demand and can generally afford to pay less than the average worker. Price discrimination can be separated into degrees:
- 15. Predatory PricingThe Legality and Ethics of Price Strategy 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.
- 16. NEW PRODUCT PRICINGYou have only one chance to get new product prices right. Set them too high and lose valuable market opportunities. Set them too low and leave money at the table.
- 17. Stages in theProduct Life Cycle Introductory Stage Growth Stage Decline Stage P High P Stable P Decrease Maturity Stage P Decrease Stable High
- 18. Cost : Whatdoes it cost to produce this product? How will costs be used to set pricing floors? Perceived Value : what does the market really think of my product? How do they value it? Competitive Positioning : How are my competitors positioned in the marketplace and how are their product lines valued by consumers? Three factors are critical in setting new product prices.
- 19.
- 20. SETTING THE RIGHTPRICE 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 P High P
- 21. Three main categoriesfor fine-tuning the base price Discounts, allowances, rebates and value based pricing Geographic pricing Other pricing tactics
- 22. Discounts, Allowances, Rebates,and Value-Based Pricing Lower prices are given to those that pay promptly, order a large quantity, or perform some functions to the manufacturer. Value based pricing starts with the customer, considers the competition and costs and then determines the price. Additional tactics in this category include seasonal discounts, promotion allowances, rebates (cash refunds) and zero percent financing.
- 23. Value-Based Pricing Settingthe 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. Geographic pricing tacticsWays of moderating the impact of shipping costs on distant customers. Includes FOB origin pricing, uniform delivered pricing, zone pricing, freight absorption pricing, and basing point pricing.
- 25. Geographic Pricing FOBOrigin 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.
- 26. Other Pricing TacticsSingle-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
- 27. Consumer Penalties Anirrevocable loss of revenue is suffered Additional transaction costs are incurred Businesses Impose Consumer Penalties If...
- 28. FINE TUNING THEBASE PRICE
- 29.
Editor's Notes
- #9 Notes: The issues that limit pricing decisions are unfair trade practices, price fixing, price discrimination, and predatory pricing. Unethical Pricing Practices Price fixing - an agreement between business competitors to sell the same product or service at the same price. Price skimming - a pricing strategy in which a marketer sets a relatively high price for a product or service at first, then lowers the price over time. It allows the firm to recover its sunk costs quickly before competition steps in and lowers the market price. Price discrimination - exists when sales of identical goods or services are transacted at different prices from the same provider. Bid rigging - an agreement between two or more competitors. It is a form of collusion, which is illegal in most countries. It is a form of price fixing and market allocation, and it involves an agreement in which one party of a group of bidders will be designated to win the bid. It is often practised where contracts are determined by a call for bids, for example in the case of government construction contracts. Price war - is a term used in business to indicate a state of intense competitive rivalry accompanied by a multi-lateral series of price reductions. One competitor will lower its price, then others will lower their prices to match. If one of the reactors reduces their price below the original price cut, then a new round of reductions is initiated. In the short-term, price wars are good for consumers who are able to take advantage of lower prices. Typically they are not good for the companies involved. The lower prices reduce profit margins and can threaten survival. etc....
- #10 Notes: In over half the states, unfair trade practice acts put a floor under wholesale and retail prices, and selling below cost is illegal. Wholesalers and retailers must take a certain minimum percentage markup on their combined merchandise cost and transportation cost. The most common markup figures are 6 percent at the retail level and 2 percent at the wholesale level. If a specific wholesaler or retailer can provide conclusive proof that operating costs are lower than the minimum required figure, lower prices may be allowed. The intent of unfair trade practice acts is to protect small firms from retail giants like Wal-Mart and Target, which operate efficiently on razor-thin margins. State enforcement of unfair trade practice laws has generally been lax, because low prices benefit local consumers. ------------------------------------------------------ Price fixing is illegal under the Sherman Act and the Federal Trade Commission Act. Cases involving price fixing include: * ISK Japan, for conspiring to fix prices for video magnetic iron oxide particles * Gemstar-TV Guide International *Hoechst AG, for suppressing competition for an industrial chemical used in production * Uniroyal, for fixing prices on neoprene *Hoffman-LaRoche for price fixing in the vitamin industry
- #11 Notes: Price fixing is illegal under the Sherman Act and the Federal Trade Commission Act. Cases involving price fixing include: * ISK Japan, for conspiring to fix prices for video magnetic iron oxide particles * Gemstar-TV Guide International *Hoechst AG, for suppressing competition for an industrial chemical used in production * Uniroyal, for fixing prices on neoprene *Hoffman-LaRoche for price fixing in the vitamin industry ++++++++++++++++++++++++++++++++++++++ Price fixing is illegal Agreements between competing businesses to fix prices are illegal under the Trade Practices Act. Price fixing agreements do not have to be in writing: they can be a 'wink and a nod', made over a drink in the local pub, at an association meeting or at a social occasion. The important point is not how the agreement was made or even how effective it is, but that competitors are working out their prices collectively and not individually. It is illegal for a business to enter into or give effect to such agreements.
- #12 Price discrimination, as it is now understood, is separated into degrees. First, second and third degree price discrimination exist and apply to different pricing methods used by companies. Much depends on the understanding of the market in segments, and also the consumer’s ability to pay a higher or lower price, called elasticity of demand . A person who might pay more for an item is thought to have a low elasticity of demand. Another person who will not pay as much has a high elasticity of demand. xxxxxxxxxxxxxxx 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. *************************************** The ideal form of price discrimination, from the seller's point of view, is to charge each buyer the maximum that the buyer is willing to pay. ***Because price discrimination is potentially profitable, businesses have found many ways to do it. Theaters often charge younger customers less than adults. Doctors sometimes charge the rich or insured patient more for services than they charge the poor or uninsured. Grocery stores have a lower price for people who bother to check the newspaper and clip coupons. Some companies, such as firms selling alcoholic beverages, produce similar products but try to promote one as a prestige brand with a much higher price. Electric utilities usually charge lower rates to people who use a lot of electricity (and thus probably have electric stoves and water heaters) than they do to those who use only a little electricity (and who probably have gas stoves and water heaters). Banks offer special interest rates on Certificates of Deposit (CDs) that will not be obtained when one lets a CD roll over. People who are more sensitive to interest rates will take the time and effort to personally renew each maturing CD. 1 The author has met a person who at one time regularly requested and ordered from the children's menu in a restaurant because she knew it was a bargain. One day, the restaurant told her she could no longer do that. Her solution was to order carry out from the children's menu, which for some reason the restaurant allowed. 2 The word "discrimination" has come to have a very negative connotation that it did not have when the term "price discrimination" came into use. At one time it was a compliment to say that someone had "discriminating tastes." To discriminate is to make choices based on some characteristics or attributes of the situation. Our society has decided that some forms of discrimination or making decisions, such as those based on race, are improper, and the word "discrimination" has taken on a much narrower meaning than it had early in the century. 3 A third obstacle standing in the way in the United States has been legal. Several laws restrict the ways in which businesses can price discriminate. Though the stated purpose of these laws is to preserve competition, the sponsors clearly wanted to prevent competition from eliminating small sellers with high costs. A fourth obstacle is public opinion. Many people do not accept a change in demand as a legitimate reason to change price. For them only a change in costs justifies a change in price. As a result of public opinion, firms disguise price discrimination. The children's menu case mentioned at the start is an example of disguised price discrimination.
- #13 First-degree price discrimination occurs when identical goods are sold at different prices to each individual consumer. Obviously, the seller is not always going to be able to identify who is willing to pay more for certain items, but when he or she can, his profit increases. You can see this type of price discrimination in the sale of both new and used cars. People will pay different prices for cars with identical features, and the salesperson must attempt to gauge the maximum price at which the car can be sold. This type of price discrimination often includes a bargaining aspect, where the consumer attempts to negotiate a lower price. Second-degree price discrimination refers to companies charging lower prices for higher quantities. In companies where a client orders in bulk and is able to purchase a high number of the same items at once, the client may get a discounted rate. This rate would not apply to a client who only orders a few items at a time. In retail stores, second-degree price discrimination often exists. A reduced price may be offered if you buy two t-shirts instead of just one. This form helps to get rid of merchandise and generate more revenue for a company. Third degree price discrimination is based on understanding the market, and occurs with great frequency. This type takes many different forms, but in all cases attempts to derive the most sales from each segmented “group” of consumers. For example, senior citizens are considered a group, and are often offered discounts at movie theaters, for transportation, in restaurants, and even in retail stores where seniors may have a “senior day” each week that allows them to take a discount on merchandise. “Students” are another segmented group that may be offered lower prices. Both seniors and students have a higher elasticity of demand and can generally afford to pay less than the average worker.
- #14 First-degree price discrimination occurs when identical goods are sold at different prices to each individual consumer. Obviously, the seller is not always going to be able to identify who is willing to pay more for certain items, but when he or she can, his profit increases. You can see this type of price discrimination in the sale of both new and used cars. People will pay different prices for cars with identical features, and the salesperson must attempt to gauge the maximum price at which the car can be sold. This type of price discrimination often includes a bargaining aspect, where the consumer attempts to negotiate a lower price. Second-degree price discrimination refers to companies charging lower prices for higher quantities. In companies where a client orders in bulk and is able to purchase a high number of the same items at once, the client may get a discounted rate. This rate would not apply to a client who only orders a few items at a time. In retail stores, second-degree price discrimination often exists. A reduced price may be offered if you buy two t-shirts instead of just one. This form helps to get rid of merchandise and generate more revenue for a company. Third degree price discrimination is based on understanding the market, and occurs with great frequency. This type takes many different forms, but in all cases attempts to derive the most sales from each segmented “group” of consumers. For example, senior citizens are considered a group, and are often offered discounts at movie theaters, for transportation, in restaurants, and even in retail stores where seniors may have a “senior day” each week that allows them to take a discount on merchandise. “Students” are another segmented group that may be offered lower prices. Both seniors and students have a higher elasticity of demand and can generally afford to pay less than the average worker.
- #15 First-degree price discrimination occurs when identical goods are sold at different prices to each individual consumer. Obviously, the seller is not always going to be able to identify who is willing to pay more for certain items, but when he or she can, his profit increases. You can see this type of price discrimination in the sale of both new and used cars. People will pay different prices for cars with identical features, and the salesperson must attempt to gauge the maximum price at which the car can be sold. This type of price discrimination often includes a bargaining aspect, where the consumer attempts to negotiate a lower price. Second-degree price discrimination refers to companies charging lower prices for higher quantities. In companies where a client orders in bulk and is able to purchase a high number of the same items at once, the client may get a discounted rate. This rate would not apply to a client who only orders a few items at a time. In retail stores, second-degree price discrimination often exists. A reduced price may be offered if you buy two t-shirts instead of just one. This form helps to get rid of merchandise and generate more revenue for a company. Third degree price discrimination is based on understanding the market, and occurs with great frequency. This type takes many different forms, but in all cases attempts to derive the most sales from each segmented “group” of consumers. For example, senior citizens are considered a group, and are often offered discounts at movie theaters, for transportation, in restaurants, and even in retail stores where seniors may have a “senior day” each week that allows them to take a discount on merchandise. “Students” are another segmented group that may be offered lower prices. Both seniors and students have a higher elasticity of demand and can generally afford to pay less than the average worker.
- #16 Notes: Predatory pricing is illegal under the Sherman Act and the Federal Trade Commission. However, proving the use of this practice is difficult and expensive. The Justice Department must show that the predator explicitly tried to ruin a competitor and that the predatory price was below the predator’s average variable cost.
- #19 PricePoint Partners considers all of these factors when addressing new product prices. Understanding true costs is a key factor in setting price floors… floors that prevent you from selling products and services at a loss or minimum margins. While costs are often easier for companies to measure, a challenge for most firms lies in the ability to accurately measure perceived value. PricePoint Partners are experts at executing market research that identifies value perceptions and pricing threshold. If you knew exactly how customers value delivery versus product performance versus price, how would it change the way you set prices? When you know precisely how customers value your products and services you are able to set prices accordingly. Competitive positioning is always a factor. PricePoint Partners assesses competitive value through the eyes of your customers. Knowing how customers perceive your competitors products and services allows you to accurately position your product in the marketplace.
- #20 Utilizing value mapping techniques allows the integrated use of costs and perceived value to identify pricing targets. In the end, you will know precisely where to set prices, have a pricing strategy over the product life cycle and be prepared to respond to competitive moves. Price skimming : for new products, they are usually sold at a high price and lower price overtime Bait pricing: is when the product is being introduced for the first time and the priority is to get the customer to try out the product once
- #23 Notes: A base price can be lowered through the use of discounts and the related tactics of allowances, rebates, low or zero percent financing, and value-based pricing. Discounts are used to encourage customers to do what they would not ordinarily do, such as pay cash, take delivery out of season, or perform certain functions with a distribution channel. The most common tactics are: Quantity discounts with lower prices for buying in multiple units of above a specified dollar amount. Cash discounts offered for prompt payment of a bill Functional discounts (trade discounts) are offered when channel intermediaries perform a service for the manufacturer. Seasonal discounts are lower prices for buying merchandise out of season. Promotional allowances (or trade allowance) are payments to dealers for promoting the manufacturer’s products. Rebates are cash refunds given for purchasing a product within a specified period. Zero percent financing offers no interest charge to increase sales. However, it does cost the manufacturers. Value-based pricing sets the price at a level that seems to the customer to be a good price compared to other prices.
- #24 Notes: The basic assumption with value-based pricing is that the firm is customer driven, seeking to understand the attributes customers want in the goods and services they buy and the value of that bundle of attributes to customers.
- #25 Why is popcorn mahal in movie theaters
- #27 Notes: Other pricing tactics are unique and defy neat categorization. Managers use these tactics to stimulate demand for specific products, to increase store patronage, and to offer a wider variety of merchandise at a specific price point. These pricing tactics are described on this slide. Discussion/Team Activity: Discuss products and/or businesses that utilize these pricing tactics. Single price tactic = all items for 99, metro gaisano Bait pricing = Illegal practice of 'baiting' customers with unrealistically low prices to bring them into the store , and then trying to sell them higher-priced goods on the pretext that the advertised bargain-priced goods are sold out. Imagine, for a moment, what would happen if petron or caltex stations advertised for, say, $0.90 per litre but when motorists filled their cars, they discovered the real price was $1.30 per litre. There would be a national outcry. Service station operators and oil companies would be quickly prosecuted. They would face huge fines. The media scrutiny would be intense. PRICE LINING: this strategy targets a specific segment of the buying public by carrying products only in a specific price range. Example a store may wish to attract customers willing to pay over 50USD for a purse Odd-even pricing = a form of psychological pricing that suggests buyers are more sensitive to certain ending digits. Odd = 1 3 7 5 9 Even = 9.10, 10.50, 100.00 Two part pricing = coffee mug with discounted refills, entrance fee with a ride, or 6 flags free for a ride Commodity bundling = microsoft office, dell pc with monitor, amazons free shipping
- #28 On Line Princess Cruises Carnival Cruises How up-front are companies about their pricing penalties? Compare what you find out at Princess Cruises’ Web page (type “penalties” into the search box) with what you find on Carnival Cruises’ page. From a marketing standpoint, do you think it is better to hide penalties in the fine print or to clearly let the customer know in advance? Notes: More businesses are adopting consumer penalties—extra fees paid by consumers for violating the terms of a purchase agreement. Have your students brainstorm a list of common consumer penalties in different industries.