1

Lamb, Hair, McDaniel

CHAPTER 20

Setting the Right Price

2

How to Set a Price on aProduct or Service

Fine tune price with pricing tacticsFine tune price with pricing tactics

Choose a price strategyChoose a price strategy

Estimate demand, costs, and profitsEstimate demand, costs, and profits

Establish pricing goalsEstablish pricing goals

Results lead to the right price

3

Setting the Right Price

Estimate demand,costs, and profitsEstimate demand,costs, and profits

Establishprice goals

Establishprice goals

Choose aprice strategy

Choose aprice strategy

Fine-tunebase priceFine-tunebase price

Set price$x.yy

Set price$x.yy

Evaluateresults

Evaluateresults

Low $

High $

Skimming

Status quo

Penetration

4

Establish Pricing Goals

Profit-Oriented

Sales-Oriented

Status Quo

5

Choose a Price Strategy

Status Quo Pricing

Status Quo Pricing

Price Skimming

Price Skimming

Penetration Pricing

Penetration Pricing

Charging a price identical to or very close to the competition’s price.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 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.

A firm charges a relatively low price for a product initially as a way to reach the mass market.

6

The Legality of Price Strategy

Unfair Trade PracticesUnfair Trade Practices

Price FixingPrice Fixing

Price DiscriminationPrice Discrimination

Predatory PricingPredatory Pricing

7

Price Discrimination

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:

8

Predatory Pricing

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

9

Tactics for Fine-Tuning the Base Price

Special pricing tactics Special pricing tactics

DiscountsDiscounts

Geographic pricingGeographic pricing

10

Discounts, Allowances, Rebates, and Value-Based Pricing

Quantity DiscountsQuantity Discounts

Cash DiscountsCash Discounts

Functional DiscountsFunctional Discounts

Seasonal DiscountsSeasonal Discounts

Promotional AllowancesPromotional Allowances

RebatesRebates

Zero Percent FinancingZero Percent Financing

Value-Based PricingValue-Based Pricing

11

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.

Value-BasedPricing

12

Geographic PricingFOB Origin

Pricing

UniformDelivered

Pricing

Zone Pricing

FreightAbsorption

Pricing

Basing-PointPricing

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.

13

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 bargainEven-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

14

Fine-Tuning the Base PriceFine-Tuning the Base Price

Discounts GeographicOther

TacticsConsumerPenalties

Single price

Flexible

Professionalservices

Price lining

Leader

Bait

Odd–even

Bundling

UnbundlingTwo-part

Uniformdelivered

Zone

Freightabsorption

Basing-point

Quantity• cumulative• noncumulative

Quantity• cumulative• noncumulative

CashCash

Functional(trade)

Functional(trade)

SeasonalSeasonal

Promotional(trade)

Promotional(trade)

RebateRebate

0% Financing0% Financing

Value-basedValue-based

Pricing Tactics

FOBorigin

15

Pricing During Inflation and Pricing During Inflation and RecessionRecession

RecessionInflation

Contract product lines

Contract product lines

Delayed-quotation pricing

Delayed-quotation pricing

Escalatorpricing

Escalatorpricing

Select demandSelect

demand

Unique offeringUnique offering

Change package design

Change package design

Increase buyer dependence

Increase buyer dependence

Cost-oriented tactics

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

Ch 20 Discussion QuestionsCh 20 Discussion Questions

1.1. Describe the procedure for setting the right price in Describe the procedure for setting the right price in marketing.marketing.

2.2. Explain the four major legal and ethical concerns in Explain the four major legal and ethical concerns in pricing decisions. pricing decisions.

3.3. What is pricing tactics? Explain how discounts, What is pricing tactics? Explain how discounts, geographic pricing, and other special pricing tactics geographic pricing, and other special pricing tactics can be used to fine-tune the base price.can be used to fine-tune the base price.

4.4. Explain how pricing decisions change during Explain how pricing decisions change during periods of inflation and recession.periods of inflation and recession.