Setting the Right Price

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  • 1.CHAPTER18 Setting theRight Price Designed by Eric Brengle B-books, Ltd. Prepared by Deborah Baker Texas Christian University Introduction to Marketing McDaniel, Lamb, Hair 9

2. LearningOutcomes Describe the procedure for setting the right price Identify the legal and ethical constraintson 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. LearningOutcomesDiscuss product line pricing Describe the role of pricing during periods of inflation and recession LO 5 LO 4 4. How to Set a Price on a Product or Service Describe the procedure for setting the right price LO I 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. Establish Pricing Goals LO I Profit-Oriented Sales-Oriented Status Quo 7. Choose a Price Strategy A basic, long-term pricing framework, which establishes the initial price for a product and the intended direction forprice movements over the product life cycle . LO I Price Strategy 8. Choose a Price Strategy LO I Status QuoPricingPriceSkimming PenetrationPricing Charging a price identical to or very close to the competitionsprice. A firm charges a highintroductory price, often coupledwith heavy promotion. A firm charges a relatively lowprice for a product initially asa way to reach the mass market. 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. Penetration Pricing LO I

  • 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

Advantages Disadvantages Online http://www.iflyswa.com 11. Status Quo Pricing LO I

  • Simplicity
  • Safest route to long-term survival for small firms
  • Strategy may ignore demand and/or cost

Advantages Disadvantages 12. Fast Times atRidgemontHigh Biz Flix LO I 13. REVIEW LEARNING OUTCOME Setting the Right Price LO I Establish pricegoals 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. The Legality and Ethics of Price Strategy Identify the legal andethical constraintson pricing decisions LO 2 15. The Legality and Ethics of Price Strategy LO 2 Unfair Trade Practices Price Fixing Price Discrimination Predatory Pricing 16. The Legality and Ethics of Price Strategy LO 2 Unfair Trade Practices Laws that prohibit wholesalersand retailers from sellingbelow cost. Price Fixing An agreement between twoor more firms on the price theywill charge for a product. 17. 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.

LO 2 The Robinson-Patman Act of 1936: 18. Price Discrimination LO 2 The Robinson-Patman Act of 1936: Seller DefensesCost Market Conditions Competition 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. PredatoryPricing 20. Tactics for Fine-Tuning the Base Price Explain how discounts,geographic pricing, andother special pricing tacticscan be used to fine-tunethe base price LO 3 21. Tactics for Fine-Tuning the Base Price LO 3 Special pricing tacticsDiscounts Geographic pricing 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. 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. Pricing Products Too Low LO 3

  • 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.

25. Geographic Pricing LO 3 Basing-pointpricing Freight absorption pricing Zone pricing Uniform deliveredpricing FOB origin pricing Online http://www.ups.com 26. Geographic Pricing LO 3 FOB Origin Pricing Uniform Delivered Pricing Zone Pricing Freight Absorption Pricing Basing-Point Pricing The buyer absorbs the freightcosts from the shipping point(free on board). The seller pays the freight chargesand bills the purchaser anidentical, flat freight charge. The U.S. is divided into zones, anda flat freight rate is charged to customers in a given zone. The seller pays for all or part ofthe freight charges and does notpass them on to the buyer. The seller designates a location asa basing point and charges all buyers the freight costs from that point. 27. Other Pricing Tactics LO 3 Single-Price TacticAll goods offered at the same priceFlexible Pricing Different customers pay different price ProfessionalServices 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 misleadingprice advertising Odd-Even Pricing Odd-number prices imply bargain Even-number prices imply quality Price BundlingCombining two or more products in asingle packageTwo-Part Pricing Two separate charges to consume a single good 28. Consumer Penalties LO 3 http://www.princesscruises.com http://www.carnival.com Online An irrevocableloss of revenue is suffered Additionaltransaction costs are incurredBusinesses ImposeConsumer Penalties If... 29. REVIEW LEARNING OUTCOME Fine-Tuning the Base Price LO 3 30. Product Line Pricing Discuss product line pricing LO 4 31. Product Line Pricing LO 4 Product Line Pricing Setting prices for an entire line of products. Online http://www.beauty.com 32. Relationships among Products LO 4 Complementary Substitutes Neutral 33. Joint Costs LO 4 Joint Costs Costs that are shared in the manufacturing and marketing of several products in a productline. 34. Pricing during Difficult Economic Times Describe the role of pricingduring periods ofinflation and recession LO 5 35. Inflation LO 5 Cost-Oriented Tactics High Inflation Demand-Oriented Tactics 36. Cost-Oriented Tactics LO 5

  • 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 economiesof scale.
  • Eliminating a product may affect theprice-quality image of the entire line.

Problems with Cost-Oriented Tactics 37. Cost-Oriented Tactics

  • Delayed-quotation pricing
  • Escalator pricing
  • Hold prices constant, but add new fees

LO 5 38. Cost-Oriented Tactics LO 5 Increased Production Costs Decreased Demand PriceIncrease Maintaining a FixedGross Margin 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. Demand-Oriented Tactics LO 5 Strategiesto MakeDemandMore Inelastic Cultivate selected demand Create unique offerings Change the package design Heighten buyer dependence 41. Recession LO 5 Bundling or Unbundling Value-Based Pricing 42. Supplier Strategies during Recession LO 5 Renegotiating contracts Offering help Keeping the pressure on Paring down suppliers 43. REVIEW LEARNING OUTCOME Pricing During Inflation and Recession LO 5