Setting the Right Price

Key Concepts

How to Set a Price on aProduct or Service

Fine tune with pricing tacticsFine tune 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

Establish Pricing Goals

Profit-Oriented

Sales-Oriented

Status Quo

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.

Why & When Price Skimming ?

SituationsWhenPrice

SkimmingIs Successful

SituationsWhenPrice

SkimmingIs Successful

Unique Advantages/Superior

Legal Protection of Product

Blocked Entry to Competitors

Technological Breakthrough

Inelastic Demand

Penetration Pricing

AdvantagesAdvantages DisadvantagesDisadvantages

Discourages or blocks competition from market entry PRICE AS BARRIER

Boosts sales and provides large profit increases

Can justify production expansion

Requires gear up for mass production

Have to sell large volumes at low prices

Strategy to gain market share may fail

Status Quo Pricing

AdvantagesAdvantages DisadvantagesDisadvantages

Simplicity

Safest route to long-term survival for small firms Fly under the radar

Strategy may ignore demand and/or cost

Setting the Right Price

Establishprice goals

Establishprice goals

Estimate demand,costs, and profits

Estimate demand,costs, and profits

Choose aprice strategy

Choose aprice strategy

Fine-tunebase price

Fine-tunebase price

Set price$x.yy

Set price$x.yy

Evaluateresults

Evaluateresults

Skimming

Status quo

Penetration

Low $

High $

The Legality and Ethics ofPrice Strategy

Unfair Trade PracticesUnfair Trade Practices

Price FixingPrice Fixing

Price DiscriminationPrice Discrimination

Predatory PricingPredatory Pricing

The Legality and Ethics ofPrice Strategy

Unfair TradePractices

Unfair TradePractices

Laws that prohibit wholesalers and retailers from selling below cost.

Laws that prohibit wholesalers and retailers from selling below cost.

PriceFixing

PriceFixing

An agreement between two or more firms on the price they will charge for a product.

An agreement between two or more firms on the price they will charge for a product.

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:

Price Discrimination

The Robinson-Patman Act of 1936:

Seller Defenses Seller Defenses

CostCost MarketConditions

MarketConditions CompetitionCompetition

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

Tactics for Fine-Tuning the Base Price

Special pricing tactics Special pricing tactics

DiscountsDiscounts

Geographic pricingGeographic pricing

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

Value-Based Pricing

Value-BasedPricing

Value-BasedPricing

Setting the price at a level that

seems to the customer to be a

good price compared to the prices

of other options.

Pricing Products Too Low

1. Managers attempt to buy market share through aggressive pricing.

2. 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

Basing-point pricing

Basing-point pricing

Freight absorptionpricing

Freight absorptionpricing

Zone pricingZone pricing

Uniform delivered pricing

Uniform delivered pricing

FOB origin pricingFOB origin pricing

Online

http://www.ups.com

Geographic Pricing

FOB OriginPricing

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.

Other Pricing Tactics

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 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

Fine-Tuning the Base Price

Product Line Pricing

Setting prices for an entire line

of products.

Product LinePricing

Product LinePricing

Relationships among Products

ComplementaryComplementary

SubstitutesSubstitutes

NeutralNeutral

Inflation

Cost-Oriented TacticsCost-Oriented Tactics

High InflationHigh Inflation

Demand-Oriented TacticsDemand-Oriented Tactics

Cost-Oriented Tactics

IncreasedProduction

Costs

Dec

reas

edD

eman

dPrice

IncreaseMaintaininga Fixed

Gross Margin

Cost-Oriented Tactics

Delayed-quotationpricing

Escalator pricing

Hold pricesconstant, but add new fees

Cost-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 TacticsProblems with Cost-Oriented Tactics

Demand-Oriented Tactics

The use of discounts by

salespeople to increase

demand for one or more

products in a line.

PriceShading

PriceShading

Demand-Oriented Tactics

Strategies to Make Demand More Inelastic

Strategies to Make Demand More Inelastic

Cultivate selected demandCultivate selected demand

Create unique offeringsCreate unique offerings

Change the package designChange the package design

Heighten buyer dependenceHeighten buyer dependence

Recession

Bundling or UnbundlingBundling or Unbundling

Value-Based PricingValue-Based Pricing

Supplier Strategies during Recession

Renegotiating contractsRenegotiating contracts

Offering helpOffering help

Keeping the pressure onKeeping the pressure on

Paring down suppliersParing down suppliers

Pricing During Inflation and Recession