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Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved Chapter 18

1

Designed by Eric Brengle B-books, Ltd.

CHAPTER

18

Setting the Right Price

Prepared byDeborah Baker

Texas Christian University

Introduction to MarketingMcDaniel, Lamb, Hair

9

2Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved Chapter 18

Learning Outcomes

Describe the procedure for settingthe 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

LOI

LO2

LO3


Learning Outcomes

Discuss product line pricing

Describe the role of pricing during periods of inflation and recession

LO5

LO4


Describe the procedure forsetting the right price

How to Set a Price on aProduct or ServiceLOI


LOI

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

How to Set a Price on aProduct or Service

6Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved Chapter 18LOI

Establish Pricing Goals

Profit-Oriented

Sales-Oriented

Status Quo


Choose a Price Strategy

Price StrategyPrice StrategyA 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.

LOI


LOI

Status Quo Pricing

Status Quo Pricing

Price Skimming

Price Skimming

Penetration Pricing

Penetration Pricing

Charging a price identical to orvery close to the competition’s price.

Charging a price identical to orvery 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.

Choose a Price Strategy

9Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved Chapter 18 LOI

Price Skimming

SituationsWhenPrice

SkimmingIs

Successful

SituationsWhenPrice

SkimmingIs

Successful

Unique Advantages/Superior

Legal Protection of Product

Blocked Entry to Competitors

Technological Breakthrough

Inelastic Demand


LOI Penetration Pricing

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

AdvantagesAdvantages DisadvantagesDisadvantages

Online

http://www.iflyswa.com


LOI Status Quo Pricing

AdvantagesAdvantages DisadvantagesDisadvantages

Simplicity

Safest route to long-term survival for small firms

Strategy may ignore demand and/or cost


Fast Times at Ridgemont HighB

iz F

lix

LOI


REVIEW LEARNING OUTCOMESetting the Right Price

LOI

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 $


Identify the legal and ethical constraints

on pricing decisions

The Legality and Ethics ofPrice StrategyLO2


LO2 The Legality and Ethics ofPrice Strategy

Unfair Trade PracticesUnfair Trade Practices

Price FixingPrice Fixing

Price DiscriminationPrice Discrimination

Predatory PricingPredatory Pricing


LO2

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.

The Legality and Ethics ofPrice Strategy

17Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved

Chapter 18

Price DiscriminationLO2

1. There must be price discrimination.

2. Transaction must occur in interstate commerce.

3. Seller must discriminate by price among two or more purchasers.

4. Products sold must be commodities or tangible goods.

5. Products sold must be of like grade and quality.

6. There must be significant competitive injury.

The Robinson-Patman Act of 1936:

18Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved

Chapter 18

Price DiscriminationLO2

The Robinson-Patman Act of 1936:

Seller Defenses Seller Defenses

CostCost MarketConditions

MarketConditions CompetitionCompetition


LO2

Predatory Pricing

Predatory Pricing

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.


Explain how discounts, geographic pricing, and

other special pricing tactics can be used to fine-tune

the base price

Tactics for Fine-Tuning the Base PriceLO3

21Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved Chapter 18 LO3

Special pricing tactics Special pricing tactics

DiscountsDiscounts

Geographic pricingGeographic pricing

Tactics for Fine-Tuning the Base Price


LO3

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

Discounts, Allowances, Rebates, andValue-Based Pricing


LO3

Value-BasedPricing

Value-BasedPricing

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.


LO3 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

Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved Chapter 18 26LO3

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.


LO3

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

Other Pricing Tactics


LO3

http://www.princesscruises.comhttp://www.carnival.com

Online

An irrevocable loss of revenue

is suffered

Additional transaction costs

are incurred

Businesses Impose Consumer Penalties If...

Consumer Penalties


REVIEW LEARNING OUTCOMEFine-Tuning the Base Price

LO3


Discuss product line pricing

Product Line PricingLO4


Product LinePricing

Product LinePricing

LO4 Product Line Pricing

Setting prices for an entire line

of products.

Online

http://www.beauty.com


ComplementaryComplementary

SubstitutesSubstitutes

NeutralNeutral

Relationships among Products


Joint CostsJoint Costs

LO4 Joint Costs

Costs that are shared in the

manufacturing and marketing of

several products in a product

line.


Describe the role of pricing during periods of

inflation and recession

Pricing during Difficult Economic TimesLO5


InflationLO5

Cost-Oriented TacticsCost-Oriented Tactics

High InflationHigh Inflation

Demand-Oriented TacticsDemand-Oriented Tactics

36Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved Chapter 18LO5

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

Cost-Oriented Tactics


Cost-Oriented TacticsLO5

Delayed-quotation pricing

Escalator pricing

Hold prices constant, but add new fees


LO5

IncreasedProduction

Costs

Dec

reas

edD

eman

d

Price

IncreaseMaintaininga Fixed

Gross Margin

Cost-Oriented Tactics


Demand-Oriented TacticsLO5

PriceShading

PriceShading

The use of discounts by

salespeople to increase

demand for one or more

products in a line.

40Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved Chapter 18LO5

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

Demand-Oriented Tactics


Recession

Bundling or UnbundlingBundling or Unbundling

Value-Based PricingValue-Based Pricing


LO5

Renegotiating contractsRenegotiating contracts

Offering helpOffering help

Keeping the pressure onKeeping the pressure on

Paring down suppliersParing down suppliers

Supplier Strategies during Recession


REVIEW LEARNING OUTCOMEPricing During Inflation and Recession

LO5