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Lamb, Hair, McDaniel
CHAPTER 20
Setting the Right Price
2010-2011
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LO 1 Describe the procedure for setting the right price
LO 2 Identify the legal and ethical constraints on pricing decisions
LO 3 Explain how discounts, geographic pricing, and other special pricing tactics can be used to fine-tune the base price
Learning OutcomesLearning Outcomes
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LO 4 Discuss product line pricing
LO 5 Describe the role of pricing during periods of inflation and recession
Learning OutcomesLearning Outcomes
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Describe the procedure for
setting the right price
How to Set a Price on aHow to Set a Price on aProductProduct
LO1
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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
LO1
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Establish Pricing Goals
Profit-Oriented
Sales-Oriented
Status Quo
LO1
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Choose a Price Strategy
A 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.
Price StrategyPrice Strategy
LO1
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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.
LO1
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Price Skimming
SituationsWhenPrice
SkimmingIs
Successful
SituationsWhenPrice
SkimmingIs
Successful
Unique Advantages/Superior
Legal Protection of Product
Blocked Entry to Competitors
Technological Breakthrough
Inelastic Demand
LO1
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Penetration Pricing
AdvantagesAdvantages DisadvantagesDisadvantages
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
LO1
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Status Quo Pricing
AdvantagesAdvantages DisadvantagesDisadvantages
Simplicity
Safest route to long-term survival for small firms
Strategy may ignore demand and/or cost
LO1
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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
LO1
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Identify the legal and ethical constraints
on pricing decisions
The Legality and Ethics ofThe Legality and Ethics ofPrice StrategyPrice Strategy
LO2
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The Legality and Ethics ofPrice Strategy
Unfair Trade PracticesUnfair Trade Practices
Price FixingPrice Fixing
Price DiscriminationPrice Discrimination
Predatory PricingPredatory Pricing
LO2
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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.
LO2
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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:
LO2
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Price Discrimination
The Robinson-Patman Act of 1936:
Seller Defenses Seller Defenses
CostCost MarketConditions
MarketConditions CompetitionCompetition
LO2
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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
LO2
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Explain how discounts, geographic pricing, and other pricing tactics can be used to fine-tune the
base price
Tactics for Fine-Tuning Tactics for Fine-Tuning the Base Pricethe Base Price
LO3
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Tactics for Fine-Tuning the Base Price
Special pricing tactics Special pricing tactics
DiscountsDiscounts
Geographic pricingGeographic pricing
LO3
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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
LO3
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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
Value-BasedPricing
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Value-based Pricing: Step 1
Companies that set prices using a cost-plus model—adding a predetermined percentage to a product’s cost/unit to produce a profit—may be leaving money on the table.
Instead, a company should use the cost-plus model to determine its pricing threshold and then use value-based pricing to set the best price.
Source: Elisabeth A. Sullivan, “Value Pricing: Smart Marketers Know Cost-Plus Can Be Costly,” MarketingNews, January 15, 2008.LO3
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Value-based Pricing: Step 2
How to determine value? It’s simple. Really. Ask your customers: What do they like about you? What don’t they like?
Their responses represent the perceived value of your product in the marketplace.
The attributes that will determine the perceived value of your product include product quality, on-time delivery, customer service, technical service, and price.
LO3
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Value-based Pricing: Step 3
Now, ask customers what would be an acceptable price, what would be an expensive price, and what would be a prohibitively expensive price.
The best price usually falls between “expensive” and “prohibitively expensive.”
Customers want value and they’re willing to pay for it.
LO3
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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.
LO3
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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
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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
LO3
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Consumer Penalties
An irrevocable loss of revenue
is suffered
Additional transaction costs
are incurred
Businesses Impose Consumer Penalties If...
LO3
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Fine-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
LO3
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Discuss product line pricing
Product Line PricingProduct Line Pricing
LO4
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Product Line Pricing
Setting prices for an
entire line of products.
Product LinePricing
Product LinePricing
LO4
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Relationships among Products
ComplementaryComplementary
SubstitutesSubstitutes
NeutralNeutral
LO4
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Joint Costs
Joint CostsJoint Costs Costs that are shared in
the manufacturing and
marketing of several
products in a product
line.
LO4
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Describe the role of pricing during
periods of inflation and recession
Pricing during Difficult Pricing during Difficult Economic TimesEconomic Times
LO5
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Inflation
Cost-Oriented TacticsCost-Oriented Tactics
High InflationHigh Inflation
Demand-Oriented TacticsDemand-Oriented Tactics
LO5
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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
LO5
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Cost-Oriented Tactics
Delayed-quotation
pricing
Escalator pricing
Hold prices
constant, but
add new fees
LO5
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Cost-Oriented Tactics
IncreasedProduction
Costs
Dec
reas
edD
eman
dPrice
IncreaseMaintaininga Fixed
Gross Margin
LO5
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Demand-Oriented Tactics
The use of discounts by
salespeople to increase
demand for one or more
products in a line.
PriceShading
PriceShading
LO5
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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
LO5
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Recession
Bundling or UnbundlingBundling or Unbundling
Value-Based PricingValue-Based Pricing
LO5
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Supplier Strategies during Recession
Renegotiating contractsRenegotiating contracts
Offering helpOffering help
Keeping the pressure onKeeping the pressure on
Paring down suppliersParing down suppliers
LO5
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Pricing During Inflation and Recession
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 suppliersLO5