Chapter 20 Copyright ©2012 by Cengage Learning Inc. All rights reserved 1 Lamb, Hair, McDaniel...

Chapter 20 Copyright ©2012 by Cengage Learning Inc. All rights reserved 1

Lamb, Hair, McDaniel

CHAPTER 20

Setting the Right Price

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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

New-Product Development New-Product Development ProcessProcess


Establish Pricing Goals

Profit-Oriented

Sales-Oriented

Status Quo

LO1

Pricing objectives fall into three categories:


Choose a Price Strategy

A basic, long-term pricing

framework that establishes

the initial price for a product

and the intended direction

for price movements over

the product life cycle.

Price StrategyPrice Strategy

LO1


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


Price Skimming

SituationsWhenPrice

SkimmingIs

Successful

SituationsWhenPrice

SkimmingIs

Successful

Unique Advantages/Superior

Legal Protection of Product

Blocked Entry to Competitors

Technological Breakthrough

Inelastic Demand

LO1


Penetration Pricing

AdvantagesAdvantages DisadvantagesDisadvantages Can lead to lower cost

per unit as production expands

Discourages or blocks competition from market entry

Boosts sales and provides large profit increases

Requires gear up for mass production

Selling large volumes at low prices

Strategy to gain market share may fail

LO1


Status Quo Pricing

AdvantagesAdvantages DisadvantagesDisadvantages

§ Simplicity

§ Safest route to long-term survival for small firms

§ Strategy may ignore demand and/or cost

LO1


The Legality and Ethics ofPrice Strategy

Unfair Trade PracticesUnfair Trade Practices

Price FixingPrice Fixing

Price DiscriminationPrice Discrimination

Predatory PricingPredatory Pricing

LO2


Assignment• Each student will be randomly assigned to either the “for” or “against” position in the following scenario:

• Advanced Bio Medics (ABM) has invented a new stem-cell-based drug that will arrest even advanced forms of lung cancer. Development costs were actually quite low because the drug was an accidental discovery by scientists working on a different project. To stop the disease requires a regimen of one pill per week for 20 weeks. There is no substitute offered by competitors. ABM is thinking that it could maximize its profit by charging $10,000 per pill.

• Students assigned the “for” position must argue that ABM should maximize profits; Students assigned “against” must argue that it would be unethical for ABM to maximize profits.


Tactics for Fine-Tuning the Base Price

Special pricing tactics Special pricing tactics

DiscountsDiscounts

Geographic pricingGeographic pricing

LO3


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


Pricing Products Too Low

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

2. Managers have a natural tendency to want to make decisions that can be justified objectively.

LO3


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 charges freight from a basing point, regardless of the city from which the

goods are shipped.

LO3


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


Consumer Penalties

An irrevocable loss of revenue

is suffered

Additional transaction costs

are incurred

Businesses Impose Consumer Penalties If...

LO3


Product Line Pricing

LO4

setting prices for an entire line of products.

Product Line Pricing is…


Relationships among Products

ComplementaryComplementary

SubstitutesSubstitutes

NeutralNeutral

LO4


Joint Costs

Joint CostsJoint Costs Costs that are shared in

the manufacturing and

marketing of several

products in a product

line.

LO4


Inflation

Cost-Oriented TacticsCost-Oriented Tactics

High InflationHigh Inflation

Demand-Oriented TacticsDemand-Oriented Tactics

LO5


Recession

Bundling or UnbundlingBundling or Unbundling

Value-Based PricingValue-Based Pricing

LO5


Supplier Strategies during Recession

Renegotiating contractsRenegotiating contracts

Offering helpOffering help

Keeping the pressure onKeeping the pressure on

Paring down suppliersParing down suppliersLO5


AssignmentName That Price

• In groups, discuss and then decide what the appropriate price is for each of the items listed in class.

• This is a competition between groups and the group that wins gets double in-class exercise points for this assignment.

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