Designed by Eric Brengle B-books, Ltd.

1Copyright ©2009 by Cengage Learning Inc. All rights reserved

Designed by Eric Brengle B-books, Ltd.

CHAPTER

20

Setting the Right Price

Prepared byAmit Shah

Frostburg State University

MarketingLamb, Hair, McDaniel

10

Copyright ©2009 by Cengage Learning Inc. All rights reserved

Learning Outcomes

2

Describe the procedure for settingthe right price

Identify the legal and ethical constraints on pricing decisions

Explain how discounts, geographic pricing, and other pricing tactics can be used to fine-tune the base price

LOI

LO2

LO3


Learning Outcomes

3

Discuss product line pricing

Describe the role of pricing during periods of inflation and recessionLO5

LO4


How to Set a Price on aProduct or Service

4

Describe the procedure forsetting the right price

LOI


How to Set a Price on aProduct or Service

5

LOI

Fine tune with pricing tactics

Choose a price strategy

Estimate demand, costs, and profits

Establish pricing goals

Results lead to the right price


Establish Pricing Goals

6LOI

Profit-Oriented

Sales-Oriented

Status Quo


Choose a Price Strategy

7

Price StrategyA basic, long-term pricing framework, which establishes the initial price for a product and the intended direction for price movements over theproduct life cycle.

LOI


Choose a Price Strategy

8

LOI

Status Quo Pricing

Price Skimming

Penetration Pricing

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 relatively low price for a product initially as a way to reach the mass market.


Price Skimming

9

LOI

SituationsWhenPrice

SkimmingIs

Successful

Unique Advantages/Superior

Legal Protection of Product

Blocked Entry to Competitors

Technological Breakthrough

Inelastic Demand


Penetration Pricing

10

LOI

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

http://www.iflyswa.com/

http://www.iflyswa.com/


Status Quo Pricing

11

LOI

AdvantagesAdvantages DisadvantagesDisadvantages

Simplicity

Safest route to long-term survival for small firms

Strategy may ignore demand and/or cost


REVIEW LEARNING OUTCOMESetting the Right Price

12

LOI

Establishprice goals

Estimate demand,costs, and profits

Choose aprice strategy

Fine-tunebase price

Set price$x.yy

Evaluateresults

Skimming

Status quo

Penetration

Low $

High $


The Legality and Ethics ofPrice Strategy

13

Identify the legal and ethical constraints

on pricing decisions

LO2



14

LO2

Unfair Trade Practices

Price Fixing

Price Discrimination

Predatory Pricing



15

LO2

Unfair TradePractices

Laws that prohibit wholesalers and retailers from selling below cost.

PriceFixing

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



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.

16

LO2

The Robinson-Patman Act of 1936:



17

LO2

The Robinson-Patman Act of 1936:

Seller Defenses

Cost MarketConditions Competition


Predatory Pricing

18

LO2

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.


Tactics for Fine-Tuning the Base Price

19

Explain how discounts, geographic pricing, and

other special pricing tactics can be used to fine-tune

the base price

LO3


Tactics for Fine-Tuning the Base Price

20

LO3

Special pricing tactics

Discounts

Geographic pricing


Discounts, Allowances, Rebates, andValue-Based Pricing

21

LO3

Quantity Discounts

Cash Discounts

Functional Discounts

Seasonal Discounts

Promotional Allowances

Rebates

Zero Percent Financing

Value-Based Pricing

Markdown Money


Value-Based Pricing

22

LO3

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

23LO3

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

24

LO3

Basing-point pricing

Freight absorptionpricing

Zone pricing

Uniform delivered pricing

FOB origin pricing

Online

http://www.ups.com

http://www.ups.com/

http://www.ups.com/

Copyright ©2009 by Cengage Learning Inc. All rights reserved 25

LO3Geographic 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

26

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


Consumer Penalties

27LO3

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...

http://www.princesscruises.com/

http://www.princesscruises.com/

http://www.carnival.com/

http://www.carnival.com/


REVIEW LEARNING OUTCOMEFine-Tuning the Base Price

28

LO3


Product Line Pricing

29

Discuss product line pricing

LO4


Product Line Pricing

30

Product LinePricing

LO4

Setting prices for an entire line of products.

Online

http://www.beauty.com

http://www.beauty.com/

http://www.beauty.com/


Relationships among Products

31

LO4

Complementary

Substitutes

Neutral


Joint Costs

32

Joint Costs

LO4

Costs that are shared in the manufacturing and marketing of several products in a product line.


Pricing during Difficult Economic Times

33

Describe the role of pricing during periods of

inflation and recession

LO5


Inflation

34

LO5

Cost-Oriented Tactics

High Inflation

Demand-Oriented Tactics



35LO5

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 Delayed-quotation pricing

Escalator pricing

Hold prices constant, but add new fees

36

LO5



37

LO5

IncreasedProduction

Costs

Decr

ease

dDe

man

d

Price

IncreaseMaintaininga Fixed

Gross Margin



38

LO5

PriceShading

The use of discounts by salespeople to increase demand for one or more products in a line.



39LO5

Strategies to Make Demand

More Inelastic

Cultivate selected demand

Create unique offerings

Change the package design

Heighten buyer dependence


Recession

40

LO5

Bundling or Unbundling

Value-Based Pricing


Supplier Strategies During Recession

41

LO5

Renegotiating contracts

Offering help

Keeping the pressure on

Paring down suppliers


REVIEW LEARNING OUTCOMEPricing During Inflation and Recession

42

LO5

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