Lamb Hair Mc Daniel 2010 2011 CHAPTER 20

Lamb, Hair, Mc. Daniel 2010 -2011 CHAPTER 20 Setting the Right Price 1

Learning Outcomes 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 2

Learning Outcomes LO 4 Discuss product line pricing LO 5 Describe the role of pricing during periods of inflation and recession 3

How to Set a Price on a Product Describe the procedure for setting the right price LO 1 4

How to Set a Price on a Product or Service Establish pricing goals Estimate demand, costs, and profits Choose a price strategy Fine tune with pricing tactics Results lead to the right price LO 1 5

Establish Pricing Goals Profit-Oriented Sales-Oriented Status Quo LO 1 6

Choose a Price Strategy LO 1 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. 7

Choose a Price Strategy Price Skimming A firm charges a high introductory price, often coupled with heavy promotion. Penetration Pricing A firm charges a relatively low price for a product initially as a way to reach the mass market. Status Quo Pricing Charging a price identical to or very close to the competition’s price. LO 1 8

Price Skimming Inelastic Demand Situations When Price Skimming Is Successful Unique Advantages/Superior Legal Protection of Product Technological Breakthrough Blocked Entry to Competitors LO 1 9

Penetration Pricing Advantages § § § Discourages or blocks competition from market entry Boosts sales and provides large profit increases Can justify production expansion LO 1 Disadvantages § Requires gear up for mass production § Selling large volumes at low prices § Strategy to gain market share may fail 10

Status Quo Pricing Advantages § Simplicity § Safest route to longterm survival for small firms LO 1 Disadvantages § Strategy may ignore demand and/or cost 11

Setting the Right Price Establish price goals High $ Estimate demand, costs, and profits Skimming Choose a price strategy Status quo Penetration Evaluate results LO 1 Fine-tune base price Low $ Set price $x. yy 12

The Legality and Ethics of Price Strategy Identify the legal and ethical constraints on pricing decisions LO 2 13

The Legality and Ethics of Price Strategy Unfair Trade Practices Price Fixing Price Discrimination Predatory Pricing LO 2 14

The Legality and Ethics of Price Strategy LO 2 Unfair Trade Practices Laws that prohibit wholesalers and retailers from selling below cost. Price Fixing An agreement between two or more firms on the price they will charge for a product. 15

Price Discrimination The Robinson-Patman Act of 1936: u There must be price discrimination. u Transaction must occur in interstate commerce. u Seller must discriminate by price among two or more purchasers. u Products sold must be commodities or tangible goods. u Products sold must be of like grade and quality. u There must be significant competitive injury. LO 2 16

Price Discrimination The Robinson-Patman Act of 1936: Seller Defenses Cost LO 2 Market Conditions Competition 17

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. LO 2 18

Tactics for Fine-Tuning the Base Price Explain how discounts, geographic pricing, and other pricing tactics can be used to fine-tune the base price LO 3 19

Tactics for Fine-Tuning the Base Price Discounts Geographic pricing Special pricing tactics LO 3 20

Discounts, Allowances, Rebates, and Value-Based Pricing Quantity Discounts Promotional Allowances Cash Discounts Rebates Functional Discounts Zero Percent Financing Seasonal Discounts Value-Based Pricing LO 3 21

Value-Based Pricing Value-Based Setting the price at a level that seems to the Pricing customer to be a good price compared to the prices of other options. LO 3 22

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 valuebased pricing to set the best price. LO 3 Source: Elisabeth A. Sullivan, “Value Pricing: Smart Marketers Know Cost-Plus Can Be Costly, ” Marketing. News, January 15, 2008. 23

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. LO 3 24

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. LO 3 25

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. LO 3 26

Geographic Pricing FOB Origin Pricing The buyer absorbs the freight costs from the shipping point (“free on board”). Uniform Delivered Pricing The seller pays the freight charges and bills the purchaser an identical, flat freight charge. Zone Pricing The U. S. is divided into zones, and a flat freight rate is charged to customers in a given zone. Freight Absorption Pricing The seller pays for all or part of the freight charges and does not pass them on to the buyer. Basing-Point Pricing The seller designates a location as a basing point and charges all buyers the freight costs from that point. LO 3 27

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 Odd-Even Pricing Price Bundling Two-Part Pricing LO 3 Lure customers through false or misleading price advertising Odd-number prices imply bargain Even-number prices imply quality Combining two or more products in a single package Two separate charges to consume a single good 28

Consumer Penalties Businesses Impose Consumer Penalties If. . . An irrevocable loss of revenue is suffered LO 3 Additional transaction costs are incurred 29

Fine-Tuning the Base Pricing Tactics Discounts Quantity • cumulative • noncumulative Cash Functional (trade) Seasonal Promotional (trade) Geographic Other Tactics FOB origin Single price Consumer Penalties Flexible Uniform delivered Zone Professional services Price lining Leader Freight absorption Bait Rebate 0% Financing LO 3 Value-based Basingpoint Odd–even Bundling Unbundling Two-part 30

Product Line Pricing Discuss product line pricing LO 4 31

Product Line Pricing Setting prices for an entire line of products. LO 4 32

Relationships among Products Complementary Substitutes Neutral LO 4 33

Joint Costs LO 4 Costs that are shared in the manufacturing and marketing of several products in a product line. 34

Pricing during Difficult Economic Times Describe the role of pricing during periods of inflation and recession LO 5 35

Inflation Cost-Oriented Tactics High Inflation Demand-Oriented Tactics LO 5 36

Cost-Oriented Tactics Problems with 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. LO 5 37

Cost-Oriented Tactics u Delayed-quotation pricing u Escalator pricing u Hold prices constant, but add new fees LO 5 38

LO 5 e ic e Pr eas cr In Dec reas Dem ed and Cost-Oriented Tactics Maintaining a Fixed Gross Margin Increased Production Costs 39

Demand-Oriented Tactics Price Shading LO 5 The use of discounts by salespeople to increase demand for one or more products in a line. 40

Demand-Oriented Tactics Cultivate selected demand Strategies to Make Demand More Inelastic Create unique offerings Change the package design Heighten buyer dependence LO 5 41

Recession Value-Based Pricing Bundling or Unbundling LO 5 42

Supplier Strategies during Recession Renegotiating contracts Offering help Keeping the pressure on Paring down suppliers LO 5 43

Pricing During Inflation and Recession Inflation Recession Contract product lines Cost-oriented tactics Delayedquotation pricing Value-based Price Unbundling Escalator pricing Select demand Demand-oriented tactics Increase buyer dependence LO 5 New products Product Unique offering Change package design Bundling New product categories Renegotiate contracts Offer help Suppliers Keep pressure on suppliers Reduce number of suppliers 44