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Setting the Right Price Key Concepts. How to Set a Price on a Product or Service Fine tune with pricing tactics Choose a price strategy Estimate demand,

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Presentation on theme: "Setting the Right Price Key Concepts. How to Set a Price on a Product or Service Fine tune with pricing tactics Choose a price strategy Estimate demand,"— Presentation transcript:

1 Setting the Right Price Key Concepts

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

3 Establish Pricing Goals Profit-Oriented Sales-Oriented Status Quo

4 Choose a Price Strategy Status Quo Pricing Price Skimming 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.

5 Why & When Price Skimming ? Situations When Price Skimming Is Successful Situations When Price Skimming Is Successful Unique Advantages/Superior Legal Protection of Product Blocked Entry to Competitors Technological Breakthrough Inelastic Demand

6 Penetration PricingAdvantagesDisadvantages  Discourages or blocks competition from market entry PRICE AS BARRIER  Boosts sales and provides large profit increases  Can justify production expansion  Requires gear up for mass production  Have to sell large volumes at low prices  Strategy to gain market share may fail

7 Status Quo PricingAdvantagesDisadvantages  Simplicity  Safest route to long-term survival for small firms Fly under the radar  Strategy may ignore demand and/or cost

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

9 The Legality and Ethics of Price Strategy Unfair Trade Practices Price Fixing Price Discrimination Predatory Pricing

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

11 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:

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

13 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

14 Tactics for Fine-Tuning the Base Price Special pricing tactics Discounts Geographic pricing

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

16 Setting the price at a level that seems to the customer to be a good price compared to the prices of other options.

17 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.

18 Geographic Pricing Basing-point pricing Basing-point pricing Freight absorption pricing Freight absorption pricing Zone pricing Uniform delivered pricing Uniform delivered pricing FOB origin pricing Online

19 Geographic Pricing FOB Origin Pricing Uniform Delivered Pricing Zone Pricing Freight Absorption Pricing Basing-Point Pricing 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.

20 Other Pricing Tactics Single-Price TacticAll goods offered at the same price Flexible PricingDifferent customers pay different price Professional Services Pricing Used by professionals with experience, training or certification Price LiningSeveral line items at specific price points Leader PricingSell product at near or below cost Bait Pricing Lure customers through false or misleading price advertising Odd-Even Pricing Odd-number prices imply bargain Even-number prices imply quality Price Bundling Combining two or more products in a single package Two-Part PricingTwo separate charges to consume a single good

21 Fine-Tuning the Base Price

22 Product Line Pricing Setting prices for an entire line of products. Product Line Pricing

23 Relationships among Products Complementary Substitutes Neutral

24 Inflation Cost-Oriented Tactics High Inflation Demand-Oriented Tactics

25 Cost-Oriented Tactics Increased Production Costs Decreased Demand Price Increase Maintaining a Fixed Gross Margin

26 Cost-Oriented Tactics  Delayed-quotation pricing  Escalator pricing  Hold prices constant, but add new fees

27 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 Tactics

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

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

30 Recession Bundling or Unbundling Value-Based Pricing

31 Supplier Strategies during Recession Renegotiating contracts Offering help Keeping the pressure on Paring down suppliers

32 Pricing During Inflation and Recession


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