2. Copyright 2000 Prentice Hall13-1 Chapter 13 Pricing Methods

3. Copyright 2000 Prentice Hall13-2 Steps in Price Planning (Fig. 13.1)

4. Copyright 2000 Prentice Hall13-3 Pricing Strategies (Fig. 13.2)

5. Copyright 2000 Prentice Hall13-4 Price-Floor Pricing Method that considers both costs and what can be done to assure that a plant can operate at its capacity. Sell some products at full price that covers all costs. Sell remaining products at price that covers just average variable costs. Price-Floor Pricing Method that considers both costs and what can be done to assure that a plant can operate at its capacity. Sell some products at full price that covers all costs. Sell remaining products at price that covers just average variable costs. Advantages: simple to calculate, and relatively safe. Disadvantages: doesn’t consider nature of the target market, demand, competition, the product’s life cycle, & product’s image. Advantages: simple to calculate, and relatively safe. Disadvantages: doesn’t consider nature of the target market, demand, competition, the product’s life cycle, & product’s image. Cost-Plus Pricing Seller totals all the costs for the product and then adds the desired profit per unit. Examples: Straight mark-up pricing 1. Estimate cost per unit of output, then 2. Add a markup Cost-Plus Pricing Seller totals all the costs for the product and then adds the desired profit per unit. Examples: Straight mark-up pricing 1. Estimate cost per unit of output, then 2. Add a markup Pricing Strategies Based on Cost

6. Copyright 2000 Prentice Hall13-5 Starts with a Customer-Pleasing Price and Works Backward to Costs. Extends Demand-Backward Pricing from the Consumer Back Through the Distribution Channel to the Manufacturer. Demand-Backward Pricing Chain-Markup Pricing Pricing Strategies Based on Demand Selling Price is Based on an Estimate of Volume or Quantity that a Firm Can Sell at Different Prices.

7. Copyright 2000 Prentice Hall13-6 Pricing Strategies Based on the Competition n n Firms may price their products: – – at the same or similar level as the competition, – – below the competition, – – above the competition. n n A price leadership strategy follows the industry leader by setting the same or similar prices.

8. Copyright 2000 Prentice Hall13-7 Pricing Strategies Based on Customers’ Needs n n Strategies that focus on keeping customers for the long term. n n May use a cost-of-ownership strategy: – – price consumers pay for a product, plus the cost of maintaining and using the product, less its resale (or salvage) value. n n May use a value pricing or every day low pricing strategy: – – firm sets prices that provide ultimate value or price/benefit ratio to customers.

9. Copyright 2000 Prentice Hall13-8 New Product Pricing: Reasons for Using a Skimming Price Skimming Price - Charging a High, Premium Price e.g. Strata Golf Balls Skimming Price - Charging a High, Premium Price e.g. Strata Golf Balls Product Benefits that Customers Want at Any Cost. Little Chance that Competitors Can Enter the Market Quickly. Several Customer Segments with Different Levels of Price Sensitivity.

10. Copyright 2000 Prentice Hall13-9 Penetration Pricing A New Product is Introduced at a Very Low Price i.e. Intel’s Pentium chip Penetration Pricing A New Product is Introduced at a Very Low Price i.e. Intel’s Pentium chip Discourages Competitors From Entering the Market Pioneering Brand Discourages Competitors From Entering the Market Pioneering Brand New Product Pricing: Reasons for Using a Penetration Price Low Price Encourages Demand and Sales in the Early Stages of the Product Life Cycle

11. Copyright 2000 Prentice Hall13-10 Trial Pricing n n Pricing a new product low for a limited period of time in order to lower the risk for a customer. n n In trial pricing, the idea is to: – – win customer acceptance first by offering a low price, then – – make profits later as buyers are converted to regular-priced customers. n n Example: CA-Simply Money, trial price $7.00, regular-priced $69.95.

12. Copyright 2000 Prentice Hall13-11 Pricing Tactics (Fig. 13.3)

13. Copyright 2000 Prentice Hall13-12 Pricing Tactics for Individual Products n Two-Part Pricing – – Two separate types of payment required to purchase the product. – – e.g. Cell phone companies charge a monthly fee + per minute fees. n Payment Pricing – – Seeks to make the consumer think the price is ‘doable”. – – e.g. Three payments of $39.99 each. – – Monthly lease payments on a car.

14. Copyright 2000 Prentice Hall13-13 Pricing Tactics for Multiple Products n Price Bundling – – Selling two or more goods or services as a single package for one price. – – e.g. Season music tickets for a single price, computer with a monitor, keyboard, and software. n Captive Pricing – – Pricing tactic a firm uses when it has two products that work only when used together. – – Sells one at a very low-price (razor), and make a profit on second high-margin item (blades).

15. Copyright 2000 Prentice Hall13-14 Geographic Pricing F.O.B. Pricing F.O.B. Origin: Customer Pays F.O.B. Delivered: Seller Pays F.O.B. Pricing F.O.B. Origin: Customer Pays F.O.B. Delivered: Seller Pays Zone Pricing Customers in Different Geographic Zones Pay Different Rates. e.g. UPS Zone Pricing Customers in Different Geographic Zones Pay Different Rates. e.g. UPS Freight Absorption Pricing Seller Takes on Part or All of the Cost of Shipping Freight Absorption Pricing Seller Takes on Part or All of the Cost of Shipping Uniform Delivered Pricing Average Shipping Cost is Added to Price for all Customers Uniform Delivered Pricing Average Shipping Cost is Added to Price for all Customers How Firms Handle the Cost of Shipping Products

16. Copyright 2000 Prentice Hall13-15 Discounting for Members of the Channel Trade or Functional Discounts Quantity Discounts Cash Discounts Seasonal Discounts

17. Copyright 2000 Prentice Hall13-16 Characteristics of E-Commerce Sellers Offer Customized Deals to Buyers Sellers Offer Customized Deals to Buyers Buyers May Comparison Shop Buyers May Comparison Shop Sellers Gather Data About Buying Habits Sellers Gather Data About Buying Habits Price is Used as a Competitive Strategy Price is Used as a Competitive Strategy Pricing With Electronic Commerce

18. Copyright 2000 Prentice Hall13-17 Internal Reference Prices Internal Reference Prices Buyers’ Pricing Expectations Buyers’ Pricing Expectations Price-Quality Inferences Price-Quality Inferences Psychological Issues in Pricing

19. Copyright 2000 Prentice Hall13-18 Psychological Pricing Strategies n n Odd-Even Pricing – – Marketers assume there is a psychological response to odd prices that differs from the responses to even prices. – – $1.99 vs $2.00 n n Price Lining – – Similar items in a product line sell at different prices, called price points. – – Refrigerator prices: $400, $600, $800, $1,000.

20. Copyright 2000 Prentice Hall13-19 Deceptive Pricing Practices Bait-and-Switch Price Fixing Horizontal and Vertical Price Fixing Price Fixing Horizontal and Vertical Price Fixing Unfair Sales Acts Loss Leader Pricing Unfair Sales Acts Loss Leader Pricing Price Discrimination Robinson-Patman Act Price Discrimination Robinson-Patman Act Legal & Ethical Considerations in Pricing

21. Copyright 2000 Prentice Hall13-20 Chapter Summary n Understand key pricing strategies. n Explain pricing tactics for individual and multiple products. n Describe the important psychological aspects of pricing. n Understand some of the legal and ethical considerations in pricing.