1. Chapter 20 Setting the Right Price
Marketing 333
Chapter 20
Setting the Right Price

2. How to Set a Price on a Product or Service
Chapter 18 Setting the Right Price
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
Notes:
Setting the right price is a four-step process as shown in Exhibit 18.1.

3. Choose a Price Strategy
Chapter 18 Setting the Right Price
Choose a Price Strategy
Status Quo Pricing
Price Skimming
Penetration Pricing
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 relatively low price for a product initially as a way to reach the mass market.
Notes:
Companies that plan for creating a price strategy can select from three basic approaches: price skimming, penetration pricing, and status quo pricing. A discussion of each type follows.

4. Price Skimming Inelastic Demand Unique Advantages/Superior
Chapter 18 Setting the Right Price
Price Skimming
Situations
When
Price Skimming
Is Successful
Unique Advantages/Superior
Legal Protection of Product
Blocked Entry to Competitors
Technological Breakthrough
Inelastic Demand
Notes:
Price skimming is a pricing policy whereby a firm charges a high introductory price, often coupled with heavy promotion. The term is derived from the phrase “skimming the cream off the top.”
Companies often use price skimming for new products when the product is perceived as having unique advantages. As a product enters different stages of its life cycle, the price may decrease to reach larger market segments.
Additional situations when price skimming is successful are listed on this slide.
Firms often feel it is better to test the market at high prices and then lower the price if sales are too slow.
A price skimming strategy will encourage competitors to enter the market.
Discussion/Team Activity:
List companies and/or products that utilize a price skimming strategy.

5. Penetration Pricing Advantages Disadvantages
Chapter 18 Setting the Right Price
Advantages
Disadvantages
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
On Line
Southwest Airlines
It’s no secret that Southwest Airlines has some of the cheapest fares around the nation. But just how much cheaper are they? The next time you travel, take the time to compare Southwest’s prices with another carrier’s. Has your regular airline met the challenge of Southwest’s penetration pricing strategy? If so, how?
Notes:
Penetration pricing is at the opposite end of the spectrum from price skimming.
By charging a low price for a product, a larger share of the market is captured, resulting in lower production costs.
It does, however, mean lower profit per unit, and a higher volume of sales is required to reach the break-even point. Penetration pricing does tend to discourage competition and is effective in a price-sensitive market.

6. Status Quo Pricing Advantages Disadvantages Simplicity
Chapter 18 Setting the Right Price
Status Quo Pricing
Advantages
Disadvantages
Simplicity
Safest route to long- term survival for small firms
Strategy may ignore demand and/or cost
Notes:
Status quo pricing means meeting the competition’s prices by charging an identical price or very close to the competition’s price.
It is a simple method of pricing, but the strategy may ignore demand and/or cost. However, if the firm is small, meeting the competition’s prices may be the safest route to long-term survival.

7. The Legality and Ethics of Price Strategy
Chapter 18 Setting the Right Price
The Legality and Ethics of Price Strategy
Unfair Trade Practices
Price Fixing
Price Discrimination
Predatory Pricing
Notes:
The issues that limit pricing decisions are unfair trade practices, price fixing, price discrimination, and predatory pricing.

8. Tactics for Fine-Tuning the Base Price
Chapter 18 Setting the Right Price
Tactics for Fine-Tuning the Base Price
Special pricing tactics
Discounts
Geographic pricing
Notes:
The base price is the general price level at which the company expects to sell a good or service. The general price level is correlated with the pricing policy: above the market, at the market, or below the market. The final step is to fine-tune the base price.
Fine tuning techniques include discounts, geographic pricing, and special pricing tactics.

9. Discounts, Allowances, Rebates, and Value-Based Pricing
Chapter 18 Setting the Right Price
Discounts, Allowances, Rebates, and Value-Based Pricing
Quantity Discounts
Cash Discounts
Functional Discounts
Seasonal Discounts
Promotional Allowances
Rebates
Zero Percent Financing
Value-Based Pricing
Notes:
A base price can be lowered through the use of discounts and the related tactics of allowances, rebates, low or zero percent financing, and value-based pricing. Discounts are used to encourage customers to do what they would not ordinarily do, such as pay cash, take delivery out of season, or perform certain functions with a distribution channel.
The most common tactics are:
Quantity discounts with lower prices for buying in multiple units of above a specified dollar amount.
Cash discounts offered for prompt payment of a bill
Functional discounts (trade discounts) are offered when channel intermediaries perform a service for the manufacturer.
Seasonal discounts are lower prices for buying merchandise out of season.
Promotional allowances (or trade allowance) are payments to dealers for promoting the manufacturer’s products.
Rebates are cash refunds given for purchasing a product within a specified period.
Zero percent financing offers no interest charge to increase sales. However, it does cost the manufacturers.
Value-based pricing sets the price at a level that seems to the customer to be a good price compared to other prices.

10. Geographic Pricing FOB origin pricing Uniform delivered Zone pricing
Chapter 18 Setting the Right Price
Geographic Pricing
Basing-point
pricing
Freight absorption
Zone pricing
Uniform delivered
FOB origin pricing
On Line
United Parcel Service
Go to UPS’s Web site and do some quick cost comparison on sending the same package to a friend in town and to a friend out-of-state. Does the difference in cost surprise you? Do you think it is justified? Why or why not?
Notes:
The cost of freight can greatly affect the total cost of a product. The common methods of geographic pricing are listed on this slide.

11. Other Pricing Tactics Single-Price Tactic
Chapter 18 Setting the Right Price
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 bargain
Even-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
Notes:
Other pricing tactics are unique and defy neat categorization. Managers use these tactics to stimulate demand for specific products, to increase store patronage, and to offer a wider variety of merchandise at a specific price point. These pricing tactics are described on this slide.
Discussion/Team Activity:
Discuss products and/or businesses that utilize these pricing tactics.

12. Product Line Pricing Setting prices for an entire line of products.
Chapter 18 Setting the Right Price
Product Line Pricing
Product Line Pricing
Setting prices for an entire line of products.
On Line
Beauty.com
Does Beauty.com use a product line pricing strategy? Choose a brand and view the product list and pricing sheet. What evidence do you see of product line pricing? Of other pricing strategies?
Notes:
In product line pricing, the manager tries to achieve maximum profits for the entire line rather than for a single component of the line.

13. Relationships among Products
Chapter 18 Setting the Right Price
Relationships among Products
Complementary
Substitutes
Neutral
Notes:
In setting product line prices, the manager first determines the relationship among the products in the line:
Complementary: An increase in the sale of one good causes an increase in demand for the complementary product.
Substitutes: Two products in a line can be substitutes for each other. If buyers buy one item in the line, they are less likely to buy a second item in the line.
Neutral: A neutral relationship can exist between two products. Demand for one of the products is unrelated to demand for the other.

14. Chapter 18 Setting the Right Price
Joint Costs
Joint Costs
Costs that are shared in the manufacturing and marketing of several products in a product line.
Notes:
If costs are shared in the manufacturing and marketing of several products in the product line, product pricing is more difficult.
Some common assignments of joint costs include a weight basis, market value, or quantity sold.
Discussion/Team Activity:
Name products that may require joint cost pricing.

15. Pricing in Difficult Times - Inflation
Chapter 18 Setting the Right Price
Pricing in Difficult Times - Inflation
Cost-Oriented Tactics
High Inflation
Demand-Oriented Tactics

16. Cost-Oriented Tactics
Chapter 18 Setting the Right Price
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.
Notes: One common cost-oriented tactic is culling products with a low profit margin. However this tactic may backfire for the three reasons listed on this slide.

17. Demand-Oriented Tactics
Chapter 18 Setting the Right Price
Demand-Oriented Tactics
Strategies to Make
Demand
More Inelastic
Cultivate selected demand
Create unique offerings
Change the package design
Heighten buyer dependence
Notes:
To make the demand for a good or service more inelastic and to create buyer dependency, a company can use the strategies as shown on this slide:
Cultivate selected demand: Target prosperous customers who will pay extra for convenience or service. Example: Neiman Marcus
Create unique offerings: By studying buyers’ needs, the seller can design distinctive products to fit a buyers’ needs and establish a beneficial relationship. Example: Value-added or multi-ingredient cereals
Change the package design: Companies pass on higher costs by shrinking the product sizes but keep prices the same.
Heighten buyer dependence: Provide additional value-added services and training with product offerings to freeze out competition and support higher prices. Example: Owens-Corning Fiberglas integrated insulation service (from feasibility studies to installation)

18. Pricing in Difficult Times - Recession
Chapter 18 Setting the Right Price
Pricing in Difficult Times - Recession
Value-Based Pricing
Bundling or Unbundling
Notes:
Effective pricing tactics during recession are value-based pricing and bundling.
Value-based pricing stresses to customers that they are getting a good value for their money.
Bundling or unbundling of features or services gives a perception of higher value. Bundling can be demonstrated in vacation packages that include lodging, meals, massages, etc.

19. Supplier Strategies During Recession
Chapter 18 Setting the Right Price
Supplier Strategies During Recession
Renegotiating contracts
Offering help
Keeping the pressure on
Paring down suppliers
Notes:
In a recession, prices often fall so that companies can maintain demand for their products. Falling prices are an incentive to lower costs since falling prices mean lower profits or no profits. Suppliers can be excellent sources of cost savings. Some ways companies can use cost-saving strategies with suppliers are listed on this slide.
Renegotiating contracts: Demanding lower prices or rebidding the contracts.
Offering help: Help suppliers’ plants reorganize and increase productivity.
Keeping the pressure on: Set annual, across-the-board cost-reduction targets.
Paring down suppliers: Reduce the number of suppliers and boost purchases from those that remain.