Chapter 20: Setting the Right Price Prepared by Amit Shah, Frostburg State University Designed by Eric Brengle, B-books, Ltd. Copyright 2010 by Cengage Learning Inc. All Rights Reserved 1

Copyright 2010 by Cengage Learning Inc. All Rights Reserved Chapter 20 Setting the Right Price Learning Outcomes Describe the procedure for setting the 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 LO1 LO2 LO3 Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Copyright 2010 by Cengage Learning Inc. All Rights Reserved Chapter 20 Setting the Right Price Learning Outcomes Discuss product line pricing Describe the role of pricing during periods of inflation and recession LO4 LO5 Copyright 2010 by Cengage Learning Inc. All Rights Reserved

How to Set a Price on a Product or Service Chapter 20 Setting the Right Price How to Set a Price on a Product or Service Describe the procedure for setting the right price. LO1 Copyright 2010 by Cengage Learning Inc. All Rights Reserved

How to Set a Price on a Product or Service Chapter 20 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 Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Establish Pricing Goals Chapter 20 Setting the Right Price Establish Pricing Goals Profit-Oriented Sales-Oriented Status Quo Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Choose a Price Strategy Chapter 20 Setting the Right Price Choose a Price Strategy Price Strategy - 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. Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Choose a Price Strategy Chapter 20 Setting the Right Price 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. Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Price Skimming Situations When Price Skimming Is Successful Chapter 20 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 Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Copyright 2010 by Cengage Learning Inc. All Rights Reserved Chapter 20 Setting the Right Price Penetration Pricing Advantages Disadvantages Requires gear up for mass production Selling large volumes at low prices Strategy to gain market share may fail Discourages or blocks competition from market entry Boosts sales and provides large profit increases Can justify production expansion Online http://www.iflyswa.com Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Copyright 2010 by Cengage Learning Inc. All Rights Reserved Chapter 20 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 Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Review Learning Outcome Setting the Right Price LO1 Chapter 20 Setting the Right Price Review Learning Outcome 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 $ Copyright 2010 by Cengage Learning Inc. All Rights Reserved

The Legality and Ethics of Price Strategy Chapter 20 Setting the Right Price The Legality and Ethics of Price Strategy Identify the legal and ethical constraints on pricing decisions. LO2 Copyright 2010 by Cengage Learning Inc. All Rights Reserved

The Legality and Ethics of Price Strategy Chapter 20 Setting the Right Price The Legality and Ethics of Price Strategy Unfair Trade Practices Price Fixing Price Discrimination Predatory Pricing Copyright 2010 by Cengage Learning Inc. All Rights Reserved

The Legality and Ethics of Price Strategy Chapter 20 Setting the Right Price The Legality and Ethics of Price Strategy 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. Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Copyright 2010 by Cengage Learning Inc. All Rights Reserved Price Discrimination Chapter 20 Setting the Right Price The Robinson-Patman Act of 1936: 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. Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Copyright 2010 by Cengage Learning Inc. All Rights Reserved Chapter 20 Setting the Right Price Price Discrimination The Robinson-Patman Act of 1936: Seller Defenses Cost Market Conditions Competition Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Predatory Pricing The practice of charging a Chapter 20 Setting the Right Price 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. Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Tactics for Fine-Tuning the Base Price Chapter 20 Setting the Right Price Tactics for Fine-Tuning the Base Price Explain how discounts, geographic pricing, and other special pricing tactics can be used to fine-tune the base price. LO3 Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Tactics for Fine-Tuning the Base Price Chapter 20 Setting the Right Price Tactics for Fine-Tuning the Base Price Special pricing tactics Discounts Geographic pricing Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Discounts, Allowances, Rebates, and Value-Based Pricing Chapter 20 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 Markdown Money Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Value-Based Pricing Selling the price at a level Chapter 20 Setting the Right Price Value-Based Pricing Selling the price at a level that seems to be a good price compared to the prices of other options. Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Pricing Products Too Low Chapter 20 Setting the Right Price Pricing Products Too Low Managers attempt to buy market share through aggressive pricing. Managers tend to make pricing decisions based on current costs, current competitor prices, and short-term share gains rather than on long-term profitability. Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Copyright 2010 by Cengage Learning Inc. All Rights Reserved Chapter 20 Setting the Right Price Geographic Pricing Basing-point pricing Freight absorption Zone pricing Uniform delivered FOB origin pricing Online http://www.ups.com Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Copyright 2010 by Cengage Learning Inc. All Rights Reserved Geographic Pricing Chapter 20 Setting the Right Price FOB Origin Pricing Uniform Delivered Zone Pricing Freight Absorption Basing-Point 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. Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Copyright 2010 by Cengage Learning Inc. All Rights Reserved Other Pricing Tactics Chapter 20 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 Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Businesses Impose Consumer Penalties If... Chapter 20 Setting the Right Price Consumer Penalties An irrevocable loss of revenue is suffered Additional transaction costs are incurred Businesses Impose Consumer Penalties If... http://www.princesscruises.com http://www.carnival.com Online Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Review Learning Outcome Fine-Tuning the Base Price Chapter 20 Setting the Right Price Review Learning Outcome Fine-Tuning the Base Price LO3 Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Discuss product line pricing. Chapter 20 Setting the Right Price Product Line Pricing Discuss product line pricing. LO4 Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Setting prices for an entire line Chapter 20 Setting the Right Price Product Line Pricing Setting prices for an entire line of products. Online http://www.beauty.com Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Relationships Among Products Chapter 20 Setting the Right Price Relationships Among Products Complementary Substitutes Neutral Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Joint Costs Costs that are shared in the manufacturing Chapter 20 Setting the Right Price Joint Costs Costs that are shared in the manufacturing and marketing of several products in a product life. Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Pricing During Difficult Economic Times Chapter 20 Setting the Right Price Pricing During Difficult Economic Times Describe the role of pricing during periods of inflation and recession. LO5 Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Cost-Oriented Tactics Demand-Oriented Tactics Chapter 20 Setting the Right Price Inflation Cost-Oriented Tactics High Inflation Demand-Oriented Tactics Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Cost-Oriented Tactics Chapter 20 Setting the Right Price 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. Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Cost-Oriented Tactics Chapter 20 Setting the Right Price Cost-Oriented Tactics Delayed-quotation pricing Escalator pricing Hold prices constant, but add new fees Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Cost-Oriented Tactics Chapter 20 Setting the Right Price Cost-Oriented Tactics Increased Production Costs Decreased Demand Price Increase Maintaining a Fixed Gross Margin Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Demand-Oriented Tactics Chapter 20 Setting the Right Price Demand-Oriented Tactics Price Shading – The use of discounts by salespeople to increase demand for one or more products in a line. Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Demand-Oriented Tactics Chapter 20 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 Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Bundling or Unbundling Chapter 20 Setting the Right Price Recession Value-Based Pricing Bundling or Unbundling Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Supplier Strategies During Recession Chapter 20 Setting the Right Price Supplier Strategies During Recession Renegotiating contracts Offering help Keeping the pressure on Paring down suppliers Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Review Learning Outcome Pricing During Inflation and Recession LO5 Chapter 20 Setting the Right Price Review Learning Outcome Pricing During Inflation and Recession Copyright 2010 by Cengage Learning Inc. All Rights Reserved