Copyright Cengage Learning 2013 All Rights Reserved 1 Chapter 20: Setting the Right Price Designed & Prepared by Laura Rush B-books, Ltd. Introduction to

Copyright Cengage Learning 2013 All Rights Reserved 2 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 Discuss product line pricing Describe the role of pricing during periods of inflation and recession LO 1 LO 2 LO 3 LO 5 LO 4

3 Establish Pricing Goals Profit-Oriented Sales-Oriented Status Quo Copyright Cengage Learning 2013 All Rights Reserved

4 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 Cengage Learning 2013 All Rights Reserved

5 The Legality and Ethics of Price Strategy Unfair Trade Practices Price Fixing Price Discrimination Predatory Pricing Copyright Cengage Learning 2013 All Rights Reserved

6 Tactics for Fine-Tuning the Base Price Special pricing tactics Discounts Geographic pricing Copyright Cengage Learning 2013 All Rights Reserved

7 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 Cengage Learning 2013 All Rights Reserved

8 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. Copyright Cengage Learning 2013 All Rights Reserved

9 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 Copyright Cengage Learning 2013 All Rights Reserved

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 Pricing Two separate charges to consume a single good Pay What You Want Allowing customers to pay what they think a product is worth

11 Consumer Penalties An irrevocable loss of revenue is suffered Additional transaction costs are incurred Businesses Impose Consumer Penalties If... Online Copyright Cengage Learning 2013 All Rights Reserved

12 Product Line Pricing Online Setting prices for an entire line of products. Copyright Cengage Learning 2013 All Rights Reserved

13 Relationships Among Products Complementary Substitutes Neutral Copyright Cengage Learning 2013 All Rights Reserved

14 Joint Costs Costs that are shared in the manufacturing and marketing of several products in a product life. Copyright Cengage Learning 2013 All Rights Reserved

15 Inflation Cost-Oriented Tactics High Inflation Demand-Oriented Tactics Copyright Cengage Learning 2013 All Rights Reserved

16 Cost-Oriented Tactics  Delayed-quotation pricing  Escalator pricing  Hold prices constant, but add new fees Copyright Cengage Learning 2013 All Rights Reserved

17 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 Copyright Cengage Learning 2013 All Rights Reserved

18 Recession Bundling or Unbundling Value-Based Pricing Copyright Cengage Learning 2013 All Rights Reserved

19 Supplier Strategies During Recession Renegotiating contracts Offering help Keeping the pressure on Paring down suppliers Copyright Cengage Learning 2013 All Rights Reserved