1 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

Learning Outcomes 2 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 LO 1 LO 2 LO 3 Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Learning Outcomes 3 Discuss product line pricing Describe the role of pricing during periods of inflation and recession LO 5 LO 4 Copyright 2010 by Cengage Learning Inc. All Rights Reserved

How to Set a Price on a Product or Service 4 Describe the procedure for setting the right price. LO 1 Copyright 2010 by Cengage Learning Inc. All Rights Reserved

How to Set a Price on a Product or Service 5 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 6 Profit-Oriented Sales-Oriented Status Quo Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Choose a Price Strategy 7 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 8 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 9 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 Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Penetration Pricing 10  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 failAdvantagesDisadvantages Online Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Status Quo Pricing 11AdvantagesDisadvantages  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 12 LO 1 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 13 Identify the legal and ethical constraints on pricing decisions. LO 2 Copyright 2010 by Cengage Learning Inc. All Rights Reserved

The Legality and Ethics of Price Strategy 14 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 15 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

Price Discrimination 1.There must be price discrimination. 2.Transaction must occur in interstate commerce. 3.Seller must discriminate by price among two or more purchasers. 4.Products sold must be commodities or tangible goods. 5.Products sold must be of like grade and quality. 6.There must be significant competitive injury. 16 The Robinson-Patman Act of 1936: Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Price Discrimination 17 The Robinson-Patman Act of 1936: Seller Defenses Cost Market Conditions Market Conditions Competition Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Predatory Pricing 18 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 19 Explain how discounts, geographic pricing, and other special pricing tactics can be used to fine-tune the base price. LO 3 Copyright 2010 by Cengage Learning Inc. All Rights Reserved

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

Discounts, Allowances, Rebates, and Value-Based Pricing 21 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 22 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 23 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 2010 by Cengage Learning Inc. All Rights Reserved

Geographic Pricing 24 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 2010 by Cengage Learning Inc. All Rights Reserved

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. Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Other Pricing Tactics 26 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 Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Consumer Penalties Online An irrevocable loss of revenue is suffered Additional transaction costs are incurred Businesses Impose Consumer Penalties If... Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Review Learning Outcome Fine-Tuning the Base Price 28 LO 3 Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Product Line Pricing 29 Discuss product line pricing. LO 4 Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Product Line Pricing 30 Online Setting prices for an entire line of products. Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Relationships Among Products 31 Complementary Substitutes Neutral Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Joint Costs 32 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 33 Describe the role of pricing during periods of inflation and recession. LO 5 Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Inflation 34 Cost-Oriented Tactics High Inflation Demand-Oriented Tactics Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Cost-Oriented Tactics 35  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 Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Cost-Oriented Tactics  Delayed-quotation pricing  Escalator pricing  Hold prices constant, but add new fees 36 Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Cost-Oriented Tactics 37 Increased Production Costs Decreased Demand Price Increase Maintaining a Fixed Gross Margin Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Demand-Oriented Tactics 38 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 39 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 2010 by Cengage Learning Inc. All Rights Reserved

Recession 40 Bundling or Unbundling Value-Based Pricing Copyright 2010 by Cengage Learning Inc. All Rights Reserved

Supplier Strategies During Recession 41 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 42 LO 5 Copyright 2010 by Cengage Learning Inc. All Rights Reserved