1 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 17 Setting the 17 Right Price Canadian Adaptation prepared by Don Hill, Langara College

2 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 17 Learning Objectives 1.Describe the procedure for setting the right price 2. Identify the legal and ethical constraints on pricing decisions 3. Explain how discounts, geographic pricing, and other special pricing tactics can be used to fine-tune the base price

3 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 17 Learning Objectives [continued] 4. Discuss product line pricing 5. Describe the role of pricing during periods of inflation and recession

4 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 17 On Line www. autonews.com Learning Objective Describe the procedure for setting the right price 1 1 1

5 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 17 Steps in Setting the Right Price Fine tune with pricing tactics Choose a price strategy Estimate demand, costs, and profits Establish pricing goals 1 Results lead to the right price

6 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 17 Pricing Objectives Profit-Oriented Pricing Objectives Sales-Oriented Pricing Objectives Status Quo Pricing Objectives 1

7 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 17 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. 1

8 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 17 Choosing a Price Strategy Status Quo Pricing Price Skimming Penetration Pricing 1

9 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 17 Price Skimming Situationswhen Is Successful Situationswhen Price Skimming Is Successful Unique Advantages/Superior Legal Protection of Product Blocked Entry to Competitors Technological Breakthrough Inelastic Demand 1

10 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 17 Penetration Pricing On Line Penetration Pricing A pricing policy whereby a firm charges a relatively low price for a product initially as a way to reach the mass market. 1

11 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 17 Penetration Pricing 1 Advantages  Discourages or blocks competition from market entry  Boosts sales and provides large profit increases.  Requires gear up for mass production  Selling large volumes at low prices  Strategy to gain market share may fail Disadvantages

12 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 17 Status Quo Pricing 1  Simplicity  Safest route to long- term survival for small firms  Strategy may ignore demand and/or cost AdvantagesDisadvantages

13 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 17 Procedure for Price Setting 1

14 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 17 Learning Objective Identify the legal and ethical constraints on pricing decisions 2 2 2

15 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 17 The Legality and Ethics of Price Strategy Deceptive Pricing Price Maintenance Price Fixing Price Discrimination 2 Predatory Pricing

16 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 17 Deceptive Pricing Promoting a price or price saving that is not actually available. 2

17 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 17 Price Maintenance Relates to laws that prohibit manufacturers from controlling prices at the retail level. 2

18 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 17 Price Fixing On Line Price Fixing An agreement between two or more firms on the price they will charge for a product. 2

19 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 17 Price Discrimination Prohibits any firm from selling to two or more different buyers at different prices if the result would lessen competition 2

20 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 17 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. 2

21 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 17 Legal Constraints on Pricing 2

22 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 17 Learning Objective Explain how discounts, geographic pricing, and other special pricing tactics can be used to fine-tune the base price 3 3 3

23 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 17 Tactics for Fine-Tuning the Base Price Special pricing tactics Discounts Geographic pricing 3

24 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 17 Tactics for Fine-Tuning the Base Price Quantity Discounts Cash Discounts Functional Discounts Seasonal Discounts Promotional Allowances Rebates Value-Based Pricing Zero Percent Financing On Line 3 Pricing Too Low

25 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 17 Value-Based Pricing The price is set at a level that seems to the customer to be a good price compared to the prices of other options. 3

26 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 17 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 3

27 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 17 Geographic Pricing FOB Origin Pricing FOB Origin Pricing The buyer absorbs the freight costs from the shipping point (“free on board”). Uniform Delivered Pricing Uniform Delivered Pricing The seller pays the freight charges and bills the purchaser an identical, flat freight charge. 3

28 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 17 Geographic Pricing Zone Pricing Freight Absorption Pricing Freight Absorption Pricing Basing-Point Pricing Basing-Point Pricing The country 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. 3 On Line

29 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 17 Special Pricing Tactics Single-Price Tactic Flexible Pricing Professional Services Pricing Price Lining Leader Pricing Odd-Even Pricing Price Bundling Two-Part Pricing All goods offered at the same price Different customers pay different prices Used by professionals with experience, training or certification Several line items at specific price points Sell product at near or below cost Odd-number prices imply bargain Even-number prices imply quality Combining two or more products in a single package Two separate charges to consume a single good 3 On Line

30 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 17 Consumer Penalties An irrevocable loss of revenue is suffered An irrevocable loss of revenue is suffered Additional transaction costs are incurred Additional transaction costs are incurred Businesses Impose Consumer Penalties If... On Line 3

31 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 17 Summary of Fine-Tuning the Base Price 3

32 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 17 Learning Objective Discuss product line pricing 4 4 4

33 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 17 Product Line Pricing On Line Product Line Pricing Setting prices for an entire line of products. 4

34 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 17 Joint Costs Costs that are shared in the manufacturing and marketing of several products in a product line. 4

35 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 17 Relationships among Products 4

36 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 17 Learning Objective Describe the role of pricing during periods of inflation and recession 5 5 5

37 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 17 Pricing During Difficult Economic Times Demand-Oriented Tactics Cost-Oriented Tactics High Inflation 5

38 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 17 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 Problems with Cost-Oriented Tactics 5

39 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 17 Cost-Oriented Tactics Delayed- Quotation Pricing Delayed- Quotation Pricing A firm price is not set until the item is either finished or delivered. Escalator Pricing Escalator Pricing The final selling price reflects cost increases incurred between the time the order is placed and when delivery is made. The final selling price reflects cost increases incurred between the time the order is placed and when delivery is made. 5

40 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 17 Cost-Oriented Tactics Maintaining a Fixed Gross Margin 5 IncreasedProductionCosts DecreasedDemand PriceIncrease

41 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 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 5

42 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 17 Price Shading The use of discounts by salespeople to increase demand for one or more products in a line. 5

43 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 17 Pricing During Recession Bundling or Unbundling Value-Based Pricing 5 On Line

44 Copyright © 2009 by Nelson Education, Ltd. All rights reserved. Chapter 17 Supplier Strategies During Recession Renegotiating contracts Offering help Keeping the pressure on Paring down suppliers 5