© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin ARRIVING AT THE FINAL PRICE 14 C HAPTER

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Understand how to establish the initial “approximate price level” using demand- oriented, cost-oriented, profit-oriented, and competition-oriented approaches. Identify the major factors considered in deriving a final list or quoted price from the approximate price level. AFTER READING THIS CHAPTER YOU SHOULD BE ABLE TO:

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Describe adjustments made to the approximate price level on the basis of geography, discounts, and allowances. Prepare basic financial analyses useful in evaluating alternative prices and arriving at the final sales price. AFTER READING THIS CHAPTER YOU SHOULD BE ABLE TO:

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Describe the principle laws and regulations affecting pricing practices. AFTER READING THIS CHAPTER YOU SHOULD BE ABLE TO:

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin DURACELL KNOWS THE VALUE OF PORTABLE POWER ARRIVING AT THE FINAL PRICE

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Demand-Oriented Approaches Skimming Pricing Penetration Pricing Prestige Pricing Price Lining STEP 4: SELECT AN APPROXIMATE PRICE LEVEL

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Demand-Oriented Approaches (cont) Odd-Even Pricing Target Pricing Bundle Pricing Yield Management Pricing STEP 4: SELECT AN APPROXIMATE PRICE LEVEL

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Concept Check 1. What are the circumstances in pricing a new product that might support skimming or penetration pricing? A: Circumstances supporting a skimming strategy include: (1) Enough prospective customers are willing to buy the product immediately at the initial high price to make these sales profitable, (2) The high initial price will not attract competitors, (3) Lowering price has only a minor effect on increasing the sales volume and reducing the unit cost, and (4) Customers interpret the high price as signifying high quality. Conditions supporting a penetration strategy include: (1) Many segments of the market are price sensitive, (2) A low initial price discourages competitors from entering the market, and (3) Unit production and marketing costs fall dramatically as production volumes increase.

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Concept Check 2. What is odd-even pricing? A: Odd-even pricing involves setting prices with a few dollars or cents under an even number, with the assumption that demand might drop off dramatically if the price were raised to the even number.

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Cost-Oriented Approaches Standard Markup Pricing Cost-Plus Pricing Experience Curve Pricing STEP 4: SELECT AN APPROXIMATE PRICE LEVEL

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Profit-Oriented Approaches Target Profit Pricing Target Return-on-Sales Pricing Target Return-on-Investment Pricing STEP 4: SELECT AN APPROXIMATE PRICE LEVEL

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Competition-Oriented Approaches Customary Pricing Above-, At-, or Below-Market Pricing Loss-Leader Pricing STEP 4: SELECT AN APPROXIMATE PRICE LEVEL

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Concept Check 1. What is standard markup pricing? A: Standard markup pricing entails adding a fixed percentage to the cost of all items in a specific product class.

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Concept Check 2. What profit-based pricing approach should a manager use if he or she wants to reflect the percentage of the firm’s resources used in obtaining the profit? A: Target-return-on-investment pricing.

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Concept Check 3. What is the purpose of loss-leader pricing when used by a retail firm? A: Loss-leader pricing is used to attract customers in hopes they will buy other products as well.

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin One-Price versus Flexible-Price PolicyOne-PriceFlexible-Price Company, Customer, and Competitive Effects Company Effects  Product-line pricing Product-line pricing Customer Effects STEP 5: SET THE LIST OR QUOTED PRICE

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Company, Customer, and Competitive Effects (cont) Competitive Effects  Price war Price war Balancing Incremental Costs and Revenues STEP 5: SET THE LIST OR QUOTED PRICE

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Discounts Quantity Discounts Seasonal Discounts Trade (Functional) Discounts Cash Discounts STEP 6: MAKE SPECIAL ADJUSTMENTS TO THE LIST OR QUOTED PRICE

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Allowances Trade-In Allowances Promotional Allowances  Everyday low pricing Everyday low pricing Geographical Adjustments FOB Origin Pricing Uniform Delivered Pricing Basing Point Pricing STEP 6: MAKE SPECIAL ADJUSTMENTS TO THE LIST OR QUOTED PRICE

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Legal and Regulatory Aspects of Pricing Price Fixing Price Discrimination Deceptive Pricing Geographical Pricing Predatory Pricing STEP 6: MAKE SPECIAL ADJUSTMENTS TO THE LIST OR QUOTED PRICE

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Concept Check 1. Why would a seller choose a flexible- price policy? A: Flexible-price policies give sellers greater discretion in setting the final price in light of demand, cost, and competitive factors.

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Concept Check 2. If a firm wished to encourage repeat purchases by a buyer throughout a year, would a cumulative or noncumulative quantity discount be a better strategy? A: Cumulative

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Concept Check 3. Which pricing practices are covered by the Sherman Act? A: Price-fixing, geographical pricing, and predatory pricing.

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin The highest initial price that customers really desiring the product are willing to pay. Skimming Pricing

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Setting a low initial price on a new product to appeal immediately to the mass market. Penetration Pricing

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Setting a high price so that status-conscious consumers will be attracted to the product and buy it. Prestige Pricing

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Setting the price of a line of products at a number of different specific pricing points. Price Lining

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Setting prices a few dollars or cents under an even number, such at $ Odd-Even Pricing

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Manufacturer deliberately adjusting the composition and features of a product to achieve the target price to consumers. Target Pricing

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin The marketing of two or more products in a single “package” price. Bundle Pricing

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin The charging of different prices to maximize revenue for a set amount of capacity at any given time. Yield Management Pricing

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Adding a fixed percentage to the cost of all items in a specific product class. Standard Markup Pricing

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin The practice of summing the total unit cost of providing a product or service and adding a specific amount to the cost to arrive at a price. Cost-Plus Pricing

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin A method of pricing based on the learning effect, which holds that the unit cost of many products and services declines by 10 percent to 30 percent each time a firm’s experience at producing and selling them doubles. Experience Curve Pricing

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Setting an annual target of a specific dollar volume of profit. Target Profit Pricing

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Setting a price to achieve a profit that is a specified percentage of the sales volume. Target Return-on-Sales Pricing

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Setting a price to achieve a return-on- investment (ROI) target. Target Return-on-Investment Pricing

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin A method of pricing based on tradition, a standardized channel of distribution, or other competitive factors. Customary Pricing

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Pricing based on market price. Above-, At-, or Below-Market Pricing

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Deliberately selling a product below its customary price to attract attention to it. Loss-Leader Pricing

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Setting one price for all buyers of a product or service. Also called fixed pricing. One-Price Policy

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Setting different prices for products and services depending on individual buyers and purchase situations. Flexible-Price Policy

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin The setting of prices for all items in a product line. Product-Line Pricing

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Successive price cutting by competitors to increase or maintain their unit sales or market share. Price War

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Reductions in unit costs for a larger order. Quantity Discounts

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Cash payment or extra amount of “free goods” awarded sellers in the channel of distribution for undertaking certain advertising or selling activities to promote a product. Promotional Allowances

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin (1) The practice or replacing promotional allowances with lower manufacturer list prices. (2) Retail strategy that emphasizes consistently low prices and eliminates most markdowns. Everyday Low Pricing

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin A method of pricing where the title of goods passes to the buyer at the point of loading. FOB Origin Pricing

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin The price the seller quotes includes all transportation costs. Uniform Delivered Pricing

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Selecting one or more geographic locations (basing point) from which the list price for products plus freight expenses are charged to buyers. Basing-Point Pricing

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin A conspiracy among firms to set prices for a product. Price Fixing

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin The practice of charging different prices to different buyers for goods of like trade and quality. Price Discrimination

© 2003 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Charging a very low price for a product with the intent of driving competitors out of business. Predatory Pricing