1. © 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide 14-2 ARRIVING AT THE FINAL PRICE C HAPTER

2. © 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin FIGURE 14-1 FIGURE 14-1 Steps in setting price Slide 14-6

3. © 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide 14-7 FIGURE 14-2 FIGURE 14-2 Four approaches for selecting an approximate price level

4. © 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide 14-8 Demand-Oriented Approaches  Skimming Pricing Skimming Pricing  Penetration Pricing Penetration Pricing  Prestige Pricing Prestige Pricing STEP 4: SELECT AN APPROPRIATE PRICE LEVEL  Price Lining Price Lining

5. © 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide 14-9 FIGURE 14-3 FIGURE 14-3 Demand curves for two types of demand-oriented approaches

6. © 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide 14-11 Demand-Oriented Approaches  Odd-Even Pricing Odd-Even Pricing  Target Pricing Target Pricing  Bundle Pricing Bundle Pricing STEP 4: SELECT AN APPROPRIATE PRICE LEVEL  Yield Management Pricing Yield Management Pricing

7. © 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide 14-14 Cost-Oriented Approaches  Standard Markup Pricing Standard Markup Pricing  Cost-Plus Pricing Cost-Plus Pricing STEP 4: SELECT AN APPROPRIATE PRICE LEVEL Cost-Plus Percentage-of-Cost Pricing Cost-Plus Fixed-Fee Pricing  Experience Curve Pricing Experience Curve Pricing Markup on Cost Markup on Selling Price

8. © 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide 14-15 Rock Hall of Fame and Panasonic HDTV What cost-oriented approach is used by each?

9. © 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide 14-16 Profit-Oriented Approaches  Target Profit Pricing Target Profit Pricing  Target Return-On-Sales Pricing Target Return-On-Sales Pricing STEP 4: SELECT AN APPROPRIATE PRICE LEVEL  Target Return-On-Investment Pricing Target Return-On-Investment Pricing

10. © 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide 14-17 FIGURE 14-4 FIGURE 14-4 Results of computer spreadsheet simulation to select price to achieve a target return on investment

11. © 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide 14-18 Competition-Oriented Approaches  Customary Pricing Customary Pricing  Above-, At-, or Below-Market Pricing Above-, At-, or Below-Market Pricing STEP 4: SELECT AN APPROPRIATE PRICE LEVEL  Loss-Leader Pricing Loss-Leader Pricing

12. © 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide 14-22 One-Price versus Flexible-Price Policy  One-Price Policy (Fixed Pricing) One-Price Policy (Fixed Pricing)  Flexible-Price Policy (Dynamic Pricing) Flexible-Price Policy (Dynamic Pricing) STEP 5: SET THE LIST OR QUOTED PRICE Clickstream

13. © 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide 14-23 99¢ Only Store What price policy is used?

14. © 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide 14-24 ETHICS AND SOCIAL RESPONSIBILITY ALERT Flexible Pricing—Is There Race and Gender Discrimination in Bargaining for a New Car?

15. © 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Company, Customer, and Competitive Effects on Pricing  Customer Effects  Company Effects STEP 5: SET THE LIST OR QUOTED PRICE Product Line Pricing Product Line Pricing  Competitive Effects Price War Price War Slide 14-25

16. © 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide 14-26 Frito-Lay Tortilla Chips What is product-line pricing and why use it?

17. © 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide 14-27  Marginal Revenue  Marginal Analysis STEP 5: SET THE LIST OR QUOTED PRICE  Marginal Cost Balancing Incremental Costs and Revenues  Elasticity of Demand

18. © 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide 14-28 FIGURE 14-5 FIGURE 14-5 The power of marginal analysis in real-world decisions

19. © 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide 14-29 FIGURE 14-6 FIGURE 14-6 Three special adjustments to list or quoted price

20. © 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide 14-30  Seasonal Discounts  Quantity Discounts Quantity Discounts STEP 6: MAKE SPECIAL ADJUSTMENTS TO THE LIST OR QUOTED PRICE  Trade (Functional) Discounts  Cash Discounts Discounts Noncumulative Quantity Discounts Cumulative Quantity Discounts

21. © 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide 14-32 FIGURE 14-7 FIGURE 14-7 The structure of trade discounts

22. © 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide 14-33 FIGURE 14-B FIGURE 14-B Markups for a manufacturer, wholesaler, and retailer on a home appliance sold to the consumer for $100

23. © 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide 14-34  Promotional Allowances Promotional Allowances  Trade-In Allowances STEP 6: MAKE SPECIAL ADJUSTMENTS TO THE LIST OR QUOTED PRICE Allowances Everyday Low Pricing Everyday Low Pricing

24. © 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide 14-36  Uniform Delivered Pricing Uniform Delivered Pricing  FOB Origin Pricing FOB Origin Pricing STEP 6: MAKE SPECIAL ADJUSTMENTS TO THE LIST OR QUOTED PRICE Geographical Adjustments Single-Zone Pricing Multiple-Zone Pricing FOB With Freight-Allowed (Absorption) Pricing Basing-Point Pricing Basing-Point Pricing

25. © 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin FIGURE 14-C FIGURE 14-C Example of basing-point pricing Slide 14-37

26. © 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide 14-38  Price Fixing Price Fixing STEP 6: MAKE SPECIAL ADJUSTMENTS TO THE LIST OR QUOTED PRICE Legal and Regulatory Aspects of Pricing Horizontal Price Fixing Vertical Price Fixing (Resale Price Maintenance) Rule of Reason

27. © 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide 14-39 FIGURE 14-8 FIGURE 14-8 Pricing practices affected by legal restrictions

28. © 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide 14-40  Price Discrimination Price Discrimination STEP 6: MAKE SPECIAL ADJUSTMENTS TO THE LIST OR QUOTED PRICE Legal and Regulatory Aspects of Pricing Cost Justification Defense Meet-The-Competition Defense  Deceptive Pricing  Geographical Pricing  Predatory Pricing Predatory Pricing

29. © 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide 14-41 FIGURE 14-9 FIGURE 14-9 Five most common deceptive pricing practices

30. © 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide 14-67 Skimming Pricing Skimming pricing involves setting the highest initial price that customers really desiring the product are willing to pay.

31. © 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide 14-68 Penetration Pricing Penetration pricing involves setting a low initial price on a new product to appeal immediately to the mass market.

32. © 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide 14-69 Prestige Pricing Prestige pricing involves setting a high price so that quality- or status-conscious consumers will be attracted to the product and buy it.

33. © 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide 14-70 Price Lining Price lining involves setting a the price of a line of products at a number of different specific pricing points.

34. © 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide 14-71 Odd-Even Pricing Odd-even pricing involves setting prices a few dollars or cents under an even number.

35. © 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide 14-72 Target Pricing Target pricing involves estimating the price that the ultimate consumer would be willing to pay for a product, working backward through markups taken by retailers and wholesalers to determine what price is charged to wholesalers, and then deliberately adjusting the composition and features of a product to achieve the target price to consumers.

36. © 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide 14-73 Bundle Pricing Bundle pricing involves the marketing of two or more products in a single package price.

37. © 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide 14-74 Yield Management Pricing Yield management pricing involves the charging of different prices to maximize revenue for a set amount of capacity at any given time.

38. © 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide 14-75 Standard Markup Pricing Standard markup pricing involves adding a fixed percentage to the cost of all items in a specific product class.

39. © 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide 14-76 Cost-Plus Pricing Cost-plus pricing involves summing the total unit cost of providing a product or service and adding a specific amount to the cost to arrive at a price.

40. © 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide 14-77 Experience Curve Pricing Experience curve pricing is 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.

41. © 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide 14-78 Target Profit Pricing Target profit pricing involves setting an annual target of a specific dollar volume of profit.

42. © 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide 14-79 Target Return-On-Sales Pricing Target return-on-sales pricing involves setting a price to achieve a profit that is a specified percentage of the sales volume.

43. © 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide 14-80 Target Return-On-Investment Pricing Target return-on-investment pricing involves setting a price to achieve an annual target return-on-investment (ROI).

44. © 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide 14-81 Customary Pricing Customary pricing involves setting a price that is dictated by tradition, a standardized channel of distribution, or other competitive factors.

45. © 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide 14-82 Above-, At-, or Below-Market Pricing Above-, at-, or below-market pricing involves setting a market price for a product or product class based on a subjective feel for the competitors’ price or market price as the benchmark.

46. © 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide 14-83 Loss-Leader Pricing Loss-leader pricing involves deliberately selling a product below its customary price, not to increase sales, but to attract customers’ attention in hopes that they will buy other products as well.

47. © 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide 14-84 One-Price Policy A one-price policy involves setting one price for all buyers of a product or service. Also called fixed pricing.

48. © 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide 14-85 Flexible-Price Policy A flexible-price policy involves setting different prices for products and services depending on individual buyers and purchase situations. Also called dynamic pricing.

49. © 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide 14-86 Product Line Pricing Product line pricing involves setting the price of a line of products at a number of different specific pricing points.

50. © 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide 14-87 Price War A price war involves successive price cutting by competitors to increase or maintain their unit sales or market share.

51. © 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide 14-88 Quantity Discounts Quantity discounts are reductions in unit costs for a larger order.

52. © 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide 14-89 Promotional Allowances Promotional allowances are cash payments or extra amount of “free goods” awarded sellers in the channel of distribution for undertaking certain advertising or selling activities to promote a product.

53. © 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide 14-90 Everyday Low Pricing Everyday low pricing is the practice of replacing promotional allowances with lower manufacturer list prices.

54. © 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide 14-91 FOB Origin Pricing FOB origin pricing is the price the seller quotes that includes the cost of loading the product onto the vehicle. The seller names the location (factory or warehouse) where the loading is to occur. The buyer becomes responsible for picking the specific mode of transportation and paying for all transportation and handling costs.

55. © 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide 14-92 Uniform Delivered Pricing Uniform delivered pricing is the price the seller quotes includes all transportation costs.

56. © 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide 14-93 Basing-Point Pricing Basing-point pricing involves selecting one or more geographical locations (basing point) from which the list price for products plus freight expenses are charged to the buyer.

57. © 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide 14-94 Price Fixing Price fixing involves a conspiracy among firms to set prices for a product.

58. © 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide 14-95 Price Discrimination Price discrimination is the practice of charging different prices to different buyers for goods of like grade and quality.

59. © 2006 McGraw-Hill Companies, Inc., McGraw-Hill/IrwinSlide 14-96 Predatory Pricing Predatory pricing is the practice of charging a very low price for a product with the intent of driving competitors out of business.