1. McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved.

2. LO1 Describe how to establish the “approximate price level” using demand-oriented, cost-oriented, profit-oriented, and competition- oriented approaches. Recognize the major factors considered in deriving a final list or quoted price from the approximate price level. LO2 LEARNING OBJECTIVES (LO) AFTER READING CHAPTER 14, YOU SHOULD BE ABLE TO: 14-2

3. LO3 Identify the adjustments made to the approximate price level on the basis of discounts, allowances, and geography. Name the principal laws and regulations affecting specific pricing practices. LO4 LEARNING OBJECTIVES (LO) AFTER READING CHAPTER 14, YOU SHOULD BE ABLE TO: 14-3

4. FIGURE 14-1 FIGURE 14-1 The six steps in setting price. The first three steps were covered in Chapter 13 and the last three steps in Chapter 14. 14-4

5. FIGURE 14-2 FIGURE 14-2 Four approaches for selecting an approximate price level 14-5

6. STEP 4: SELECT AN APPROXIMATE PRICE LEVEL DEMAND-ORIENTED PRICING APPROACHES LO1  Skimming Pricing Skimming Pricing  Penetration Pricing Penetration Pricing  Prestige Pricing Prestige Pricing  Price Lining Price Lining 14-6

7. FIGURE 14-3 FIGURE 14-3 Demand curves for two demand-oriented pricing approaches 14-7

8. STEP 4: SELECT AN APPROXIMATE PRICE LEVEL DEMAND-ORIENTED PRICING APPROACHES LO1  Bundle Pricing Bundle Pricing  Odd-Even Pricing Odd-Even Pricing  Target Pricing Target Pricing 14-8

9. Slide 14-12 Concept Check 1. What are the circumstances in pricing a new product that might support skimming or penetration pricing? A: A firm introducing a new product can use either skimming pricing to set the highest initial price that customers desiring the product are willing to pay or penetration pricing to set a low initial price to appeal immediately to the mass market.

10. Slide 14-13 Concept Check 2. What is odd-even pricing? A: Odd-even pricing involves setting prices a few dollars or cents under an even number. Psychologically, a $499.99 price feels lower than $500.00, even though the difference is 1¢.

11. Slide 14-14 Cost-Oriented Approaches –Price is set by looking at the production and marketing costs and then adding enough to cover direct expenses, overhead, and profit STEP 4: SELECT AN APPROPRIATE PRICE LEVEL

12. Slide 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 – most common in B2B in service sector Markup on Cost Markup on Selling Price

13. Slide 14-14 Cost-Oriented Approaches  Standard Markup Pricing Standard Markup Pricing STEP 4: SELECT AN APPROPRIATE PRICE LEVEL Markup on Cost Markup on Selling Price

14. What Is Markup? ● Markup is the dollar amount added to the product cost to determine its selling price ● Markup is often expressed as a percentage 5-14 WHAT IS MARKUP?

15. $1.00 = cost to retailer $1.00 = dollar markup $2.00 = selling price 5-15 WHAT IS PERCENT MARKUP?

16. ● It depends on whether you use ● Selling Price, or ● Cost ● Dollar markup is divided by either selling price or cost to retailer 5-16 WHAT IS PERCENT MARKUP?

17. $1.00 = cost to retailer $1.00 = dollar markup $2.00 = selling price 5-17 Selling price = 50% Cost = 100% We use selling price in calculating the percent of markup WHAT IS PERCENT MARKUP?

18. 5-18 Example of Markup on Selling Price in Channel of Distribution

19. FIGURE 14-A FIGURE 14-A Markups for a manufacturer, wholesaler, and retailer on a home appliance sold to the consumer for $100 14-19

20. STEP 4: SELECT AN APPROXIMATE PRICE LEVEL PROFIT-ORIENTED PRICING APPROACHES LO1  Target Profit Pricing Target Profit Pricing  Target Return- on-Sales Pricing Target Return- on-Sales Pricing  Target Return-on- Investment Pricing Target Return-on- Investment Pricing 14-20

21.  Target Profit Pricing – setting an annual target Target Profit Pricing – setting an annual target of a specific dollar volume of profit Profit = Total revenue – Total Cost = (P x Q) – [FC + (UVC x Q)] STEP 4: SELECT AN APPROPRIATE PRICE LEVEL

22.  Target Return-On-Sales Pricing – setting a Target Return-On-Sales Pricing – setting a price to achieve a profit that is a specified percentage of sales volume STEP 4: SELECT AN APPROPRIATE PRICE LEVEL

23.  Target Return-On-Investment Pricing – setting Target Return-On-Investment Pricing – setting a price to achieve an annual target return on investment ROI = Net Profit after taxes / Investment STEP 4: SELECT AN APPROPRIATE PRICE LEVEL

24. FIGURE 14-4 FIGURE 14-4 Results of a computer spreadsheet simulation to select a price to achieve a target return on investment 14-24

25. STEP 4: SELECT AN APPROXIMATE PRICE LEVEL COMPETITION-ORIENTED PRICING APPROACHES LO1  Customary Pricing Customary Pricing  Above-, At-, or Below-Market Pricing Above-, At-, or Below-Market Pricing  Loss-Leader Pricing Loss-Leader Pricing 14-25

26.  Customary Pricing – setting a price that is Customary Pricing – setting a price that is dictated by tradition, standard channel of distribution STEP 4: SELECT AN APPROXIMATE PRICE LEVEL COMPETITION-ORIENTED PRICING APPROACHES

27.  Above-, At-, or Below-Market Pricing – setting Above-, At-, or Below-Market Pricing – setting market price based on subjective feel for competitors’ price or market price as the benchmark STEP 4: SELECT AN APPROXIMATE PRICE LEVEL COMPETITION-ORIENTED PRICING APPROACHES

28.  Loss-Leader Pricing – deliberately setting Loss-Leader Pricing – deliberately setting price below its customary price, not to increase sales, but to attract customers’ attention in hopes they will buy other products as well STEP 4: SELECT AN APPROXIMATE PRICE LEVEL COMPETITION-ORIENTED PRICING APPROACHES

29. Slide 14-19 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.

30. Slide 14-20 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

31. Slide 14-21 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.

32. STEP 5: SET THE LIST OR QUOTED PRICE CHOOSING A PRICE POLICY LO2  One-Price Policy One-Price Policy  Flexible-Price Policy Flexible-Price Policy Dynamic Pricing Clickstream 14-32

33. Slide 14-22 One-Price versus Flexible-Price Policy  One-Price Policy (Fixed Pricing) One-Price Policy (Fixed Pricing)  Car dealers, “$1 Stores” Car dealers, “$1 Stores”  Flexible-Price Policy (Dynamic Pricing) – Flexible-Price Policy (Dynamic Pricing) – Setting different prices depending on individual buyers and purchase situation STEP 5: SET THE LIST OR QUOTED PRICE Clickstream Viewed as discriminatory

34. MAKING RESPONSIBLE DECISIONS Flexible Pricing—Is There Race and Gender Discrimination in Bargaining for a New Car? 14-34

35. STEP 5: SET THE LIST OR QUOTED PRICE COMPANY, CUSTOMER, AND COMPETITIVE EFFECTS ON PRICING LO2  Company Effects  Customer Effects Product-Line Pricing  Competitive Effects Price War 14-35

36. FIGURE 14-5 FIGURE 14-5 Expected incremental revenue from pricing and other marketing actions must more than offset incremental costs to achieve incremental profit 14-36

37. FIGURE 14-6 FIGURE 14-6 Three special adjustments to list or quoted price include discounts, allowances, and geographical adjustments 14-37

38. STEP 6: MAKE SPECIAL ADJUSTMENTS TO THE LIST OR QUOTED PRICE DISCOUNTS LO3  Discounts  Quantity Discounts Quantity Discounts  Seasonal Discounts Noncumulative Quantity Discounts Cumulative Quantity Discounts 14-38

39. STEP 6: MAKE SPECIAL ADJUSTMENTS TO THE LIST OR QUOTED PRICE DISCOUNTS LO3  Trade (Functional) Discounts  Cash Discounts 14-39

40. FIGURE 14-7 FIGURE 14-7 The structure of trade discounts affects the manufacturer’s selling price and the margins made by resellers in the marketing channel 14-40

41. STEP 6: MAKE SPECIAL ADJUSTMENTS TO THE LIST OR QUOTED PRICE ALLOWANCES LO3  Allowances Trade-In Allowances Promotional Allowances 14-41  Everyday Low Pricing (EDLP)

42. STEP 6: MAKE SPECIAL ADJUSTMENTS TO THE LIST OR QUOTED PRICE GEOGRAPHICAL ADJUSTMENTS LO3  FOB Origin Pricing FOB Origin Pricing  Uniform Delivered Pricing Uniform Delivered Pricing Single-Zone Pricing Multiple-Zone Pricing FOB with Freight-Allowed Pricing Basing-Point Pricing 14-42

43. FIGURE 14-C FIGURE 14-C Example of basing-point pricing 14-43

44. FIGURE 14-8 FIGURE 14-8 Several pricing practices are affected by legal and regulatory restrictions, which benefit both consumers and firms 14-44

45. STEP 6: MAKE SPECIAL ADJUSTMENTS TO THE LIST OR QUOTED PRICE LEGAL & REGULATORY ASPECTS OF PRICING LO4  Price Fixing Price Fixing Horizontal Price Fixing Vertical Price Fixing Rule of Reason  Resale Price Maintenance 14-45

46. STEP 6: MAKE SPECIAL ADJUSTMENTS TO THE LIST OR QUOTED PRICE LEGAL & REGULATORY ASPECTS OF PRICING LO4  Price Discrimination Price Discrimination  Deceptive Pricing 14-46

47. FIGURE 14-9 FIGURE 14-9 Five most common deceptive pricing practices 14-47

48. STEP 6: MAKE SPECIAL ADJUSTMENTS TO THE LIST OR QUOTED PRICE LEGAL & REGULATORY ASPECTS OF PRICING LO4  Geographical Pricing  Predatory Pricing Predatory Pricing 14-48

49. Skimming Pricing Skimming pricing is used when introducing a new or innovative product, and involves setting the highest initial price that customers really desiring the product are willing to pay. 14-49

50. Penetration Pricing Penetration pricing involves setting a low initial price on a new product to appeal immediately to the mass market. 14-50

51. 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. 14-51

52. Price Lining Price lining involves setting the price of a line of products at a number of different specific pricing points. 14-52

53. Odd-Even Pricing Odd-even pricing involves setting prices a few dollars or cents under an even number. 14-53

54. Target Pricing Target pricing consists of (1) estimating the price that ultimate consumers would be willing to pay for a product, (2) working backward through markups taken by retailers and wholesalers to determine what price to charge wholesalers, and then (3) deliberately adjusting the composition and features of the product to achieve the target price to consumers. 14-54

55. Bundle Pricing Bundle pricing involves the marketing of two or more products in a single package price. 14-55

56. 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. 14-56

57. Standard Markup Pricing Standard markup pricing involves adding a fixed percentage to the cost of all items in a specific product class. 14-57

58. 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. 14-58

59. 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, resulting in possible rapid price reductions. 14-59

60. Target Profit Pricing Target profit pricing involves setting an annual target of a specific dollar volume of profit. 14-60

61. 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. 14-61

62. Target Return-on-Investment Pricing Target return-on-investment pricing involves setting a price to achieve an annual target return-on-investment (ROI). 14-62

63. Customary Pricing Customary pricing involves pricing setting a price that is dictated by tradition, a standardized channel of distribution, or other competitive factors. 14-63

64. 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. 14-64

65. 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. 14-65

66. One-Price Policy A one-price policy involves setting one price for all buyers of a product or service. Also called fixed pricing. 14-66

67. 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. 14-67

68. Product Line Pricing Product line pricing involves the setting of prices for all items in a product line to cover the total cost and produce a profit for the complete line, not necessarily for each item. 14-68

69. Price War A price war involves successive price cutting by competitors to increase or maintain their unit sales or market share. 14-69

70. Quantity Discounts Quantity discounts are reductions in unit costs for a larger order. 14-70

71. 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. 14-71

72. Everyday Low Pricing (EDLP) Everyday low pricing (EDLP) is the practice of replacing promotional allowances with lower manufacturer list prices. 14-72

73. FOB Origin Pricing FOB origin pricing is the “free on board” (FOB) price the seller quotes that includes only the cost of loading the product onto the vehicle and specifies the name of the location where the loading is to occur (seller’s factory or warehouse). 14-73

74. Uniform Delivered Pricing Uniform delivered pricing is the price that the seller quotes includes all transportation costs. 14-74

75. 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. 14-75

76. Price Fixing Price fixing involves a conspiracy among firms to set prices for a product. 14-76

77. Price Discrimination Price discrimination is the practice of charging different prices to different buyers for goods of like grade and quality. 14-77

78. 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. 14-78