1. 1 Lamb, Hair, McDaniel CHAPTER 20 Setting the Right Price 2010-2011

2. 2 LO 1 Describe the procedure for setting the right price LO 2 Identify the legal and ethical constraints on pricing decisions LO 3 Explain how discounts, geographic pricing, and other special pricing tactics can be used to fine-tune the base price Learning Outcomes

3. 3 LO 4 Discuss product line pricing LO 5 Describe the role of pricing during periods of inflation and recession Learning Outcomes

4. 4 Describe the procedure for setting the right price How to Set a Price on a Product LO 1

5. 5 How to Set a Price on a Product or Service Fine tune with pricing tactics Choose a price strategy Estimate demand, costs, and profits Establish pricing goals Results lead to the right price LO 1

6. 6 Establish Pricing Goals Profit-Oriented Sales-Oriented Status Quo LO 1

7. 7 Choose a 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. Price Strategy LO 1

8. 8 Choose a Price Strategy Status Quo Pricing Price Skimming Penetration Pricing Charging a price identical to or very close to the competition’s price. Charging a price identical to or very close to the competition’s price. A firm charges a high introductory price, often coupled with heavy promotion. A firm charges a high introductory price, often coupled with heavy promotion. A firm charges a relatively low price for a product initially as a way to reach the mass market. A firm charges a relatively low price for a product initially as a way to reach the mass market. LO 1

9. 9 Price Skimming 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 LO 1

10. 10 Penetration PricingAdvantagesDisadvantages  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 fail LO 1

11. 11 Status Quo PricingAdvantagesDisadvantages  Simplicity  Safest route to long- term survival for small firms  Strategy may ignore demand and/or cost LO 1

12. 12 Setting the Right Price Estimate demand, costs, and profits Establish price goals Choose a price strategy Fine-tune base price Set price $x.yy Evaluate results Low $ High $ Skimming Status quo Penetration LO 1

13. 13 Identify the legal and ethical constraints on pricing decisions The Legality and Ethics of Price Strategy LO 2

14. 14 The Legality and Ethics of Price Strategy Unfair Trade Practices Price Fixing Price Discrimination Predatory Pricing LO 2

15. 15 The Legality and Ethics of Price Strategy Unfair Trade Practices Laws that prohibit wholesalers and retailers from selling below cost. Price Fixing Price Fixing An agreement between two or more firms on the price they will charge for a product. LO 2

16. 16 Price Discrimination  There must be price discrimination.  Transaction must occur in interstate commerce.  Seller must discriminate by price among two or more purchasers.  Products sold must be commodities or tangible goods.  Products sold must be of like grade and quality.  There must be significant competitive injury. The Robinson-Patman Act of 1936: LO 2

17. 17 Price Discrimination The Robinson-Patman Act of 1936: Seller Defenses Cost Market Conditions Market Conditions Competition LO 2

18. 18 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. Predatory Pricing LO 2

19. 19 Explain how discounts, geographic pricing, and other pricing tactics can be used to fine-tune the base price Tactics for Fine-Tuning the Base Price LO 3

20. 20 Tactics for Fine-Tuning the Base Price Special pricing tactics Discounts Geographic pricing LO 3

21. 21 Discounts, Allowances, Rebates, and Value-Based Pricing Quantity Discounts Cash Discounts Functional Discounts Seasonal Discounts Promotional Allowances Rebates Zero Percent Financing Value-Based Pricing LO 3

22. 22 Value-Based Pricing Setting the price at a level that seems to the customer to be a good price compared to the prices of other options. LO 3 Value-Based Pricing

23. 23 Value-based Pricing: Step 1 Companies that set prices using a cost-plus model—adding a predetermined percentage to a product’s cost/unit to produce a profit—may be leaving money on the table. Instead, a company should use the cost-plus model to determine its pricing threshold and then use value- based pricing to set the best price. Source: Elisabeth A. Sullivan, “Value Pricing: Smart Marketers Know Cost-Plus Can Be Costly,” MarketingNews, January 15, 2008. LO 3

24. 24 Value-based Pricing: Step 2 How to determine value? It’s simple. Really. Ask your customers: What do they like about you? What don’t they like? Their responses represent the perceived value of your product in the marketplace. The attributes that will determine the perceived value of your product include product quality, on-time delivery, customer service, technical service, and price. LO 3

25. 25 Value-based Pricing: Step 3 Now, ask customers what would be an acceptable price, what would be an expensive price, and what would be a prohibitively expensive price. The best price usually falls between “expensive” and “prohibitively expensive.” Customers want value and they’re willing to pay for it. LO 3

26. 26 Pricing Products Too Low 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. LO 3

27. 27 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. LO 3

28. 28 Other Pricing Tactics 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 LO 3

29. 29 Consumer Penalties An irrevocable loss of revenue is suffered Additional transaction costs are incurred Businesses Impose Consumer Penalties If... LO 3

30. 30 Fine-Tuning the Base Price Discounts Geographic Other Tactics Consumer Penalties Single price Flexible Professional services Price lining Leader Bait Odd–even Bundling Unbundling Two-part Uniform delivered Zone Freight absorption Basing- point Quantity cumulative noncumulative Cash Functional (trade) Seasonal Promotional (trade) Rebate 0% Financing Value-based Pricing Tactics FOB origin LO 3

31. 31 Discuss product line pricing Product Line Pricing LO 4

32. 32 Product Line Pricing Setting prices for an entire line of products. Product Line Pricing LO 4

33. 33 Relationships among Products Complementary Substitutes Neutral LO 4

34. 34 Joint Costs Costs that are shared in the manufacturing and marketing of several products in a product line. LO 4

35. 35 Describe the role of pricing during periods of inflation and recession Pricing during Difficult Economic Times LO 5

36. 36 Inflation Cost-Oriented Tactics High Inflation Demand-Oriented Tactics LO 5

37. 37 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 LO 5

38. 38 Cost-Oriented Tactics  Delayed-quotation pricing  Escalator pricing  Hold prices constant, but add new fees LO 5

39. 39 Cost-Oriented Tactics Increased Production Costs Decreased Demand Price Increase Maintaining a Fixed Gross Margin LO 5

40. 40 Demand-Oriented Tactics The use of discounts by salespeople to increase demand for one or more products in a line. Price Shading LO 5

41. 41 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 LO 5

42. 42 Recession Bundling or Unbundling Value-Based Pricing LO 5

43. 43 Supplier Strategies during Recession Renegotiating contracts Offering help Keeping the pressure on Paring down suppliers LO 5

44. 44 Pricing During Inflation and Recession Recession Inflation Contract product lines Delayed- quotation pricing Escalator pricing Select demand Unique offering Change package design Increase buyer dependence Cost-oriented tactics Demand-oriented tactics Price Product Suppliers Value-based Bundling Unbundling New products New product categories Renegotiate contracts Offer help Keep pressure on suppliers Reduce number of suppliers LO 5