1. Chapter 18Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 1 MKTG Designed by Amy McGuire, B-books, Ltd. Prepared by Deborah Baker, Texas Christian University Lamb, Hair, McDaniel 2007-2008 Setting the Right Price 18 CHAPTER

2. Chapter 18Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 2 How to Set a Price on a Product or Service LO 1 Fine tune with pricing tactics Choose a price strategy Estimate demand, costs, and profits Establish pricing goals Results lead to the right price

3. Chapter 18Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 3 Establish Pricing Goals LO 1 Profit-Oriented Sales-Oriented Status Quo

4. Chapter 18Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 4 Choose a Price Strategy LO 1 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

5. Chapter 18Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 5 Choose a Price Strategy LO 1 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.

6. Chapter 18Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 6 Price Skimming LO 1 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

7. Chapter 18Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 7 Penetration Pricing LO 1AdvantagesDisadvantages  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 Online http://www.iflyswa.com

8. Chapter 18Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 8 Status Quo Pricing LO 1AdvantagesDisadvantages  Simplicity  Safest route to long- term survival for small firms  Strategy may ignore demand and/or cost

9. Chapter 18Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 9 Biz Flix LO 1 Fast Times at Ridgemont High

10. Chapter 18Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 10 REVIEW LEARNING OUTCOME LO 1 Setting the Right Price Establish price goals Estimate demand, costs, and profits Choose a price strategy Fine-tune base price Set price $x.yy Evaluate results Skimming Status quo Penetration Low $ High $

11. Chapter 18Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 11 The Legality and Ethics of Price Strategy LO 2 Unfair Trade Practices Price Fixing Price Discrimination Predatory Pricing

12. Chapter 18Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 12 The Legality and Ethics of Price Strategy LO 2 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.

13. Chapter 18Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 13 Price Discrimination LO 2  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:

14. Chapter 18Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 14 Price Discrimination LO 2 The Robinson-Patman Act of 1936: Seller Defenses Cost Market Conditions Market Conditions Competition

15. Chapter 18Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 15 Predatory Pricing LO 2 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

16. Chapter 18Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 16 Tactics for Fine-Tuning the Base Price LO 3 Special pricing tactics Discounts Geographic pricing

17. Chapter 18Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 17 Discounts, Allowances, Rebates, and Value-Based Pricing LO 3 Quantity Discounts Cash Discounts Functional Discounts Seasonal Discounts Promotional Allowances Rebates Zero Percent Financing Value-Based Pricing

18. Chapter 18Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 18 Value-Based Pricing LO 3 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.

19. Chapter 18Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 19 Pricing Products Too Low LO 3 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.

20. Chapter 18Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 20 Geographic Pricing LO 3 Basing-point pricing Basing-point pricing Freight absorption pricing Freight absorption pricing Zone pricing Uniform delivered pricing Uniform delivered pricing FOB origin pricing Online http://www.ups.com

21. Chapter 18Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 21 Geographic Pricing LO 3 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.

22. Chapter 18Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 22 Other Pricing Tactics LO 3 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

23. Chapter 18Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 23 Consumer Penalties LO 3 http://www.princesscruises.com http://www.carnival.com Online An irrevocable loss of revenue is suffered Additional transaction costs are incurred Businesses Impose Consumer Penalties If...

24. Chapter 18Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 24 REVIEW LEARNING OUTCOME LO 3 Fine-Tuning the Base Price

25. Chapter 18Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 25 LO 4 Product Line Pricing Setting prices for an entire line of products. Online http://www.beauty.com Product Line Pricing

26. Chapter 18Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 26 LO 4 Relationships among Products Complementary Substitutes Neutral

27. Chapter 18Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 27 LO 4 Joint Costs Costs that are shared in the manufacturing and marketing of several products in a product line.

28. Chapter 18Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 28 Inflation LO 5 Cost-Oriented Tactics High Inflation Demand-Oriented Tactics

29. Chapter 18Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 29 Cost-Oriented Tactics LO 5  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

30. Chapter 18Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 30 Cost-Oriented Tactics LO 5  Delayed-quotation pricing  Escalator pricing  Hold prices constant, but add new fees

31. Chapter 18Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 31 Cost-Oriented Tactics LO 5 Increased Production Costs Decreased Demand Price Increase Maintaining a Fixed Gross Margin

32. Chapter 18Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 32 Demand-Oriented Tactics LO 5 The use of discounts by salespeople to increase demand for one or more products in a line. Price Shading

33. Chapter 18Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 33 Demand-Oriented Tactics LO 5 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

34. Chapter 18Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 34 Recession LO 5 Bundling or Unbundling Value-Based Pricing

35. Chapter 18Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 35 Supplier Strategies during Recession LO 5 Renegotiating contracts Offering help Keeping the pressure on Paring down suppliers

36. Chapter 18Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 36 REVIEW LEARNING OUTCOME LO 5 Pricing During Inflation and Recession