Transcript Setting the Right Price

Setting the Right Price
chapter
18
Chapter 18 Version 6e
Prepared by
Deborah Baker
Texas Christian University
©2002 South-Western
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Learning Objectives
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2. Identify the legal and ethical constraints
on pricing decisions.
chapter
1. Describe the procedure for setting
the right price.
3. Explain how discounts, geographic pricing,
and other special pricing tactics can be
used to fine-tune the base price.
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Learning Objectives (continued)
4. Discuss product line pricing.
chapter
18
5. Describe the role of pricing during periods
of inflation and recession.
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Learning Objective
Describe the procedure for
setting the right price.
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Steps in Setting the Right Price
Establish pricing goals
Estimate demand, costs, and profits
Choose a price strategy
Fine tune with pricing tactics
Results lead to the right price
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Pricing Objectives
Profit-Oriented Pricing Objectives
Sales-Oriented Pricing Objectives
Status Quo Pricing Objectives
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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.
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Choosing a Price Strategy
Price Skimming
Basic Strategies
for
Setting Prices
Penetration Pricing
Status Quo Pricing
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Price Skimming
Inelastic Demand
Situations
when
Price
Skimming
is
Successful
Superior Product
Legal Protection of Product
Technological Breakthrough
Limited Production
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Penetration Pricing
A pricing policy whereby
a firm charges a relatively
low price for a product
initially as a way to
reach the mass market.
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Penetration Pricing
Disadvantages
Advantages
 Discourages or blocks
competition from
market entry
 Requires gear up for
mass production
 Selling large volumes
at low prices
 Strategy to gain
market share may fail
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Status Quo Pricing
Disadvantages
Advantages
 Strategy may ignore
demand or cost
 Simplicity
 Safest route to longterm survival for small
firms
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2
Learning Objective
Identify the legal and ethical constraints
on pricing decisions.
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The Legality and Ethics of
Price Strategy
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Unfair Trade Practices
Price Fixing
Issues
That Limit
Pricing
Decisions
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Price Discrimination
Predatory Pricing
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Unfair Trade Practice Acts
Laws that prohibit
wholesalers and retailers
from selling below cost.
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2
Price Fixing
An agreement between two
or more firms on the
price they will charge
for a product.
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2
Price Discrimination
The Robinson-Patman Act of 1936:
 Prohibits any firm from selling to two or
more different buyers at different prices
if the result would lessen competition
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Robinson-Patman Act Defenses
Seller Defenses
Cost
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Market
Conditions
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Competition
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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.
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3
Learning Objective
Explain how discounts, geographic
pricing, and other special
pricing tactics can be used to
fine-tune the base price.
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Tactics for Fine-Tuning
the Base Price
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Discounts
Fine-Tuning
Pricing
Tactics
Geographic Pricing
Special Pricing
Tactics
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Tactics for Fine-Tuning
the Base Price
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Quantity Discounts
Cash Discounts
Functional Discounts
Seasonal Discounts
Common
Tactics
for
Fine-Tuning
the Base Price
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Promotional Allowances
Rebates
Value-Based Pricing
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Value-Based Pricing
The price is set at a level
that seems to the customer
to be a good price
compared to the prices of
other options.
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Trade Loading
The practice of temporarily
lowering the price to
induce wholesalers and
retailers to buy more
goods than can be sold
in a reasonable time.
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Geographic Pricing
FOB Pricing
Common
Methods of
Geographic
Pricing
Uniform Delivered
Pricing
Zone Pricing
Freight Absorption
Pricing
Basing-Point
Pricing
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Geographic Pricing
FOB Origin
Pricing
The buyer absorbs the freight
costs from the shipping point
(“free on board”).
Uniform
Delivered
Pricing
The seller pays the freight charges
and bills the purchaser an
identical flat freight charge.
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Geographic Pricing
Zone Pricing
The U.S. is divided into zones and
a flat freight rate is charged to
customers in a given zone.
Freight
Absorption
Pricing
The seller pays for all or part of
the freight charges and does not
pass them on to the buyer.
Basing-Point
Pricing
The seller designates a location as
a basing point and charges all buyers
the freight costs from that point.
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Special Pricing Tactics
Single-Price Tactic
All goods offered at the same price
Flexible Pricing
Professional
Services Pricing
Price Lining
Different customers pay different price
Leader Pricing
Sell product at near or below cost
Bait Pricing
Lure customers through false or misleading
price advertising
Odd-number prices imply bargain
Even-number prices imply quality
Combining two or more products in a
single package
Odd-Even Pricing
Price Bundling
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Two-Part
Pricing
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Used by professionals with experience,
training or certification
Several line items at specific price points
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Two separate
charges to consume a single28good
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Consumer Penalties
Businesses Impose
Consumer Penalties if...
An irrevocable
loss of revenue
is suffered
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Additional
transaction costs
are incurred
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4
Learning Objective
Discuss product line pricing.
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Product Line Pricing
Setting prices for an entire
line of products.
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Relationships among Products
Relationships
Among Products
Complementary
Substitutes
Neutral
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Joint Costs
Costs that are shared in the
manufacturing and
marketing of several
products in a product line.
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5
Learning Objective
Describe the role of pricing
during periods of inflation
and recession.
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Pricing During
Difficult Economic Times
5
Cost-Oriented Tactics
High Inflation
Pricing Tactics
Demand-Oriented Tactics
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Cost-Oriented Tactics
Problems with
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 pricequality image of entire line
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Cost-Oriented Tactics
DelayedQuotation
Pricing
A firm price is not set until the
item is either finished or delivered.
Escalator
Pricing
The final selling price reflects cost
increases incurred between the
time the order is placed and
when delivery is made.
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Cost-Oriented Tactics
Maintaining
a Fixed
Gross Margin
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Increased
Production
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Price Shading
The use of discounts by
salespeople to increase
demand for one or more
products in a line.
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Demand-Oriented Tactics
Cultivate selected demand
Strategies
to Make
Demand
More Inelastic
Create unique offerings
Change the package design
Heighten buyer dependence
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Pricing During Recession
Value Pricing
Recession
Pricing Tactics
Bundling or Unbundling
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Supplier Strategies
During Recession
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Renegotiating contracts
Cost-Saving
Strategies
with
Suppliers
Offering help
Keeping the pressure on
Paring down suppliers
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