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Lamb, Hair, McDaniel

CHAPTER 20

Setting the Right Price

2010-2011

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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

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LO 4 Discuss product line pricing

LO 5 Describe the role of pricing during periods of inflation and recession

Learning Outcomes

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Describe the procedure for

setting the right price

How to Set a Price on aProduct

LO1

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How to Set a Price on aProduct or Service

Fine tune with pricing tacticsFine tune with pricing tactics

Choose a price strategyChoose a price strategy

Estimate demand, costs, and profitsEstimate demand, costs, and profits

Establish pricing goalsEstablish pricing goals

Results lead to the right price

LO1

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Establish Pricing Goals

Profit-Oriented

Sales-Oriented

Status Quo

LO1

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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 StrategyPrice Strategy

LO1

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Choose a Price Strategy

Status Quo Pricing

Status Quo Pricing

Price Skimming

Price Skimming

Penetration Pricing

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.

LO1

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Price Skimming

SituationsWhenPrice

SkimmingIs

Successful

SituationsWhenPrice

SkimmingIs

Successful

Unique Advantages/Superior

Legal Protection of Product

Blocked Entry to Competitors

Technological Breakthrough

Inelastic Demand

LO1

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Penetration Pricing

Advantages Disadvantages

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

LO1

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Status Quo Pricing

Advantages Disadvantages

Simplicity

Safest route to long-term survival for small firms

Strategy may ignore demand and/or cost

LO1

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Setting the Right Price

Estimate demand,costs, and profitsEstimate demand,costs, and profits

Establishprice goals

Establishprice goals

Choose aprice strategy

Choose aprice strategy

Fine-tunebase priceFine-tunebase price

Set price$x.yy

Set price$x.yy

Evaluateresults

Evaluateresults

Low $

High $

Skimming

Status quo

Penetration

LO1

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Identify the legal and ethical constraints

on pricing decisions

The Legality and Ethics ofPrice Strategy

LO2

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The Legality and Ethics ofPrice Strategy

Unfair Trade PracticesUnfair Trade Practices

Price FixingPrice Fixing

Price DiscriminationPrice Discrimination

Predatory PricingPredatory Pricing

LO2

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The Legality and Ethics ofPrice Strategy

Unfair TradePractices

Unfair TradePractices

Laws that prohibit wholesalers and retailers from selling below cost.

Laws that prohibit wholesalers and retailers from selling below cost.

PriceFixing

PriceFixing

An agreement between two or more firms on the price they will charge for a product.

An agreement between two or more firms on the price they will charge for a product.

LO2

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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:

LO2

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Price Discrimination

The Robinson-Patman Act of 1936:

Seller Defenses Seller Defenses

CostCost MarketConditions

MarketConditions CompetitionCompetition

LO2

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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.

Predatory Pricing

Predatory Pricing

LO2

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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

LO3

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Tactics for Fine-Tuning the Base Price

Special pricing tactics Special pricing tactics

DiscountsDiscounts

Geographic pricingGeographic pricing

LO3

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Discounts, Allowances, Rebates,

and Value-Based Pricing

Quantity DiscountsQuantity Discounts

Cash DiscountsCash Discounts

Functional DiscountsFunctional Discounts

Seasonal DiscountsSeasonal Discounts

Promotional AllowancesPromotional Allowances

RebatesRebates

Zero Percent FinancingZero Percent Financing

Value-Based PricingValue-Based Pricing

LO3

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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.

LO3

Value-BasedPricing

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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.LO3

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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.

LO3

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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.

LO3

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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.

LO3

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Geographic PricingFOB Origin

Pricing

UniformDelivered

Pricing

Zone Pricing

FreightAbsorption

Pricing

Basing-PointPricing

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.

LO3

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Other Pricing TacticsSingle-Price Tactic All goods offered at the same price

Flexible Pricing Different customers pay different price

Professional Services Pricing

Used by professionals with experience,training or certification

Price Lining Several line items at specific price points

Leader Pricing Sell product at near or below cost

Bait Pricing Lure customers through false or misleading price advertising

Odd-Even Pricing Odd-number prices imply bargainEven-number prices imply quality

Price Bundling Combining two or more products in a single package

Two-Part Pricing Two separate charges to consume a single good

LO3

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Consumer Penalties

An irrevocable loss of revenue

is suffered

Additional transaction costs

are incurred

Businesses Impose Consumer Penalties If...

LO3

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Fine-Tuning the Base Price

Discounts GeographicOther

TacticsConsumerPenalties

Single price

Flexible

Professionalservices

Price lining

Leader

Bait

Odd–even

Bundling

UnbundlingTwo-part

Uniformdelivered

Zone

Freightabsorption

Basing-point

Quantity• cumulative• noncumulative

Quantity• cumulative• noncumulative

CashCash

Functional(trade)

Functional(trade)

SeasonalSeasonal

Promotional(trade)

Promotional(trade)

RebateRebate

0% Financing0% Financing

Value-basedValue-based

Pricing Tactics

FOBorigin

LO3

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Discuss product line pricing

Product Line Pricing

LO4

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Product Line Pricing

Setting prices for an

entire line of products.

Product LinePricing

Product LinePricing

LO4

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Relationships among Products

ComplementaryComplementary

SubstitutesSubstitutes

NeutralNeutral

LO4

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Joint Costs

Joint CostsJoint Costs Costs that are shared in

the manufacturing and

marketing of several

products in a product

line.

LO4

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Describe the role of pricing during

periods of inflation and recession

Pricing during Difficult Economic Times

LO5

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Inflation

Cost-Oriented TacticsCost-Oriented Tactics

High InflationHigh Inflation

Demand-Oriented TacticsDemand-Oriented Tactics

LO5

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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

LO5

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Cost-Oriented Tactics

Delayed-quotation

pricing

Escalator pricing

Hold prices

constant, but

add new fees

LO5

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Cost-Oriented Tactics

IncreasedProduction

Costs

Dec

reas

edD

eman

dPrice

IncreaseMaintaininga Fixed

Gross Margin

LO5

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Demand-Oriented Tactics

The use of discounts by

salespeople to increase

demand for one or more

products in a line.

PriceShading

PriceShading

LO5

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Demand-Oriented Tactics

Strategies to Make Demand More Inelastic

Strategies to Make Demand More Inelastic

Cultivate selected demandCultivate selected demand

Create unique offeringsCreate unique offerings

Change the package designChange the package design

Heighten buyer dependenceHeighten buyer dependence

LO5

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Recession

Bundling or UnbundlingBundling or Unbundling

Value-Based PricingValue-Based Pricing

LO5

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Supplier Strategies during Recession

Renegotiating contractsRenegotiating contracts

Offering helpOffering help

Keeping the pressure onKeeping the pressure on

Paring down suppliersParing down suppliers

LO5

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Pricing During Inflation and Recession

RecessionInflation

Contract product lines

Contract product lines

Delayed-quotation pricing

Delayed-quotation pricing

Escalatorpricing

Escalatorpricing

Select demandSelect

demand

Unique offeringUnique offering

Change package design

Change package design

Increase buyer dependence

Increase buyer dependence

Cost-oriented tactics

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 suppliersLO5