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Designed by

Eric Brengle

B-books, Ltd.

CHAPTER �18

Setting the Right Price

Prepared by

Deborah Baker

Texas Christian University

Marketing�Lamb, Hair, McDaniel

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Chapter 18

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Learning Outcomes

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Describe the procedure for setting�the right price�

Identify the legal and ethical constraints �on pricing decisions��Explain how discounts, geographic pricing, and other special pricing tactics can be used to fine-tune the base price

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Learning Outcomes

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Discuss product line pricing�

Describe the role of pricing during periods of inflation and recession�

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How to Set a Price on a�Product or Service

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Describe the procedure for�setting the right price

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How to Set a Price on a�Product or Service

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Fine tune with pricing tactics

Choose a price strategy

Estimate demand, costs, and profits

Establish pricing goals

Results lead to the right price

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Establish Pricing Goals

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Profit-Oriented

Sales-Oriented

Status Quo

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Notes:

The first step in setting the right price is to establish pricing goals. In Chapter 17, we learned that pricing objectives fall into three categories—profit oriented, sales-oriented, and status quo. These pricing goals are derived from the firm’s overall objectives. For example, a company wanting to be the dominant sales leader will pursue a sales-oriented pricing goal. A conservative organization may establish a status quo goal. A company wanting to maximize shareholder value will establish aggressive profit-oriented goals.�
A good understanding of the marketplace and of the consumer can tell a manager if a goal is realistic. �
All pricing objectives have trade-offs. Reaching the desired market share often means sacrificing short-term profit, because without careful management, long-term profit goals may not be met. �
Meeting the competition is the easiest pricing goal to implement. But demands and costs, the lifecycle stage, and other considerations can not be ignored when creating pricing objectives.

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Choose a Price Strategy

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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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Choose a Price Strategy

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Status Quo �Pricing

Price �Skimming

Penetration �Pricing

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 relatively low �price for a product initially as �a way to reach the mass market.

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Price Skimming

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Situations

When

Price Skimming

Is Successful

Unique Advantages/Superior

Legal Protection of Product

Blocked Entry to Competitors

Technological Breakthrough

Inelastic Demand

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Notes:

Price skimming is a pricing policy whereby a firm charges a high introductory price, often coupled with heavy promotion. The term is derived from the phrase “skimming the cream off the top.”�
Companies often use price skimming for new products when the product is perceived as having unique advantages. As a product enters different stages of its life cycle, the price may decrease to reach larger market segments. �
Additional situations when price skimming is successful are listed on this slide. �
Firms often feel it is better to test the market at high prices and then lower the price if sales are too slow. �
A price skimming strategy will encourage competitors to enter the market.

Discussion/Team Activity:

List companies and/or products that utilize a price skimming strategy.

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Penetration Pricing

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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

Advantages

Disadvantages

Online

http://www.iflyswa.com

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Status Quo Pricing

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Advantages

Disadvantages

Simplicity�
Safest route to long-term survival for small firms

Strategy may ignore demand and/or cost

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REVIEW LEARNING OUTCOME�Setting the Right Price

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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 $

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The Legality and Ethics of�Price Strategy

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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

Price Discrimination

Predatory Pricing

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The Legality and Ethics of�Price Strategy

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Unfair Trade�Practices

Laws that prohibit wholesalers �and retailers from selling �below cost.

Price

Fixing

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

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Notes:

In over half the states, unfair trade practice acts put a floor under wholesale and retail prices, and selling below cost is illegal. Wholesalers and retailers must take a certain minimum percentage markup on their combined merchandise cost and transportation cost.

The most common markup figures are 6 percent at the retail level and 2 percent at the wholesale level. If a specific wholesaler or retailer can provide conclusive proof that operating costs are lower than the minimum required figure, lower prices may be allowed.

The intent of unfair trade practice acts is to protect small firms from retail giants like Wal-Mart and Target, which operate efficiently on razor-thin margins.

State enforcement of unfair trade practice laws has generally been lax, because low prices benefit local consumers.

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Price fixing is illegal under the Sherman Act and the Federal Trade Commission Act.
Cases involving price fixing include:�* ISK Japan, for conspiring to fix prices for video magnetic iron oxide particles�* Gemstar-TV Guide International�*Hoechst AG, for suppressing competition for an industrial chemical used in production�* Uniroyal, for fixing prices on neoprene�*Hoffman-LaRoche for price fixing in the vitamin industry

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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.

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The Robinson-Patman Act of 1936:

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Price Discrimination

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The Robinson-Patman Act of 1936:

Seller Defenses

Cost

Market

Conditions

Competition

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Predatory Pricing

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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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Tactics for Fine-Tuning the Base Price

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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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Special pricing tactics

Discounts

Geographic pricing

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Discounts, Allowances, Rebates, and�Value-Based Pricing

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Quantity Discounts

Cash Discounts

Functional Discounts

Seasonal Discounts

Promotional Allowances

Rebates

Zero Percent Financing

Value-Based Pricing

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Notes:

A base price can be lowered through the use of discounts and the related tactics of allowances, rebates, low or zero percent financing, and value-based pricing. Discounts are used to encourage customers to do what they would not ordinarily do, such as pay cash, take delivery out of season, or perform certain functions with a distribution channel.�

The most common tactics are:

Quantity discounts with lower prices for buying in multiple units of above a specified dollar amount.

Cash discounts offered for prompt payment of a bill

Functional discounts (trade discounts) are offered when channel intermediaries perform a service for the manufacturer.

Seasonal discounts are lower prices for buying merchandise out of season.

Promotional allowances (or trade allowance) are payments to dealers for promoting the manufacturer’s products.

Rebates are cash refunds given for purchasing a product within a specified period.

Zero percent financing offers no interest charge to increase sales. However, it does cost the manufacturers.

Value-based pricing sets the price at a level that seems to the customer to be a good price compared to other prices.

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Value-Based Pricing

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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.

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Pricing Products Too Low

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Managers attempt to buy market share through aggressive pricing.�
Managers tend to make pricing decisions based on current costs, current competitor prices, and short-term share gains rather than on long-term profitability.

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Geographic Pricing

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Basing-point

pricing

Freight absorption

pricing

Zone pricing

Uniform delivered

pricing

FOB origin pricing

Online

http://www.ups.com

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Geographic Pricing

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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.

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Other Pricing Tactics

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Single-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 bargain

Even-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

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Consumer Penalties

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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...

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REVIEW LEARNING OUTCOME�Fine-Tuning the Base Price

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Product Line Pricing

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Discuss product line pricing

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Product Line Pricing

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Product Line�Pricing

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Setting prices for an entire line of products.

Online

http://www.beauty.com

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Relationships among Products

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Complementary

Substitutes

Neutral

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Joint Costs

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Joint Costs

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

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Pricing during Difficult Economic Times

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Describe the role of pricing �during periods of �inflation and recession�

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Inflation

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Cost-Oriented Tactics

High Inflation

Demand-Oriented Tactics

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Cost-Oriented Tactics

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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

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Cost-Oriented Tactics

Delayed-quotation pricing�
Escalator pricing�
Hold prices constant, but add new fees

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Cost-Oriented Tactics

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Increased

Production

Costs

Decreased

Demand

Price

Increase

Maintaining�a Fixed �Gross Margin

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Demand-Oriented Tactics

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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

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Strategies �to Make

Demand

More Inelastic

Cultivate selected demand

Create unique offerings

Change the package design

Heighten buyer dependence

Chapter 18

Notes:

To make the demand for a good or service more inelastic and to create buyer dependency, a company can use the strategies as shown on this slide:

Cultivate selected demand: Target prosperous customers who will pay extra for convenience or service. Example: Neiman Marcus

Create unique offerings: By studying buyers’ needs, the seller can design distinctive products to fit a buyers’ needs and establish a beneficial relationship. Example: Value-added or multi-ingredient cereals

Change the package design: Companies pass on higher costs by shrinking the product sizes but keep prices the same.

Heighten buyer dependence: Provide additional value-added services and training with product offerings to freeze out competition and support higher prices. Example: Owens-Corning Fiberglas integrated insulation service (from feasibility studies to installation)

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Recession

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Bundling or Unbundling

Value-Based Pricing

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Supplier Strategies During Recession

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Renegotiating contracts

Offering help

Keeping the pressure on

Paring down suppliers

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REVIEW LEARNING OUTCOME�Pricing During Inflation and Recession

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