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1. 9 Introduction to MarketingMcDaniel, Lamb, Hair Designed by Eric Brengle B-books, Ltd. Prepared by Deborah Baker Texas Christian University Setting the Right Price CHAPTER 18

2. Learning Outcomes Describe the procedure for settingthe right price Identify the legal and ethical constraints on pricing decisionsExplain how discounts, geographic pricing, and other special pricing tactics can be used to fine-tune the base price LOI LO2 LO3

3. Learning Outcomes Discuss product line pricing Describe the role of pricing during periods of inflation and recession LO4 LO5

4. How to Set a Price on aProduct or Service LOI Describe the procedure forsetting the right price

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

6. Profit-Oriented Sales-Oriented Status Quo Establish Pricing Goals LOI

7. Price Strategy Choose a Price Strategy LOI A basic, long-term pricing framework, which establishes the initial price for a product and the intended direction for price movements over theproduct life cycle.

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

9. Inelastic Demand Situations When Price Skimming Is Successful Unique Advantages/Superior Legal Protection of Product Technological Breakthrough Blocked Entry to Competitors Price Skimming LOI

10. Penetration Pricing Advantages Disadvantages http://www.iflyswa.com Online LOI • Requires gear up for mass production • Selling large volumes at low prices • Strategy to gain market share may fail • Discourages or blocks competition from market entry • Boosts sales and provides large profit increases • Can justify production expansion

11. Status Quo Pricing Advantages Disadvantages LOI • Simplicity • Safest route to long-term survival for small firms • Strategy may ignore demand and/or cost

12. Fast Times at Ridgemont High LOI Biz Flix

13. Establishprice goals High $ Estimate demand,costs, and profits Skimming Status quo Penetration Choose aprice strategy Low $ Evaluateresults Fine-tunebase price Set price$x.yy REVIEW LEARNING OUTCOMESetting the Right Price LOI

14. The Legality and Ethics ofPrice Strategy LO2 Identify the legal and ethical constraints on pricing decisions

15. Unfair Trade Practices Price Fixing Price Discrimination Predatory Pricing The Legality and Ethics ofPrice Strategy LO2

16. The Legality and Ethics ofPrice Strategy LO2 Unfair TradePractices 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.

17. Price Discrimination LO2 The Robinson-Patman Act of 1936: • 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.

18. Seller Defenses Price Discrimination Cost Market Conditions Competition LO2 The Robinson-Patman Act of 1936:

19. Predatory Pricing Predatory Pricing LO2 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.

20. Tactics for Fine-Tuning the Base Price LO3 Explain how discounts, geographic pricing, and other special pricing tactics can be used to fine-tune the base price

21. Discounts Geographic pricing Special pricing tactics Tactics for Fine-Tuning the Base Price LO3

22. Discounts, Allowances, Rebates, andValue-Based Pricing Quantity Discounts Promotional Allowances Cash Discounts Rebates Functional Discounts Zero Percent Financing Seasonal Discounts Value-Based Pricing LO3

23. Value-BasedPricing Value-Based Pricing LO3 Setting the price at a level that seems to the customer to be a good price compared to the prices of other options.

24. Pricing Products Too Low LO3 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.

25. FOB origin pricing Uniform delivered pricing Zone pricing Freight absorption pricing Basing-point pricing http://www.ups.com Online Geographic Pricing LO3

26. 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. 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. Geographic Pricing LO3

27. Other Pricing Tactics 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 LO3

28. Businesses Impose Consumer Penalties If... Consumer Penalties An irrevocable loss of revenue is suffered Additional transaction costs are incurred http://www.princesscruises.com http://www.carnival.com Online LO3

29. REVIEW LEARNING OUTCOMEFine-Tuning the Base Price LO3

30. Product Line Pricing LO4 Discuss product line pricing

31. Product LinePricing Setting prices for an entire line of products. http://www.beauty.com Online Product Line Pricing LO4

32. Complementary Substitutes Neutral Relationships among Products LO4

33. Joint Costs Costs that are shared in the manufacturing and marketing of several products in a product line. Joint Costs LO4

34. Pricing during Difficult Economic Times LO5 Describe the role of pricing during periods of inflation and recession

35. High Inflation Cost-Oriented Tactics Demand-Oriented Tactics Inflation LO5

36. 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 price-quality image of the entire line. LO5

37. Cost-Oriented Tactics LO5 • Delayed-quotation pricing • Escalator pricing • Hold prices constant, but add new fees

38. Cost-Oriented Tactics Price Increase Maintaininga Fixed Gross Margin Decreased Demand Increased Production Costs LO5

39. PriceShading Demand-Oriented Tactics LO5 The use of discounts by salespeople to increase demand for one or more products in a line.

40. Cultivate selected demand Create unique offerings Strategies to Make Demand More Inelastic Change the package design Heighten buyer dependence Demand-Oriented Tactics LO5

41. Recession Value-Based Pricing Bundling or Unbundling LO5

42. Supplier Strategies during Recession Renegotiating contracts Offering help Keeping the pressure on Paring down suppliers LO5

43. REVIEW LEARNING OUTCOMEPricing During Inflation and Recession LO5