SETTING THE RIGHT PRICE

CHAPTER 12
HOW TO SET A PRICE ON A
PRODUCT OR SERVICE

Describe the procedure for

setting the right price
HOW TO SET A PRICE ON A
PRODUCT OR SERVICE

Establish
Establishpricing
pricinggoals
goals

Estimate
Estimatedemand,
demand,costs,
costs,and
andprofits
profits

Choose
Chooseaaprice
pricestrategy
strategy

Fine
Finetune
tunewith
withpricing
pricingtactics
tactics

Results lead to the right price

ESTABLISH PRICING GOALS

Profit-Oriented

Sales-Oriented

Status Quo
CHOOSE A PRICE STRATEGY

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.
CHOOSE A PRICE STRATEGY

AAfirm
firmcharges
chargesaahigh
high
Price
Price
Skimming introductory
introductoryprice,
price,often
oftencoupled
coupled
Skimming
with
withheavy
heavypromotion.
promotion.

AAfirm
firmcharges
chargesaarelatively
relativelylow
low
Penetration
Penetration
Pricing price
pricefor
foraaproduct
productinitially
initiallyas
as
Pricing
aaway
waytotoreach
reachthe
themass
massmarket.
market.

Charging
Charging aaprice
priceidentical
identicalto
to or
or
Status
StatusQuo
Quo
Pricing very
veryclose
closetotothe
thecompetition’s
competition’s
Pricing price.
price.
 PRICE SKIMMING

Inelastic Demand

Situations Unique Advantages/Superior

When
Price
Legal Protection of Product
Skimming
Is Successful
Technological Breakthrough

Blocked Entry to Competitors

 PENETRATION PRICING
Advantages Disadvantages

 Discourages or blocks
competition from  Requires gear up for
market entry mass production

 Boosts sales and  Selling large volumes

provides large profit at low prices
increases
 Strategy to gain market
 Can justify production share may fail
expansion
 STATUS QUO PRICING

Advantages Disadvantages

 Simplicity  Strategy may ignore

demand and/or cost
 Safest route to long-
term survival for small
firms
 REVIEW LEARNING OUTCOME
SETTING THE RIGHT PRICE
Establish
price
goals High $
Estimate demand,
costs, and profits
Skimming
Choose a
price strategy Status quo

Penetration
Low $
Evaluate Fine-tune
results base price

Set price
$x.yy
THE LEGALITY AND ETHICS OF
PRICE STRATEGY

Identify the legal and

ethical constraints
on pricing decisions
THE LEGALITY AND ETHICS OF
PRICE STRATEGY

Unfair
Unfair Trade
Trade Practices
Practices

Price
Price Fixing
Fixing

Price
Price Discrimination
Discrimination

Predatory
Predatory Pricing
Pricing
THE LEGALITY AND ETHICS OF
PRICE STRATEGY

Laws that prohibit wholesalers

Unfair Trade
and retailers from selling
Practices
below cost.

An agreement between two

Price
or more firms on the price they
Fixing
will charge for a product.
 PRICE DISCRIMINATION

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.
 PRICE DISCRIMINATION

The Robinson-Patman Act of 1936:

Seller
SellerDefenses
Defenses

Market
Market
Cost
Cost Competition
Competition
Conditions
Conditions
 PREDATORY PRICING

Predatory The practice of charging a

Pricing very low price for a
product with the intent of
driving competitors out of
business or out of a
market.
TACTICS FOR FINE-TUNING THE
BASE PRICE

Explain how discounts,

geographic pricing, and
other special pricing tactics
can be used to fine-tune
the base price
TACTICS FOR FINE-TUNING THE
BASE PRICE

Discounts
Discounts

Geographic
Geographicpricing
pricing

Special
Special pricing
pricingtactics
tactics
DISCOUNTS, ALLOWANCES, REBATES,
AND
VALUE-BASED PRICING

Quantity
QuantityDiscounts
Discounts Promotional
PromotionalAllowances
Allowances

Cash
CashDiscounts
Discounts Rebates
Rebates

Functional
FunctionalDiscounts
Discounts Zero
Zero Percent
PercentFinancing
Financing

Seasonal
SeasonalDiscounts
Discounts Value-Based
Value-BasedPricing
Pricing
 VALUE-BASED PRICING

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.
PRICING PRODUCTS TOO LOW

PRICING PRODUCTS TOO LOW REDUCES COMPANY

PROFITS. THIS HAPPENS FOR 2 REASONS:

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.
GEOGRAPHIC PRICING

FOB
FOBorigin
originpricing
pricing

Uniform
Uniformdelivered
delivered
pricing
pricing

Zone
Zonepricing
pricing

Freight
Freightabsorption
absorption
pricing
pricing

Basing-point
Basing-point
pricing
pricing
 GEOGRAPHIC PRICING
The buyer absorbs the freight
FOB Origin
costs from the shipping point
Pricing
(“free on board”).
Uniform
Delivered The seller pays the freight charges
Pricing and bills the purchaser an
The identical, flat freight
U.S. is divided charge.
into zones, and
Zone Pricing a flat freight rate is charged to customers in
a given zone.
Freight
Absorption The seller pays for all or part of
Pricing the freight charges and does not
Basing-Point pass them on to the buyer.
Pricing The seller designates a location as
a basing point and charges all buyers the
freight costs from that point.
 OTHER PRICING TACTICS

Single-Price Tactic All goods offered at the same price

Flexible Pricing Different customers pay different price

Professional Used by professionals with experience,
Services Pricing training or certification
Price Lining Several line items at specific price points

Leader Pricing Sell product at near or below cost

Lure customers through false or misleading
Bait Pricing
price advertising
Odd-number prices imply bargain
Odd-Even Pricing
Even-number prices imply quality
Combining two or more products in a
Price Bundling
single package
Two-Part Pricing Two separate charges to consume a single good
CONSUMER PENALTIES

Businesses Impose
Consumer Penalties If...

An irrevocable Additional
loss of revenue transaction costs
is suffered are incurred
REVIEW LEARNING OUTCOME
FINE-TUNING THE BASE PRICE
PRODUCT LINE PRICING

Discuss product line pricing

 PRODUCT LINE PRICING

Product Line
Pricing
Setting prices for an entire line
of products.

http://www.beauty.com

Online
RELATIONSHIPS AMONG
PRODUCTS

Complementary
Complementary

Substitutes
Substitutes

Neutral
Neutral
 JOINT COSTS

Joint Costs
Costs that are shared in the
manufacturing and marketing
of several products in a
product line.
PRICING DURING DIFFICULT
ECONOMIC TIMES

Describe the role of pricing

during periods of
inflation and recession
 INFLATION

Cost-Oriented
Cost-Oriented Tactics
Tactics

High
High Inflation
Inflation
Demand-Oriented
Demand-Oriented Tactics
Tactics
 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.
 COST-ORIENTED TACTICS
 Delayed-quotation pricing

 Escalator pricing

 Hold prices constant, but add new fees

COST-ORIENTED TACTICS

Pr eas
In

ic e
D em e d

cr
e
and
reas
Maintaining
D ec a Fixed
Gross Margin

Increased
Production
Costs
DEMAND-ORIENTED TACTICS

Price
Shading The use of discounts by
salespeople to increase
demand for one or more
products in a line.
DEMAND-ORIENTED TACTICS

Cultivate
Cultivateselected
selected demand
demand

Create
Createunique
uniqueofferings
offerings
Strategies
Strategies
to
toMake
Make
Demand
Demand
More
MoreInelastic
Inelastic Change
Changethe
thepackage
packagedesign
design

Heighten
Heightenbuyer
buyerdependence
dependence
RECESSION

Value-Based
Value-Based Pricing
Pricing

Bundling
Bundling or
or Unbundling
Unbundling
SUPPLIER STRATEGIES DURING
RECESSION

Renegotiating
Renegotiating contracts
contracts

Offering
Offering help
help

Keeping
Keeping the
the pressure
pressure on
on

Paring
Paring down
down suppliers
suppliers
REVIEW LEARNING OUTCOME
PRICING DURING INFLATION AND
RECESSION
 Q&A
SESSION
THANK YOU…