McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

LO1 Describe how to establish the “approximate price level” using demand-oriented, cost-oriented, profit-oriented, and competition- oriented approaches. Recognize the major factors considered in deriving a final list or quoted price from the approximate price level. LO2 LEARNING OBJECTIVES (LO) AFTER READING CHAPTER 14, YOU SHOULD BE ABLE TO: 14-2

LO3 Identify the adjustments made to the approximate price level on the basis of discounts, allowances, and geography. Name the principal laws and regulations affecting specific pricing practices. LO4 LEARNING OBJECTIVES (LO) AFTER READING CHAPTER 14, YOU SHOULD BE ABLE TO: 14-3

VIZIO, INC.—WHERE VISION MEETS VALUE ™ IN HDTV 14-4

FIGURE 14-1 FIGURE 14-1 The six steps in setting price. The first three steps were covered in Chapter 13 and the last three steps in Chapter

FIGURE 14-2 FIGURE 14-2 Four approaches for selecting an approximate price level 14-6

STEP 4: SELECT AN APPROXIMATE PRICE LEVEL DEMAND-ORIENTED PRICING APPROACHES LO1  Skimming Pricing Skimming Pricing  Penetration Pricing Penetration Pricing  Prestige Pricing Prestige Pricing  Price Lining Price Lining 14-7

MARKETING MATTERS Energizer’s Lesson in Price Perception— Value Lies in the Eye of the Beholder LO1 14-8

FIGURE 14-3 FIGURE 14-3 Demand curves for two demand-oriented pricing approaches 14-9

STEP 4: SELECT AN APPROXIMATE PRICE LEVEL DEMAND-ORIENTED PRICING APPROACHES LO1  Bundle Pricing Bundle Pricing  Yield Management Pricing Yield Management Pricing  Odd-Even Pricing Odd-Even Pricing  Target Pricing Target Pricing 14-10

STEP 4: SELECT AN APPROXIMATE PRICE LEVEL COST-ORIENTED PRICING APPROACHES LO1  Standard Markup Pricing Standard Markup Pricing  Cost-Plus Pricing Cost-Plus Pricing  Experience Curve Pricing Experience Curve Pricing Cost-Plus Percentage- of-Cost Pricing Cost-Plus Fixed-Fee Pricing 14-11

FIGURE 14-A FIGURE 14-A Markups for a manufacturer, wholesaler, and retailer on a home appliance sold to consumers for $

STEP 4: SELECT AN APPROXIMATE PRICE LEVEL PROFIT-ORIENTED PRICING APPROACHES LO1  Target Profit Pricing Target Profit Pricing  Target Return- on-Sales Pricing Target Return- on-Sales Pricing  Target Return-on- Investment Pricing Target Return-on- Investment Pricing 14-13

FIGURE 14-4 FIGURE 14-4 Results of a computer spreadsheet simulation to select a price to achieve a target return on investment 14-14

STEP 4: SELECT AN APPROXIMATE PRICE LEVEL COMPETITION-ORIENTED PRICING APPROACHES LO1  Customary Pricing Customary Pricing  Above-, At-, or Below-Market Pricing Above-, At-, or Below-Market Pricing  Loss-Leader Pricing Loss-Leader Pricing 14-15

USING MARKETING DASHBOARDS Are Cracker Jack Prices Above, At, or Below the Market? Price Premium (%) LO

STEP 5: SET THE LIST OR QUOTED PRICE CHOOSING A PRICE POLICY LO2  One-Price Policy One-Price Policy  Flexible-Price Policy Flexible-Price Policy Dynamic Pricing Clickstream 14-17

MAKING RESPONSIBLE DECISIONS Flexible Pricing—Is There Discrimination in Bargaining for a New Car? Buying a New Car: Some Folks Pay More LO

STEP 5: SET THE LIST OR QUOTED PRICE COMPANY, CUSTOMER, AND COMPETITIVE EFFECTS ON PRICING LO2  Company Effects  Customer Effects Product-Line Pricing  Competitive Effects Price War 14-19

STEP 5: SET THE LIST OR QUOTED PRICE BALANCING INCREMENTAL COSTS AND REVENUES LO2  Marginal Analysis How Many Extra Units to Sell for a $1,000 Advertisement? Should 3 More Salespeople be Hired? 14-20

FIGURE 14-5 FIGURE 14-5 Expected incremental revenue from pricing and other marketing actions must more than offset incremental costs to achieve incremental profit 14-21

FIGURE 14-6 FIGURE 14-6 Three special adjustments to list or quoted price include discounts, allowances, and geographical adjustments 14-22

STEP 6: MAKE SPECIAL ADJUSTMENTS TO THE LIST OR QUOTED PRICE DISCOUNTS LO3  Quantity Discounts Quantity Discounts  Seasonal Discounts Noncumulative Quantity Discounts Cumulative Quantity Discounts 14-23

STEP 6: MAKE SPECIAL ADJUSTMENTS TO THE LIST OR QUOTED PRICE DISCOUNTS LO3  Trade (Functional) Discounts  Cash Discounts 14-24

FIGURE 14-7 FIGURE 14-7 The structure of trade discounts affects the manufacturer’s selling price and the margins made by resellers in the marketing channel 14-25

STEP 6: MAKE SPECIAL ADJUSTMENTS TO THE LIST OR QUOTED PRICE ALLOWANCES LO3  Trade-In Allowances  Promotional Allowances Promotional Allowances Everyday Low Pricing (EDLP) 14-26

MARKETING MATTERS Everyday Low Prices at the Supermarket = Everyday Low Profits—Creating Customer Value at a Cost LO

STEP 6: MAKE SPECIAL ADJUSTMENTS TO THE LIST OR QUOTED PRICE GEOGRAPHICAL ADJUSTMENTS LO3  FOB Origin Pricing FOB Origin Pricing 14-28

STEP 6: MAKE SPECIAL ADJUSTMENTS TO THE LIST OR QUOTED PRICE GEOGRAPHICAL ADJUSTMENTS LO3  Uniform Delivered Pricing Uniform Delivered Pricing Single-Zone Pricing U.S. Postal Service Priority Mail Flat Rate Prices From Denver to Anywhere in the U.S.  Envelope: $4.95  Small Box: $4.95  Medium Box: $10.35  Large Box: $

STEP 6: MAKE SPECIAL ADJUSTMENTS TO THE LIST OR QUOTED PRICE GEOGRAPHICAL ADJUSTMENTS LO3 Multiple-Zone Pricing  Uniform Delivered Pricing Uniform Delivered Pricing 14-30

STEP 6: MAKE SPECIAL ADJUSTMENTS TO THE LIST OR QUOTED PRICE GEOGRAPHICAL ADJUSTMENTS LO3 FOB with Freight-Allowed Pricing Freight Absorption Pricing  Uniform Delivered Pricing Uniform Delivered Pricing 14-31

STEP 6: MAKE SPECIAL ADJUSTMENTS TO THE LIST OR QUOTED PRICE GEOGRAPHICAL ADJUSTMENTS LO3 Basing-Point Pricing  Uniform Delivered Pricing Uniform Delivered Pricing 14-32

FIGURE 14-8 FIGURE 14-8 Several pricing practices are affected by legal and regulatory restrictions, which benefit both consumers and firms 14-33

STEP 6: MAKE SPECIAL ADJUSTMENTS TO THE LIST OR QUOTED PRICE LEGAL & REGULATORY ASPECTS OF PRICING LO4  Price Fixing Price Fixing Horizontal Price Fixing Vertical Price Fixing Rule of Reason  Resale Price Maintenance 14-34

STEP 6: MAKE SPECIAL ADJUSTMENTS TO THE LIST OR QUOTED PRICE LEGAL & REGULATORY ASPECTS OF PRICING LO4  Price Discrimination Price Discrimination  Deceptive Pricing  Geographical Pricing  Predatory Pricing Predatory Pricing 14-35

GOING ONLINE And You Thought That “Free” is Simply Defined LO

FIGURE 14-9 FIGURE 14-9 Five most common deceptive pricing practices 14-37

3M GREPTILE ™ GRIP GOLF GLOVE: PRICING AN INNOVATIVE PRODUCT VIDEO CASE

VIDEO CASE 14 3M GOLF GLOVE 1. What are the characteristics of the target market for the 3M Greptile Grip golf glove? 14-39

VIDEO CASE 14 3M GOLF GLOVE 2. (a) What are the key points of difference of the 3M Greptile Grip golf glove when compared to competitors’ products, such as FootJoy and Bionic? (b) Substitute products, such as golf grips? 14-40

VIDEO CASE 14 3M GOLF GLOVE 3. How does the Greptile Grip golf glove meet 3M’s three criteria for new products? 14-41

VIDEO CASE 14 3M GOLF GLOVE 4. Since 3M has no prior products for the golf market, what special promotion and distribution problems might 3M have? 14-42

VIDEO CASE 14 3M GOLF GLOVE 5. (a) Looking at the competitors’ prices today, should 3M use a demand- oriented, cost-oriented, profit-oriented, or competition-oriented pricing strategy for its Greptile Grip golf glove? (b) Give your reasons. (c) For the strategy you selected, recommend a price-point, justifying your answer

Skimming Pricing Skimming pricing involves setting the highest initial price that customers really desiring the product are willing to pay when introducing a new or innovative product

Penetration Pricing Penetration pricing involves setting a low initial price on a new product to appeal immediately to the mass market

Prestige Pricing Prestige pricing involves setting a high price so that quality- or status-conscious consumers will be attracted to the product and buy it

Price Lining Price lining involves setting the price of a line of products at a number of different specific pricing points

Odd-Even Pricing Odd-even pricing involves setting prices a few dollars or cents under an even number

Target Pricing Target pricing consists of (1) estimating the price that ultimate consumers would be willing to pay for a product, (2) working backward through markups taken by retailers and wholesalers to determine what price to charge wholesalers, and then (3) deliberately adjusting the composition and features of the product to achieve the target price to consumers

Bundle Pricing Bundle pricing involves the marketing of two or more products in a single package price

Yield Management Pricing Yield management pricing involves the charging of different prices to maximize revenue for a set amount of capacity at any given time

Standard Markup Pricing Standard markup pricing involves adding a fixed percentage to the cost of all items in a specific product class

Cost-Plus Pricing Cost-plus pricing involves summing the total unit cost of providing a product or service and adding a specific amount to the cost to arrive at a price

Experience Curve Pricing Experience curve pricing is a method of pricing based on the learning effect, which holds that the unit cost of many products and services declines by 10 percent to 30 percent each time a firm’s experience at producing and selling them doubles, resulting in possible rapid price reductions

Target Profit Pricing Target profit pricing involves setting an annual target of a specific dollar volume of profit

Target Return-on-Sales Pricing Target return-on-sales pricing involves setting a price to achieve a profit that is a specified percentage of the sales volume

Target Return-on-Investment Pricing Target return-on-investment pricing involves setting a price to achieve an annual target return-on-investment (ROI)

Customary Pricing Customary pricing involves setting a price that is dictated by tradition, a standardized channel of distribution, or other competitive factors

Above-, At-, or Below-Market Pricing Above-, at, or below-market pricing involves setting a market price for a product or product class based on a subjective feel for the competitors’ price or market price as the benchmark

Loss-Leader Pricing Loss-leader pricing involves deliberately selling a product below its customary price, not to increase sales, but to attract customers’ attention in hopes that they will buy other products as well

One-Price Policy A one-price policy involves setting one price for all buyers of a product or service. Also called fixed pricing

Flexible Price Policy A flexible price policy involves setting different prices for products and services depending on individual buyers and purchase situations. Also called dynamic pricing

Product Line Pricing Product line pricing involves the setting of prices for all items in a product line to cover the total cost and produce a profit for the complete line, not necessarily for each item

Price War A price war involves successive price cutting by competitors to increase or maintain their unit sales or market share

Quantity Discounts Quantity discounts are reductions in unit costs for a larger order

Promotional Allowances Promotional allowances are cash payments or extra amount of “free goods” awarded sellers in the channel of distribution for undertaking certain advertising or selling activities to promote a product

Everyday Low Pricing (EDLP) Everyday low pricing (EDLP) is the practice of replacing promotional allowances with lower manufacturer list prices

FOB Origin Pricing FOB origin pricing is the “free on board” (FOB) price the seller quotes that includes only the cost of loading the product onto the vehicle and specifies the name of the location where the loading is to occur (seller’s factory or warehouse)

Uniform Delivered Pricing Uniform delivered pricing is the price that the seller quotes includes all transportation costs

Basing-Point Pricing Basing-point pricing involves selecting one or more geographical locations (basing point) from which the list price for products plus freight expenses are charged to the buyer

Price Fixing Price fixing involves a conspiracy among firms to set prices for a product

Price Discrimination Price discrimination is the practice of charging different prices to different buyers for goods of like grade and quality

Predatory Pricing Predatory pricing is the practice of charging a very low price for a product with the intent of driving competitors out of business