© 2002 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Steps in setting price

© 2002 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin STEP 4: SELECT AN APPROXIMATE PRICE LEVEL

© 2002 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Demand-Oriented Approaches Skimming Pricing Penetration Pricing Prestige Pricing Price Lining STEP 4: SELECT AN APPROXIMATE PRICE LEVEL

© 2002 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Demand curves for two types of demand-oriented approaches

© 2002 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Demand-Oriented Approaches Odd-Even Pricing Target Pricing Bundle Pricing Yield Management Pricing STEP 4: SELECT AN APPROXIMATE PRICE LEVEL

© 2002 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Cost-Oriented Approaches Standard Markup Pricing Cost-Plus Pricing Experience Curve Pricing STEP 4: SELECT AN APPROXIMATE PRICE LEVEL

© 2002 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Profit-Oriented Approaches Target Profit Pricing Target Return-on-Sales Pricing Target Return-on-Investment Pricing STEP 4: SELECT AN APPROXIMATE PRICE LEVEL

© 2002 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Competition-Oriented Approaches Customary Pricing Above- At- or Below- Market Pricing Loss-Leader Pricing STEP 4: SELECT AN APPROXIMATE PRICE LEVEL

© 2002 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin One-Price versus Flexible-Price PolicyOne-PriceFlexible-Price STEP 5: SET THE LIST OR QUOTED PRICE

© 2002 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin One-Price Policy

© 2002 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Company, Customer, and Competitive Effects Company Effects  Product-line pricing Product-line pricing Customer Effects STEP 5: SET THE LIST OR QUOTED PRICE

© 2002 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Frito-Lay Products Substitutes and complements: Information for product-line pricing

© 2002 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Company, Customer, and Competitive Effects (cont) Competitive Effects  Price war Price war Balancing Incremental Costs and Revenues STEP 5: SET THE LIST OR QUOTED PRICE

© 2002 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin The power of marginal analysis in real-world decisions

© 2002 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin STEP 6: MAKE SPECIAL ADJUSTMENTS TO THE LIST OR QUOTED PRICE

© 2002 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Discounts Quantity Discounts Seasonal Discounts Trade (Functional) Discounts Cash Discounts STEP 6: MAKE SPECIAL ADJUSTMENTS TO THE LIST OR QUOTED PRICE

© 2002 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Toro Ad Seasonal discounts

© 2002 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin The structure of trade discounts

© 2002 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Allowances Trade-In Allowances Promotional Allowances  Everyday low pricing Everyday low pricing Geographical Adjustments FOB Origin Pricing Uniform Delivered Pricing Basing-Point Pricing STEP 6: MAKE SPECIAL ADJUSTMENTS TO THE LIST OR QUOTED PRICE

© 2002 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Legal and Regulatory Aspects of Pricing Price Fixing Price Discrimination Deceptive Pricing Geographical Pricing Predatory Pricing STEP 6: MAKE SPECIAL ADJUSTMENTS TO THE LIST OR QUOTED PRICE

© 2002 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Pricing practices affected by legal restrictions

© 2002 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin The highest initial price that customers really desiring the product are willing to pay. Skimming Pricing

© 2002 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Setting a low initial price on a new product to appeal immediately to the mass market. Penetration Pricing

© 2002 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Setting a high price so that status-conscious consumers will be attracted to the product and buy it. Prestige Pricing

© 2002 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Setting the price of a line of products at a number of different specific pricing points. Price Lining

© 2002 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Setting prices a few dollars or cents under an even number, such at $ Odd-Even Pricing

© 2002 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Manufacturer deliberately adjusting the composition and features of a product to achieve the target price to consumers. Target Pricing

© 2002 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin The marketing of two or more products in a single “package” price. Bundle Pricing

© 2002 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin The charging of different prices to maximize revenue for a set amount of capacity at any given time. Yield Management Pricing

© 2002 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Adding a fixed percentage to the cost of all items in a specific product class. Standard Markup Pricing

© 2002 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin The practice of summing the total unit cost of providing a product or service and adding a specific amount to the cost to arrive at a price. Cost-Plus Pricing

© 2002 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin 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. Experience Curve Pricing

© 2002 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Setting an annual target of a specific dollar volume of profit. Target Profit Pricing

© 2002 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Setting a price to achieve a profit that is a specified percentage of the sales volume. Target Return-on-Sales Pricing

© 2002 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Setting a price to achieve a return-on- investment (ROI) target. Target Return-on-Investment Pricing

© 2002 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin A method of pricing based on tradition, a standardized channel of distribution, or other competitive factors. Customary Pricing

© 2002 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Pricing based on market price. Above- At- or Below- Market Pricing

© 2002 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Deliberately selling a product below its customary price to attract attention to it. Loss-Leader Pricing

© 2002 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Setting one price for all buyers of a product or service. Also called fixed pricing. One-Price Policy

© 2002 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Setting different prices for products and services depending on individual buyers and purchase situations. Flexible-Price Policy

© 2002 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin The setting of prices for all items in a product line. Product-Line Pricing

© 2002 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Successive price cutting by competitors to increase or maintain their unit sales or market share. Price War

© 2002 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Reductions in unit costs for a larger order. Quantity Discounts

© 2002 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Cash payment or extra amount of “free goods” awarded sellers in the channel of distribution for undertaking certain advertising or selling activities to promote a product. Promotional Allowances

© 2002 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin (1) The practice or replacing promotional allowances with lower manufacturer list prices. (2) Retail strategy that emphasizes consistently low prices and eliminates most markdowns. Everyday Low Pricing

© 2002 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin A method of pricing where the title of goods passes to the buyer at the point of loading. FOB Origin Pricing

© 2002 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin The price the seller quotes includes all transportation costs. Uniform Delivered Pricing

© 2002 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Selecting one or more geographic locations (basing point) from which the list price for products plus freight expenses are charged to buyers. Basing-Point Pricing

© 2002 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin A conspiracy among firms to set prices for a product. Price Fixing

© 2002 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin The practice of charging different prices to different buyers for goods of like trade and quality. Price Discrimination

© 2002 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Charging a very low price for a product with the intent of driving competitors out of business. Predatory Pricing