Setting the Right Price Lamb, Hair, McDaniel Chapter 20 Setting the Right Price CHAPTER 20 Setting the Right Price © BUENA VISTA IMAGES/THE IMAGE BANK/GETTY IMAGES

New-Product Development Process Chapter 20 Setting the Right Price New-Product Development Process Fine-tune with pricing tactics Choose a price strategy Estimate demand, costs, and profits Establish pricing goals Results lead to the right price LO1

Establish Pricing Goals Chapter 20 Setting the Right Price Pricing objectives fall into three categories: Profit-Oriented Sales-Oriented Status Quo LO1

Choose a Price Strategy Chapter 20 Setting the Right Price Price Strategy A basic, long-term pricing framework that establishes the initial price for a product and the intended direction for price movements over the product life cycle. LO1

Choose a Price Strategy Chapter 20 Setting the Right Price 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. LO1

Price Skimming LO1 Situations When Price Skimming Is Successful Chapter 20 Setting the Right Price Situations When Price Skimming Is Successful Unique Advantages/Superior Legal Protection of Product Blocked Entry to Competitors Technological Breakthrough Inelastic Demand LO1

Penetration Pricing LO1 Advantages Disadvantages Chapter 20 Setting the Right Price Advantages Disadvantages Can lead to lower cost per unit as production expands Discourages or blocks competition from market entry Boosts sales and provides large profit increases Requires gear up for mass production Selling large volumes at low prices Strategy to gain market share may fail LO1

Status Quo Pricing LO1 Advantages Disadvantages Simplicity Chapter 20 Setting the Right Price Advantages Disadvantages Simplicity Safest route to long- term survival for small firms Strategy may ignore demand and/or cost LO1

The Legality and Ethics of Price Strategy Chapter 20 Setting the Right Price The Legality and Ethics of Price Strategy Unfair Trade Practices Price Fixing Price Discrimination Predatory Pricing LO2

Chapter 20 Setting the Right Price Assignment Each student will be randomly assigned to either the “for” or “against” position in the following scenario: Advanced Bio Medics (ABM) has invented a new stem-cell-based drug that will arrest even advanced forms of lung cancer. Development costs were actually quite low because the drug was an accidental discovery by scientists working on a different project. To stop the disease requires a regimen of one pill per week for 20 weeks. There is no substitute offered by competitors. ABM is thinking that it could maximize its profit by charging $10,000 per pill. Students assigned the “for” position must argue that ABM should maximize profits; Students assigned “against” must argue that it would be unethical for ABM to maximize profits.

Tactics for Fine-Tuning the Base Price Chapter 20 Setting the Right Price Tactics for Fine-Tuning the Base Price Special pricing tactics Discounts Geographic pricing LO3

Discounts, Allowances, Rebates, and Value-Based Pricing Chapter 20 Setting the Right Price Discounts, Allowances, Rebates, and Value-Based Pricing Quantity Discounts Cash Discounts Functional Discounts Seasonal Discounts Promotional Allowances Rebates Zero Percent Financing Value-Based Pricing LO3

Pricing Products Too Low Chapter 20 Setting the Right Price Pricing Products Too Low Managers attempt to buy market share through aggressive pricing. Managers have a natural tendency to want to make decisions that can be justified objectively. LO3

Geographic Pricing LO3 FOB Origin Pricing Uniform Delivered Chapter 20 Setting the Right Price FOB Origin Pricing Uniform Delivered Zone Pricing Freight Absorption Basing-Point 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 charges freight from a basing point, regardless of the city from which the goods are shipped.

Other Pricing Tactics LO3 Single-Price Tactic Chapter 20 Setting the Right Price 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

Businesses Impose Consumer Penalties If... Chapter 20 Setting the Right Price Consumer Penalties An irrevocable loss of revenue is suffered Additional transaction costs are incurred Businesses Impose Consumer Penalties If... LO3

Product Line Pricing Product Line Pricing is… LO4 Chapter 20 Setting the Right Price Product Line Pricing Product Line Pricing is… setting prices for an entire line of products. LO4

Relationships among Products Chapter 20 Setting the Right Price Relationships among Products Complementary Substitutes Neutral LO4

Chapter 20 Setting the Right Price Joint Costs Joint Costs Costs that are shared in the manufacturing and marketing of several products in a product line. LO4

Cost-Oriented Tactics Demand-Oriented Tactics Inflation Chapter 20 Setting the Right Price Cost-Oriented Tactics High Inflation Demand-Oriented Tactics LO5

Bundling or Unbundling Recession Chapter 20 Setting the Right Price Value-Based Pricing Bundling or Unbundling LO5

Renegotiating contracts Keeping the pressure on Supplier Strategies during Recession Chapter 20 Setting the Right Price Renegotiating contracts Offering help Keeping the pressure on Paring down suppliers LO5

Assignment Name That Price Chapter 20 Setting the Right Price Assignment Name That Price In groups, discuss and then decide what the appropriate price is for each of the items listed in class. This is a competition between groups and the group that wins gets double in-class exercise points for this assignment.