1 Copyright ©2009 by Cengage Learning Inc. All rights reserved Designed by Eric Brengle B-books, Ltd. CHAPTER 20 Setting the Right Price Prepared by Amit Shah Frostburg State University Marketing Lamb, Hair, McDaniel 10

Copyright ©2009 by Cengage Learning Inc. All rights reserved How to Set a Price on a Product or Service 2 LO I Fine tune with pricing tactics Choose a price strategy Estimate demand, costs, and profits Establish pricing goals Results lead to the right price

Copyright ©2009 by Cengage Learning Inc. All rights reserved Establish Pricing Goals 3 LO I Profit-Oriented Sales-Oriented Status Quo

Copyright ©2009 by Cengage Learning Inc. All rights reserved Choose a Price Strategy 4 LO I 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.

Copyright ©2009 by Cengage Learning Inc. All rights reserved Price Skimming 5 LO I Situations When Price Skimming Is Successful Situations When Price Skimming Is Successful Unique Advantages/Superior Legal Protection of Product Blocked Entry to Competitors Technological Breakthrough Inelastic Demand

Copyright ©2009 by Cengage Learning Inc. All rights reserved Penetration Pricing 6 LO I  Discourages or blocks competition from market entry  Boosts sales and provides large profit increases  Can justify production expansion  Requires gear up for mass production  Selling large volumes at low prices  Strategy to gain market share may failAdvantagesDisadvantages Online

Copyright ©2009 by Cengage Learning Inc. All rights reserved Status Quo Pricing 7 LO IAdvantagesDisadvantages  Simplicity  Safest route to long- term survival for small firms  Strategy may ignore demand and/or cost

Copyright ©2009 by Cengage Learning Inc. All rights reserved The Legality and Ethics of Price Strategy 8 LO 2 Unfair Trade Practices Laws that prohibit wholesalers and retailers from selling below cost. Price Fixing Price Fixing An agreement between two or more firms on the price they will charge for a product.

Copyright ©2009 by Cengage Learning Inc. All rights reserved Price Discrimination 1.There must be price discrimination. 2.Transaction must occur in interstate commerce. 3.Seller must discriminate by price among two or more purchasers. 4.Products sold must be commodities or tangible goods. 5.Products sold must be of like grade and quality. 6.There must be significant competitive injury. 9 LO 2 The Robinson-Patman Act of 1936:

Copyright ©2009 by Cengage Learning Inc. All rights reserved Predatory Pricing 10 LO 2 Predatory Pricing 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.

Copyright ©2009 by Cengage Learning Inc. All rights reserved Tactics for Fine-Tuning the Base Price 11 LO 3 Special pricing tactics Discounts Geographic pricing

Copyright ©2009 by Cengage Learning Inc. All rights reserved Discounts, Allowances, Rebates, and Value-Based Pricing 12 LO 3 Quantity Discounts Cash Discounts Functional Discounts Seasonal Discounts Promotional Allowances Rebates Zero Percent Financing Value-Based Pricing Markdown Money

Copyright ©2009 by Cengage Learning Inc. All rights reserved Value-Based Pricing 13 LO 3 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.

Copyright ©2009 by Cengage Learning Inc. All rights reserved Pricing Products Too Low 14 LO 3 1.Managers attempt to buy market share through aggressive pricing. 2.Managers tend to make pricing decisions based on short-term (current costs, current competitor prices, and short-term share gains) rather than on long-term profitability.

Copyright ©2009 by Cengage Learning Inc. All rights reserved Other Pricing Tactics 15 LO 3 Single-Price TacticAll goods offered at the same price Flexible PricingDifferent customers pay different price Professional Services Pricing Used by professionals with experience, training or certification Price LiningSeveral line items at specific price points Leader PricingSell 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 PricingTwo separate charges to consume a single good

Copyright ©2009 by Cengage Learning Inc. All rights reserved Pricing during Difficult Economic Times 16 Describe the role of pricing during periods of inflation and recession LO 5

Copyright ©2009 by Cengage Learning Inc. All rights reserved Inflation 17 LO 5 Cost-Oriented Tactics High Inflation Demand-Oriented Tactics

Copyright ©2009 by Cengage Learning Inc. All rights reserved Cost-Oriented Tactics 18 LO 5  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. Problems with Cost-Oriented Tactics

Copyright ©2009 by Cengage Learning Inc. All rights reserved Demand-Oriented Tactics 19 LO 5 Strategies to Make Demand More Inelastic Strategies to Make Demand More Inelastic Cultivate selected demand Create unique offerings Change the package design Heighten buyer dependence

Copyright ©2009 by Cengage Learning Inc. All rights reserved Recession 20 LO 5 Bundling or Unbundling Value-Based Pricing

Copyright ©2009 by Cengage Learning Inc. All rights reserved Supplier Strategies During Recession 21 LO 5 Renegotiating contracts Offering help Keeping the pressure on Paring down suppliers