1Chap. 18 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning Setting the Right Price Prepared by Deborah Baker Texas Christian University Chapter 18

2Chap. 18 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning Learning Objectives 1.Describe the procedure for setting the right price. 2. Identify the legal and ethical constraints on pricing decisions. 3. Explain how discounts, geographic pricing, and other special pricing tactics can be used to fine-tune the base price.

3Chap. 18 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning Learning Objectives (continued) 4. Discuss product line pricing. 5. Describe the role of pricing during periods of inflation and recession.

4Chap. 18 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning On Line On Line Learning Objective Describe the procedure for setting the right price. 1 1

5Chap. 18 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning Steps in Setting the Right Price Results lead to the right price Fine tune with pricing tactics Choose a price strategy Estimate demand, costs, and profits Establish pricing goals 1 1

6Chap. 18 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning Pricing Objectives 1 1 Profit-Oriented Pricing Objectives Sales-Oriented Pricing Objectives Status Quo Pricing Objectives

7Chap. 18 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning 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. 1 1

8Chap. 18 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning Choosing a Price Strategy Basic Strategies for Setting Prices Basic Strategies for Setting Prices Status Quo Pricing Price Skimming Penetration Pricing 1 1

9Chap. 18 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning Price Skimming Situationswhen Is Successful Situationswhen Price Skimming Is Successful Unique Advantages/Superior Legal Protection of Product Blocked Entry to Competitors Technological Breakthrough Inelastic Demand 1 1

10Chap. 18 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning Penetration Pricing A pricing policy whereby a firm charges a relatively low price for a product initially as a way to reach the mass market. 1 1 On Line On Line

11Chap. 18 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning Penetration Pricing AdvantagesAdvantages  Discourages or blocks competition from market entry  Boosts sales and provides large profit increases.DisadvantagesDisadvantages  Requires gear up for mass production  Selling large volumes at low prices  Strategy to gain market share may fail 1 1

12Chap. 18 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning Status Quo Pricing AdvantagesAdvantages  Simplicity  Safest route to long- term survival for small firmsDisadvantagesDisadvantages  Strategy may ignore demand and/or cost 1 1

13Chap. 18 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning Learning Objective Identify the legal and ethical constraints on pricing decisions. 2 2

14Chap. 18 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning The Legality and Ethics of Price Strategy Issues That Limit PricingDecisionsIssues PricingDecisions Unfair Trade Practices Price Fixing Price Discrimination Predatory Pricing 2 2

15Chap. 18 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning Unfair Trade Practice Acts Laws that prohibit wholesalers and retailers from selling below cost. 2 2

16Chap. 18 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning Price Fixing An agreement between two or more firms on the price they will charge for a product. 2 2 On Line On Line

17Chap. 18 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning Price Discrimination The Robinson-Patman Act of 1936: Prohibits any firm from selling to two or more different buyers at different prices if the result would lessen competition 2 2

18Chap. 18 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning Robinson-Patman Act Defenses Seller Defenses Cost Market Conditions Market Conditions Competition 2 2

19Chap. 18 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning 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. 2 2

20Chap. 18 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning Learning Objective Explain how discounts, geographic pricing, and other special pricing tactics can be used to fine-tune the base price. 3 3

21Chap. 18 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning Tactics for Fine-Tuning the Base Price Special Pricing Tactics Discounts Geographic Pricing 3 3

22Chap. 18 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning Tactics for Fine-Tuning the Base Price Quantity Discounts Cash Discounts Functional Discounts Seasonal Discounts 3 3 Promotional Allowances Rebates Value-Based Pricing Zero Percent Financing On Line On Line

23Chap. 18 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning Value-Based Pricing The price is set at a level that seems to the customer to be a good price compared to the prices of other options. 3 3

24Chap. 18 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning Geographic Pricing Basing-Point Pricing Basing-Point Pricing Freight Absorption Pricing Freight Absorption Pricing Zone Pricing Uniform Delivered Pricing Uniform Delivered Pricing FOB Origin Pricing Common Methods of GeographicPricingCommon GeographicPricing 3 3

25Chap. 18 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning Geographic Pricing FOB Origin Pricing FOB Origin Pricing The buyer absorbs the freight costs from the shipping point (“free on board”). Uniform Delivered Pricing Uniform Delivered Pricing The seller pays the freight charges and bills the purchaser an identical, flat freight charge. 3 3

26Chap. 18 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning On Line On Line Geographic Pricing Zone Pricing Freight Absorption Pricing Freight Absorption Pricing Basing-Point Pricing Basing-Point Pricing 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 designates a location as a basing point and charges all buyers the freight costs from that point. 3 3

27Chap. 18 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning On Line On Line Special Pricing Tactics Single-Price Tactic Flexible Pricing Professional Services Pricing Professional Services Pricing Price Lining Leader Pricing Bait Pricing Odd-Even Pricing Price Bundling Two-Part Pricing All goods offered at the same price Different customers pay different price Used by professionals with experience, training or certification Used by professionals with experience, training or certification Several line items at specific price points Sell product at near or below cost Lure customers through false or misleading price advertising Lure customers through false or misleading price advertising Odd-number prices imply bargain Even-number prices imply quality Odd-number prices imply bargain Even-number prices imply quality Combining two or more products in a single package Combining two or more products in a single package Two separate charges to consume a single good 3 3

28Chap. 18 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning Consumer Penalties An irrevocable loss of revenue is suffered An irrevocable loss of revenue is suffered Additional transaction costs are incurred Additional transaction costs are incurred Businesses Impose Consumer Penalties If On Line On Line

29Chap. 18 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning Consumer Penalties 3 3

30Chap. 18 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning Learning Objective Discuss product line pricing. 4 4

31Chap. 18 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning Product Line Pricing Setting prices for an entire line of products. 4 4 On Line On Line

32Chap. 18 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning Relationships among Products Relationships Among Products Relationships Among Products Complementary Substitutes Neutral 4 4

33Chap. 18 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning Joint Costs Costs that are shared in the manufacturing and marketing of several products in a product line. 4 4

34Chap. 18 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning Learning Objective Describe the role of pricing during periods of inflation and recession. 5 5

35Chap. 18 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning Pricing During Difficult Economic Times Demand-Oriented Tactics Cost-Oriented Tactics High Inflation Pricing Tactics High Inflation Pricing Tactics 5 5

36Chap. 18 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning 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 entire line Problems with Cost-Oriented Tactics 5 5

37Chap. 18 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning Cost-Oriented Tactics Delayed- Quotation Pricing Delayed- Quotation Pricing A firm price is not set until the item is either finished or delivered. Escalator Pricing Escalator Pricing The final selling price reflects cost increases incurred between the time the order is placed and when delivery is made. The final selling price reflects cost increases incurred between the time the order is placed and when delivery is made. 5 5

38Chap. 18 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning Cost-Oriented Tactics IncreasedProductionCosts DecreasedDemand PriceIncrease Maintaining a Fixed Gross Margin 5 5

39Chap. 18 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning Price Shading The use of discounts by salespeople to increase demand for one or more products in a line. 5 5

40Chap. 18 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning Demand-Oriented Tactics 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 5 5

41Chap. 18 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning Pricing During Recession Bundling or Unbundling Value-Based Pricing Recession Pricing Tactics Recession 5 5 On Line On Line

42Chap. 18 Marketing 7e Lamb Hair McDaniel ©2004 South-Western/Thomson Learning Supplier Strategies During Recession Cost-Saving Strategies with SuppliersCost-Saving Suppliers Renegotiating contracts Offering help Keeping the pressure on Paring down suppliers 5 5