Chapter 20 Setting the Right Price Marketing 333 Chapter 20 Setting the Right Price

How to Set a Price on a Product or Service Chapter 18 Setting the Right Price How to Set a Price on a Product or Service Fine tune with pricing tactics Choose a price strategy Estimate demand, costs, and profits Establish pricing goals Results lead to the right price Notes: Setting the right price is a four-step process as shown in Exhibit 18.1.

Choose a Price Strategy Chapter 18 Setting the Right Price Choose a Price Strategy 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. Notes: Companies that plan for creating a price strategy can select from three basic approaches: price skimming, penetration pricing, and status quo pricing. A discussion of each type follows.

Price Skimming Inelastic Demand Unique Advantages/Superior Chapter 18 Setting the Right Price Price Skimming Situations When Price Skimming Is Successful Unique Advantages/Superior Legal Protection of Product Blocked Entry to Competitors Technological Breakthrough Inelastic Demand Notes: Price skimming is a pricing policy whereby a firm charges a high introductory price, often coupled with heavy promotion. The term is derived from the phrase “skimming the cream off the top.” Companies often use price skimming for new products when the product is perceived as having unique advantages. As a product enters different stages of its life cycle, the price may decrease to reach larger market segments. Additional situations when price skimming is successful are listed on this slide. Firms often feel it is better to test the market at high prices and then lower the price if sales are too slow. A price skimming strategy will encourage competitors to enter the market. Discussion/Team Activity: List companies and/or products that utilize a price skimming strategy.

Penetration Pricing Advantages Disadvantages Chapter 18 Setting the Right Price Advantages Disadvantages 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 fail On Line Southwest Airlines It’s no secret that Southwest Airlines has some of the cheapest fares around the nation. But just how much cheaper are they? The next time you travel, take the time to compare Southwest’s prices with another carrier’s. Has your regular airline met the challenge of Southwest’s penetration pricing strategy? If so, how? Notes: Penetration pricing is at the opposite end of the spectrum from price skimming. By charging a low price for a product, a larger share of the market is captured, resulting in lower production costs. It does, however, mean lower profit per unit, and a higher volume of sales is required to reach the break-even point. Penetration pricing does tend to discourage competition and is effective in a price-sensitive market.

Status Quo Pricing Advantages Disadvantages Simplicity Chapter 18 Setting the Right Price Status Quo Pricing Advantages Disadvantages Simplicity Safest route to long- term survival for small firms Strategy may ignore demand and/or cost Notes: Status quo pricing means meeting the competition’s prices by charging an identical price or very close to the competition’s price. It is a simple method of pricing, but the strategy may ignore demand and/or cost. However, if the firm is small, meeting the competition’s prices may be the safest route to long-term survival.

The Legality and Ethics of Price Strategy Chapter 18 Setting the Right Price The Legality and Ethics of Price Strategy Unfair Trade Practices Price Fixing Price Discrimination Predatory Pricing Notes: The issues that limit pricing decisions are unfair trade practices, price fixing, price discrimination, and predatory pricing.

Tactics for Fine-Tuning the Base Price Chapter 18 Setting the Right Price Tactics for Fine-Tuning the Base Price Special pricing tactics Discounts Geographic pricing Notes: The base price is the general price level at which the company expects to sell a good or service. The general price level is correlated with the pricing policy: above the market, at the market, or below the market. The final step is to fine-tune the base price. Fine tuning techniques include discounts, geographic pricing, and special pricing tactics.

Discounts, Allowances, Rebates, and Value-Based Pricing Chapter 18 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 Notes: A base price can be lowered through the use of discounts and the related tactics of allowances, rebates, low or zero percent financing, and value-based pricing. Discounts are used to encourage customers to do what they would not ordinarily do, such as pay cash, take delivery out of season, or perform certain functions with a distribution channel. The most common tactics are: Quantity discounts with lower prices for buying in multiple units of above a specified dollar amount. Cash discounts offered for prompt payment of a bill Functional discounts (trade discounts) are offered when channel intermediaries perform a service for the manufacturer. Seasonal discounts are lower prices for buying merchandise out of season. Promotional allowances (or trade allowance) are payments to dealers for promoting the manufacturer’s products. Rebates are cash refunds given for purchasing a product within a specified period. Zero percent financing offers no interest charge to increase sales. However, it does cost the manufacturers. Value-based pricing sets the price at a level that seems to the customer to be a good price compared to other prices.

Geographic Pricing FOB origin pricing Uniform delivered Zone pricing Chapter 18 Setting the Right Price Geographic Pricing Basing-point pricing Freight absorption Zone pricing Uniform delivered FOB origin pricing On Line United Parcel Service Go to UPS’s Web site and do some quick cost comparison on sending the same package to a friend in town and to a friend out-of-state. Does the difference in cost surprise you? Do you think it is justified? Why or why not? Notes: The cost of freight can greatly affect the total cost of a product. The common methods of geographic pricing are listed on this slide.

Other Pricing Tactics Single-Price Tactic Chapter 18 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 Notes: Other pricing tactics are unique and defy neat categorization. Managers use these tactics to stimulate demand for specific products, to increase store patronage, and to offer a wider variety of merchandise at a specific price point. These pricing tactics are described on this slide. Discussion/Team Activity: Discuss products and/or businesses that utilize these pricing tactics.

Product Line Pricing Setting prices for an entire line of products. Chapter 18 Setting the Right Price Product Line Pricing Product Line Pricing Setting prices for an entire line of products. On Line Beauty.com Does Beauty.com use a product line pricing strategy? Choose a brand and view the product list and pricing sheet. What evidence do you see of product line pricing? Of other pricing strategies? Notes: In product line pricing, the manager tries to achieve maximum profits for the entire line rather than for a single component of the line.

Relationships among Products Chapter 18 Setting the Right Price Relationships among Products Complementary Substitutes Neutral Notes: In setting product line prices, the manager first determines the relationship among the products in the line: Complementary: An increase in the sale of one good causes an increase in demand for the complementary product. Substitutes: Two products in a line can be substitutes for each other. If buyers buy one item in the line, they are less likely to buy a second item in the line. Neutral: A neutral relationship can exist between two products. Demand for one of the products is unrelated to demand for the other.

Chapter 18 Setting the Right Price Joint Costs Joint Costs Costs that are shared in the manufacturing and marketing of several products in a product line. Notes: If costs are shared in the manufacturing and marketing of several products in the product line, product pricing is more difficult. Some common assignments of joint costs include a weight basis, market value, or quantity sold. Discussion/Team Activity: Name products that may require joint cost pricing.

Pricing in Difficult Times - Inflation Chapter 18 Setting the Right Price Pricing in Difficult Times - Inflation Cost-Oriented Tactics High Inflation Demand-Oriented Tactics

Cost-Oriented Tactics Chapter 18 Setting the Right Price Cost-Oriented Tactics Problems with 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 the entire line. Notes: One common cost-oriented tactic is culling products with a low profit margin. However this tactic may backfire for the three reasons listed on this slide.

Demand-Oriented Tactics Chapter 18 Setting the Right Price Demand-Oriented Tactics Strategies to Make Demand More Inelastic Cultivate selected demand Create unique offerings Change the package design Heighten buyer dependence Notes: To make the demand for a good or service more inelastic and to create buyer dependency, a company can use the strategies as shown on this slide: Cultivate selected demand: Target prosperous customers who will pay extra for convenience or service. Example: Neiman Marcus Create unique offerings: By studying buyers’ needs, the seller can design distinctive products to fit a buyers’ needs and establish a beneficial relationship. Example: Value-added or multi-ingredient cereals Change the package design: Companies pass on higher costs by shrinking the product sizes but keep prices the same. Heighten buyer dependence: Provide additional value-added services and training with product offerings to freeze out competition and support higher prices. Example: Owens-Corning Fiberglas integrated insulation service (from feasibility studies to installation)

Pricing in Difficult Times - Recession Chapter 18 Setting the Right Price Pricing in Difficult Times - Recession Value-Based Pricing Bundling or Unbundling Notes: Effective pricing tactics during recession are value-based pricing and bundling. Value-based pricing stresses to customers that they are getting a good value for their money. Bundling or unbundling of features or services gives a perception of higher value. Bundling can be demonstrated in vacation packages that include lodging, meals, massages, etc.

Supplier Strategies During Recession Chapter 18 Setting the Right Price Supplier Strategies During Recession Renegotiating contracts Offering help Keeping the pressure on Paring down suppliers Notes: In a recession, prices often fall so that companies can maintain demand for their products. Falling prices are an incentive to lower costs since falling prices mean lower profits or no profits. Suppliers can be excellent sources of cost savings. Some ways companies can use cost-saving strategies with suppliers are listed on this slide. Renegotiating contracts: Demanding lower prices or rebidding the contracts. Offering help: Help suppliers’ plants reorganize and increase productivity. Keeping the pressure on: Set annual, across-the-board cost-reduction targets. Paring down suppliers: Reduce the number of suppliers and boost purchases from those that remain.