1. foundations of Chapter M A R K E T I N G Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Managing the Pricing Function 14

2. Chapter Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Objectives 1. Understand the benefits of the marketing approach to pricing. 2. Present a useful model for settling a price. 3. Explain the importance of establishing pricing policies before individual prices are set. 4. Understand an apply skimming and penetration pricing strategies. 5. Describe how prices are quoted. Managing the Pricing Function 14 14-1

3. Chapter Copyright © 2003 by Nelson, a division of Thomson Canada Limited. A Pricing Decision Flow Chart Managing the Pricing Function 14 Figure 14.1 Consumer analysis Legal and ethical analysis Discounts Marketing Strategy Pricing Objectives Price Range Initial Price Final Price Profit and Marketing Mix Analysis Economic analysis Cost analysis Competitive analysis Polices 14-2

4. Chapter Copyright © 2003 by Nelson, a division of Thomson Canada Limited. The Role of Pricing Objectives in Contemporary Marketing Managing the Pricing Function 14 Figure 14.2 Profitability 4. Pricing policies and procedures Volume Meeting competition Prestige 1. Company objectives 2. Marketing objectives 3. Pricing objectives 14-3

5. Chapter Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Price and Marketing Mix Profit maximization The point where the addition to total revenue is just balanced by an increase in total cost. Managing the Pricing Function 14 14-4

6. Chapter Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Target Return Objectives Either short-run or long-run goals, usually stated as a percentage of sales or investments. Managing the Pricing Function 14 14-5

7. Chapter Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Sales maximization The pricing philosophy analyzed by economist William J. Beaumol. Beaumol believes that many firms attempt to maximize sales within a profit constraint. Market share objective To control a specific portion of the market for the firms product. Managing the Pricing Function 14 14-6

8. Chapter Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Status Quo Objectives Objectives based on maintaining stable prices. Managing the Pricing Function 14 14-7

9. Chapter Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Prestige Objectives Establishing relatively high prices in order to develop and maintain an image of quality and exclusiveness. Managing the Pricing Function 14 14-8

10. Chapter Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Pricing Policy and Price Structure Pricing Policy A general guideline based on pricing objectives that is intended for use in specific pricing decisions. Price Structure An outline of the selling price and the various discounts offered to intermediaries. Managing the Pricing Function 14 14-9

11. Chapter Copyright © 2003 by Nelson, a division of Thomson Canada Limited. New Product Pricing Policies Pricing Policy 1.Skimming 2.Penetration Managing the Pricing Function 14 14-10

12. Chapter Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Skimming Pricing Choosing a high entry price; to sell first to consumers who are willing to pay the highest price, and then reduce the price. Managing the Pricing Function 14 14-11

13. Chapter Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Penetration Pricing An entry price for a product that is lower than what is estimated to be the long- term price. Managing the Pricing Function 14 14-12

14. Chapter Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Flexible Pricing A variable price policy. Managing the Pricing Function 14 14-13

15. Chapter Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Pricing Practices 1.Price Lining 2.Promotional Prices 3.Psychological Pricing 4.Unit Pricing Managing the Pricing Function 14 14-14

16. Chapter Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Price Lining and Promotional Price Price Lining The practice of marketing merchandise at a limited number of prices. Promotional Price A lower-than-normal price used as an ingredient in a firms selling strategy. Managing the Pricing Function 14 14-15

17. Chapter Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Psychological Pricing and Unit Pricing Psychological Pricing The use of prices to suggest values of a product or attributes of a product/price offering. Unit Pricing Stating prices in terms of some recognized unit of measurement (such as grams and litres) or a standard numerical count. Managing the Pricing Function 14 14-16

18. Chapter Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Loss Leader Goods priced below cost to attract customers. Managing the Pricing Function 14 14-17

19. Chapter Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Odd Pricing Prices are set ending in some amount just below the next rounded number. Managing the Pricing Function 14 14-18

20. Chapter Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Price Limits Limits within which product quality perception varies directly with price. Managing the Pricing Function 14 14-19

21. Chapter Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Price Quotations List price The rate normal quoted to potential buyers. Market price The amount that a consumer pays. Managing the Pricing Function 14 14-20

22. Chapter Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Price Quotations 1.List price 2.Discounts a) Cash b)Trade c)Quantity Managing the Pricing Function 14 3.Allowances a) Trade-In b) Promotional 4.Rebates 14-21

23. Chapter Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Cash discount Reduction in price that is given for prompt payment of a bill. Trade discount Payment to channel members or buyers for performing some marketing function normally required of the manufacturer. Quality discount Price reduction granted for large purchases. Managing the Pricing Function 14 14-22

24. Chapter Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Trade-in Deduction from an items price of an amount for the customers old item that is being replaced. Managing the Pricing Function 14 14-23

25. Chapter Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Promotional Allowance Extra discount offered to retailers so that they will advertise the manufacturer along with the retailer. Managing the Pricing Function 14 14-24

26. Chapter Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Rebate Refund by the seller of a portion of the purchase price. Managing the Pricing Function 14 14-25

27. Chapter Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Geographic Considerations and Pricing 1.FOB Plant 2.Freight Absorption 3.Uniform Delivered Price 4.Zone Pricing Managing the Pricing Function 14 14-26

28. Chapter Copyright © 2003 by Nelson, a division of Thomson Canada Limited. FOB Plant The buyer must pay all the freight. Freight Absorption The seller permits the buyer to subtract transportation expenses from the bill. Managing the Pricing Function 14 14-27

29. Chapter Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Uniform Delivered Price The same price (including transportation expenses) is quoted to all buyers. Zone Pricing The market is divided into different zones and a price is established within each. Managing the Pricing Function 14 14-28

30. Chapter Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Zone Pricing for a Winnipeg Firm Managing the Pricing Function 14 Figure 14.5 14-29