1. ©2002 South-Western Chapter 18 Version 6e1 chapter Setting the Right Price 18 Prepared by Deborah Baker Texas Christian University

2. ©2002 South-Western Chapter 18 Version 6e2 chapter Learning Objectives 18 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.

3. ©2002 South-Western Chapter 18 Version 6e3 chapter Learning Objectives (continued) 18 4. Discuss product line pricing. 5. Describe the role of pricing during periods of inflation and recession.

4. ©2002 South-Western Chapter 18 Version 6e4 Learning Objective 1 1 Describe the procedure for setting the right price.

5. ©2002 South-Western Chapter 18 Version 6e5 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

6. ©2002 South-Western Chapter 18 Version 6e6 Pricing Objectives Profit-Oriented Pricing Objectives Sales-Oriented Pricing Objectives Status Quo Pricing Objectives 1 1

7. ©2002 South-Western Chapter 18 Version 6e7 Price Strategy 1 1 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.

8. ©2002 South-Western Chapter 18 Version 6e8 Choosing a Price Strategy Basic Strategies for Setting Prices Basic Strategies for Setting Prices Status Quo Pricing Price Skimming Penetration Pricing 1 1

9. ©2002 South-Western Chapter 18 Version 6e9 Price Skimming Situationswhen is Successful Situationswhen Price Skimming is Successful Superior Product Legal Protection of Product Limited Production Technological Breakthrough Inelastic Demand 1 1

10. ©2002 South-Western Chapter 18 Version 6e10 Penetration Pricing 1 1 A pricing policy whereby a firm charges a relatively low price for a product initially as a way to reach the mass market.

11. ©2002 South-Western Chapter 18 Version 6e11 Penetration Pricing AdvantagesAdvantages  Discourages or blocks competition from market entryDisadvantagesDisadvantages  Requires gear up for mass production  Selling large volumes at low prices  Strategy to gain market share may fail 1 1

12. ©2002 South-Western Chapter 18 Version 6e12 Status Quo Pricing AdvantagesAdvantages  Simplicity  Safest route to long- term survival for small firmsDisadvantagesDisadvantages  Strategy may ignore demand or cost 1 1

13. ©2002 South-Western Chapter 18 Version 6e13 Learning Objective 2 2 Identify the legal and ethical constraints on pricing decisions.

14. ©2002 South-Western Chapter 18 Version 6e14 The Legality and Ethics of Price Strategy Issues That Limit PricingDecisionsIssues PricingDecisions Unfair Trade Practices Price Fixing Price Discrimination Predatory Pricing 2 2

15. ©2002 South-Western Chapter 18 Version 6e15 Unfair Trade Practice Acts Laws that prohibit wholesalers and retailers from selling below cost. 2 2

16. ©2002 South-Western Chapter 18 Version 6e16 Price Fixing An agreement between two or more firms on the price they will charge for a product. 2 2

17. ©2002 South-Western Chapter 18 Version 6e17 Price Discrimination 2 2 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

18. ©2002 South-Western Chapter 18 Version 6e18 Robinson-Patman Act Defenses 2 2 Seller Defenses Cost Market Conditions Market Conditions Competition

19. ©2002 South-Western Chapter 18 Version 6e19 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

20. ©2002 South-Western Chapter 18 Version 6e20 Learning Objective Explain how discounts, geographic pricing, and other special pricing tactics can be used to fine-tune the base price. fine-tune the base price. 3 3

21. ©2002 South-Western Chapter 18 Version 6e21 Tactics for Fine-Tuning the Base Price 3 3 Fine-TuningPricingTacticsFine-TuningPricingTactics Special Pricing Tactics Discounts Geographic Pricing

22. ©2002 South-Western Chapter 18 Version 6e22 Tactics for Fine-Tuning the Base Price Common Tactics forFine-Tuning the Base Price Common Tactics forFine-Tuning the Base Price Quantity Discounts Cash Discounts Functional Discounts Seasonal Discounts Promotional Allowances Rebates Value-Based Pricing 3 3

23. ©2002 South-Western Chapter 18 Version 6e23 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

24. ©2002 South-Western Chapter 18 Version 6e24 Trade Loading The practice of temporarily lowering the price to induce wholesalers and retailers to buy more goods than can be sold in a reasonable time. 3 3

25. ©2002 South-Western Chapter 18 Version 6e25 Geographic Pricing Basing-Point Pricing Basing-Point Pricing Freight Absorption Pricing Freight Absorption Pricing Zone Pricing Uniform Delivered Pricing Uniform Delivered Pricing FOB Pricing Common Methods of GeographicPricingCommon GeographicPricing 3 3

26. ©2002 South-Western Chapter 18 Version 6e26 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

27. ©2002 South-Western Chapter 18 Version 6e27 Geographic Pricing 3 3 Zone Pricing The U.S. is divided into zones and a flat freight rate is charged to customers in a given zone. Freight Absorption Pricing Freight Absorption Pricing The seller pays for all or part of the freight charges and does not pass them on to the buyer. Basing-Point Pricing Basing-Point Pricing The seller designates a location as a basing point and charges all buyers the freight costs from that point.

28. ©2002 South-Western Chapter 18 Version 6e28 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

29. ©2002 South-Western Chapter 18 Version 6e29 Consumer Penalties 3 3 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...

30. ©2002 South-Western Chapter 18 Version 6e30 Learning Objective 4 4 Discuss product line pricing.

31. ©2002 South-Western Chapter 18 Version 6e31 Product Line Pricing Setting prices for an entire line of products. 4 4

32. ©2002 South-Western Chapter 18 Version 6e32 Relationships among Products 4 4 Relationships Among Products Relationships Among Products Complementary Substitutes Neutral

33. ©2002 South-Western Chapter 18 Version 6e33 Joint Costs Costs that are shared in the manufacturing and marketing of several products in a product line. 4 4

34. ©2002 South-Western Chapter 18 Version 6e34 Learning Objective Describe the role of pricing during periods of inflation and recession. 5 5

35. ©2002 South-Western Chapter 18 Version 6e35 Pricing During Difficult Economic Times Demand-Oriented Tactics Cost-Oriented Tactics High Inflation Pricing Tactics High Inflation Pricing Tactics 5 5

36. ©2002 South-Western Chapter 18 Version 6e36 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

37. ©2002 South-Western Chapter 18 Version 6e37 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

38. ©2002 South-Western Chapter 18 Version 6e38 5 5 IncreasedProductionCosts DecreasedDemand PriceIncrease Cost-Oriented Tactics Maintaining a Fixed Gross Margin

39. ©2002 South-Western Chapter 18 Version 6e39 Price Shading 5 5 The use of discounts by salespeople to increase demand for one or more products in a line.

40. ©2002 South-Western Chapter 18 Version 6e40 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

41. ©2002 South-Western Chapter 18 Version 6e41 Pricing During Recession Bundling or Unbundling Value Pricing Recession Pricing Tactics Recession 5 5

42. ©2002 South-Western Chapter 18 Version 6e42 Supplier Strategies During Recession Cost-Saving Strategies with SuppliersCost-Saving Suppliers Renegotiating contracts Offering help Keeping the pressure on Paring down suppliers 5 5