1. Chapter 20 Copyright ©2012 by Cengage Learning Inc. All rights reserved 1 Lamb, Hair, McDaniel CHAPTER 20 Setting the Right Price 2011-2012 © BUENA VISTA IMAGES/THE IMAGE BANK/GETTY IMAGES

2. Chapter 20 Copyright ©2012 by Cengage Learning Inc. All rights reserved 2 Fine-tune with pricing tactics Choose a price strategy Estimate demand, costs, and profits Establish pricing goals Results lead to the right price LO 1 Exhibit 20.1 New-Product Development Process

3. Chapter 20 Copyright ©2012 by Cengage Learning Inc. All rights reserved 3 Establish Pricing Goals Profit-Oriented Sales-Oriented Status Quo LO 1 Pricing objectives fall into three categories:

4. Chapter 20 Copyright ©2012 by Cengage Learning Inc. All rights reserved 4 Choose a Price Strategy A basic, long-term pricing framework that establishes the initial price for a product and the intended direction for price movements over the product life cycle. Price Strategy LO 1

5. Chapter 20 Copyright ©2012 by Cengage Learning Inc. All rights reserved 5 Choose a Price Strategy Status Quo Pricing Price Skimming Penetration Pricing Charging a price identical to or very close to the competition’s price. 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 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. A firm charges a relatively low price for a product initially as a way to reach the mass market. LO 1

6. Chapter 20 Copyright ©2012 by Cengage Learning Inc. All rights reserved 6 Price Skimming 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 LO 1

7. Chapter 20 Copyright ©2012 by Cengage Learning Inc. All rights reserved 7 Penetration PricingAdvantagesDisadvantages  Can lead to lower cost per unit as production expands  Discourages or blocks competition from market entry  Boosts sales and provides large profit increases  Requires gear up for mass production  Selling large volumes at low prices  Strategy to gain market share may fail LO 1

8. Chapter 20 Copyright ©2012 by Cengage Learning Inc. All rights reserved 8 Status Quo PricingAdvantagesDisadvantages § Simplicity § Safest route to long- term survival for small firms § Strategy may ignore demand and/or cost LO 1

9. Chapter 20 Copyright ©2012 by Cengage Learning Inc. All rights reserved 9 The Legality and Ethics of Price Strategy Unfair Trade Practices Price Fixing Price Discrimination Predatory Pricing LO 2

10. Chapter 20 Copyright ©2012 by Cengage Learning Inc. All rights reserved 10 Unfair Trade Practices and Price Fixing Unfair Trade Practices Acts 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. LO 2

11. Chapter 20 Copyright ©2012 by Cengage Learning Inc. All rights reserved 11 Price Discrimination  There must be price discrimination.  Transaction must occur in interstate commerce.  Seller must discriminate by price among two or more purchasers.  Products sold must be commodities or tangible goods.  Products sold must be of like grade and quality.  There must be significant competitive injury. The Robinson-Patman Act of 1936: LO 2

12. Chapter 20 Copyright ©2012 by Cengage Learning Inc. All rights reserved 12 Price Discrimination The Robinson-Patman Act of 1936: Seller Defenses Cost Market Conditions Market Conditions Competition LO 2

13. Chapter 20 Copyright ©2012 by Cengage Learning Inc. All rights reserved 13 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. Predatory Pricing LO 2

14. Chapter 20 Copyright ©2012 by Cengage Learning Inc. All rights reserved 14 Tactics for Fine-Tuning the Base Price Special pricing tactics Discounts Geographic pricing LO 3

15. Chapter 20 Copyright ©2012 by Cengage Learning Inc. All rights reserved 15 Discounts, Allowances, Rebates, and Value-Based Pricing Quantity Discounts Cash Discounts Functional Discounts Seasonal Discounts Promotional Allowances Rebates Zero Percent Financing Value-Based Pricing LO 3

16. Chapter 20 Copyright ©2012 by Cengage Learning Inc. All rights reserved 16 Value-Based Pricing LO 3 setting the price at a level that seems to the customer to be a good price compared to the prices of other options. Value-Based Pricing is…

17. Chapter 20 Copyright ©2012 by Cengage Learning Inc. All rights reserved 17 Pricing Products Too Low 1.Managers attempt to buy market share through aggressive pricing. 2.Managers have a natural tendency to want to make decisions that can be justified objectively. LO 3

18. Chapter 20 Copyright ©2012 by Cengage Learning Inc. All rights reserved 18 Geographic Pricing FOB Origin Pricing Uniform Delivered Pricing Zone Pricing Freight Absorption Pricing Basing-Point Pricing The buyer absorbs the freight costs from the shipping point (“free on board”). The seller pays the freight charges and bills the purchaser an identical, flat freight charge. 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 charges freight from a basing point, regardless of the city from which the goods are shipped. LO 3

19. Chapter 20 Copyright ©2012 by Cengage Learning Inc. All rights reserved 19 Other Pricing Tactics 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 LO 3

20. Chapter 20 Copyright ©2012 by Cengage Learning Inc. All rights reserved 20 Consumer Penalties An irrevocable loss of revenue is suffered Additional transaction costs are incurred Businesses Impose Consumer Penalties If... LO 3

21. Chapter 20 Copyright ©2012 by Cengage Learning Inc. All rights reserved 21 Product Line Pricing LO 4 setting prices for an entire line of products. Product Line Pricing is…

22. Chapter 20 Copyright ©2012 by Cengage Learning Inc. All rights reserved 22 Relationships among Products Complementary Substitutes Neutral LO 4

23. Chapter 20 Copyright ©2012 by Cengage Learning Inc. All rights reserved 23 Joint Costs Costs that are shared in the manufacturing and marketing of several products in a product line. LO 4

24. Chapter 20 Copyright ©2012 by Cengage Learning Inc. All rights reserved 24 Inflation Cost-Oriented Tactics High Inflation Demand-Oriented Tactics LO 5

25. Chapter 20 Copyright ©2012 by Cengage Learning Inc. All rights reserved 25 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. Problems with Cost-Oriented Tactics LO 5

26. Chapter 20 Copyright ©2012 by Cengage Learning Inc. All rights reserved 26 Cost-Oriented Tactics  Delayed-quotation pricing – used for industrial installations and many accessory items; firm price is not set until the item is finished or delivered  Escalator pricing – final selling price reflects cost increases incurred between the order time and the delivery time  Hold pricesconstant, but add new fees LO 5

27. Chapter 20 Copyright ©2012 by Cengage Learning Inc. All rights reserved 27 Cost-Oriented Tactics Increased Production Costs Decreased Demand Price Increase Maintaining a Fixed Gross Margin LO 5

28. Chapter 20 Copyright ©2012 by Cengage Learning Inc. All rights reserved 28 Demand-Oriented Tactics The use of discounts by salespeople to increase demand for one or more products in a line. Price Shading LO 5

29. Chapter 20 Copyright ©2012 by Cengage Learning Inc. All rights reserved 29 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 LO 5

30. Chapter 20 Copyright ©2012 by Cengage Learning Inc. All rights reserved 30 Recession Bundling or Unbundling Value-Based Pricing LO 5

31. Chapter 20 Copyright ©2012 by Cengage Learning Inc. All rights reserved 31 Supplier Strategies during Recession Renegotiating contracts Offering help Keeping the pressure on Paring down suppliers LO 5