1. Lamb, Hair, McDaniel Chapter 20 Setting the Right Price 2014-2015 © Cengage Learning 2015. All Rights Reserved.

2. Describe the procedure for setting the right price Identify the legal and ethical constraints on pricing decisions Explain how discounts, geographic pricing, and other special pricing tactics can be used to fine- tune the base price Discuss product line pricing Describe the role of pricing during periods of inflation and recession © 2015 by Cengage Learning Inc. All Rights Reserved. 2

3. Describe the procedure for setting the right price How to Set a Price on a Product © 2015 by Cengage Learning Inc. All Rights Reserved. 3 1

4. Fine-tune with pricing tactics Choose a price strategy Estimate demand, costs, and profits Establish pricing goals Results lead to the right price Exhibit 20.1 New-Product Development Process © 2015 by Cengage Learning Inc. All Rights Reserved. 4 1

5. Establish Pricing Goals Profit-Oriented Sales-Oriented Status Quo Pricing objectives fall into three categories: © 2015 by Cengage Learning Inc. All Rights Reserved. 5 1

6. 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. © 2015 by Cengage Learning Inc. All Rights Reserved. 6 1

7. 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. © 2015 by Cengage Learning Inc. All Rights Reserved. 7 1

8. 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 © 2015 by Cengage Learning Inc. All Rights Reserved. 8 1

9. Penetration Pricing AdvantagesDisadvantages  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 © 2015 by Cengage Learning Inc. All Rights Reserved. 9 1

10. Status Quo Pricing AdvantagesDisadvantages  Simplicity  Safest route to long-term survival for small firms  Strategy may ignore demand and/or cost © 2015 by Cengage Learning Inc. All Rights Reserved. 10 1

11. © 2015 by Cengage Learning Inc. All Rights Reserved. 11 The Legality of Price Strategy Unfair Trade Practices Price Fixing Price Discrimination Predatory Pricing 2

12. © 2015 by Cengage Learning Inc. All Rights Reserved. 12 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. 2

13. © 2015 by Cengage Learning Inc. All Rights Reserved. 13 Price Discrimination 1.There must be price discrimination. 2.Transaction must occur in interstate commerce. 3.Seller must discriminate by price among two or more purchasers. 4.Products sold must be commodities or tangible goods. 5.Products sold must be of like grade and quality. 6.There must be significant competitive injury. The Robinson-Patman Act of 1936: 2

14. © 2015 by Cengage Learning Inc. All Rights Reserved. 14 Price Discrimination The Robinson-Patman Act of 1936: Seller Defenses Cost Market Conditions Market Conditions Competition 2

15. © 2015 by Cengage Learning Inc. All Rights Reserved. 15 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

16. © 2015 by Cengage Learning Inc. All Rights Reserved. 16 Tactics for Fine-Tuning the Base Price Other pricing tactics Discounts Geographic pricing 3

17. © 2015 by Cengage Learning Inc. All Rights Reserved. 17 Discounts, Allowances, Rebates, and Value-Based Pricing Quantity Discounts Cash Discounts Functional Discounts Seasonal Discounts Promotional Allowances Promotional Allowances Rebates Zero Percent Financing Zero Percent Financing Value-Based Pricing 3

18. © 2015 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.

19. © 2015 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 prices Trade-Ins Exchanging one item for a credit towards another. Used often at car dealerships 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 Pay What You WantProduct price chosen by customers

20. © 2015 by Cengage Learning Inc. All Rights Reserved. 20 Product Line Pricing 4 Setting prices for an entire line of products.

21. Describe the role of pricing during periods of inflation and recession Pricing during Difficult Economic Times © 2015 by Cengage Learning Inc. All Rights Reserved. 21 5

22. Inflation Cost-Oriented Tactics Cost-Oriented Tactics High Inflation Demand-Oriented Tactics Demand-Oriented Tactics © 2015 by Cengage Learning Inc. All Rights Reserved. 22 5

23. Recession Bundling or Unbundling Value-Based Pricing © 2015 by Cengage Learning Inc. All Rights Reserved. 23 5

24. Ch 20 Discussion Questions 1.Describe the procedure for setting the right price in marketing. 2.Explain “The Legality of Price Strategy” in marketing. 3.What is pricing tactics? Explain how discounts, geographic pricing, and other special pricing tactics can be used to fine- tune the base price. 4.Explain “Other Pricing Tactics” in marketing. I may ask you to explain a few of them.