1. Pricing Strategy and Determination

2. LEARNING OBJECTIVES Define price and explain why cost-based pricing methods are used so widely, despite their drawbacks. Incorporate demand considerations into pricing and determine a short-term profit-maximizing price. Identify and explain strategic drivers of prices. Define price and explain why cost-based pricing methods are used so widely, despite their drawbacks Incorporate demand considerations into pricing and determine a short-term profit-maximizing price Identify and explain strategic drivers of prices

3. LEARNING OBJECTIVES Explain and evaluate reasons why base prices change over time in both business and consumer markets. Explain basic legal and ethical constraints on pricing behavior. Explain and evaluate reasons why base prices change over time in both business and consumer markets Explain basic legal and ethical constraints on pricing behavior

4. WHAT IS PRICE? Price is some unit of value given up by party in return for something from another party.

5. Insert Figure 14.1 WHAT DETERMINES BASE PRICE? Base Price Selection Cost Possible Adjustments To Base Price Over time

6. Insert Figure 14.2 WHAT DETERMINES BASE PRICE?

7. Cost-Plus Pricing  Easiest, often misleading  A simple allocation of fixed and variable costs  Standard mark-up - a standard profit margin  Target return pricing - a standard amount of profit per item  Ignores demand (price sensitivity) and fails to account for competition

8. WHAT DETERMINES BASE PRICE? Demand Pricing  Based on the elasticity of demand Higher prices are favored with inelastic –Price increases offset volume losses Lower prices are favored with elastic –Volume increases offset price reductions Consumers are indifferent with unitary demand  Breakeven analysis  Demand schedules

9. Insert Table 14.1 Break-Even Analysis

10. Insert Table 14.2 The Demand Schedule

11. Insert Table 14.3 The Demand Schedule

12. Insert Table 14.4 The Demand Schedule

13. Insert Figure 14.3 The Demand Schedule

14. Insert Figure 14.4 The Demand Schedule

15. Insert Figure 14.5 The Demand Schedule

16. WHAT DETERMINES BASE PRICE? Demand Pricing  Profit-Maximization Calculate the profit at each price point on a demand curve and choose the highest In other words, which price produces the highest total contribution Verified by observing marginal revenue and cost figures

17. WHAT DETERMINES BASE PRICE? Demand Pricing  Where does demand information come from? Analytic modeling Experiments Customer surveys Managerial judgment

18. Insert Table 14.6 WHAT DETERMINES BASE PRICE?

19. Insert Table 14.7 WHAT DETERMINES BASE PRICE?

20. Insert Figure 14.6 WHAT DETERMINES BASE PRICE? Demand (Customer Price Response) Strategic Concerns: Positioning/Competition Objectives New Product Pricing Price/Quality Signaling Base Price Selection Possible Adjustments To Base Price Over Time Cost Legal/Ethical Concerns

21. PRICING STRATEGIES: PRICE DRIVERS Competitive Strategy Positioning Continuum priceunique Low cost focus Differentiation focus

22. PRICING STRATEGIES: PRICE DRIVERS Competitive Strategy Positioning Continuum priceunique Low cost focus Differentiation focus

23. PRICING STRATEGIES: PRICE DRIVERS Competitive Strategy Positioning Continuum priceunique Low cost focus Differentiation focus

24. PRICING STRATEGIES: PRICE DRIVERS Objectives  Goal-setting/Objective-setting  Pricing to achieve a target ROI  Pricing to stabilize price and margin  Pricing to reach a target market share  Pricing to meet or prevent competition  Pricing for profit maximization  Pricing for survival

25. Skimming Pricing Strategy New Product Pricing New product pricing  Skimming Vs. Penetration Penetration Pricing Strategy Introduction Growth Maturity Decline

26. New Product Pricing High initial price for quick ROI Inelastic demand Price insensitivity by the market Skimming Pricing Strategy Introduction Growth Maturity Decline

27. Penetration Pricing Strategy New Product Pricing Low initial price with elastic demand Volume for lower production costs Imminent competition Introduction Growth Maturity Decline

28. New Product Pricing Price-Quality judgments  Customers uncertain about brand quality prior to purchase look to price  Customers look to price in high risk purchases

29. EXPLAINING ADJUSTMENTS TO BASE PRICE OVER TIME Demand (Customer Price Response) Strategic Concerns: Positioning/Competition Objectives New Product Pricing Price/Quality Signaling Base Price Selection Possible Adjustments To Base Price Over Time Cost Legal/Ethical Concerns Product Life Cycle Stage Competitive Price Moves Price Flexing: Consumers Price Promotion Couponing Segmented Pricing Customization Price Flexing Business Customers Price Shading Cash/Payment Disc. Volume Disc. Geographic Pricing Sales Promo. Allow. Creative Alternatives Customization

30. LEGAL AND ETHICAL ISSUES IN PRICING Price Fixing  Violation of Sherman Anti-Trust Act  Conspiring to restrain trade

31. LEGAL AND ETHICAL ISSUES IN PRICING Resale Price Maintenance  When a manufacturer and retailer agree on a minimum price to be charged to consumers at retail Manufacturers can set suggested prices (MSRP) Legal to stop selling to retailers who ignore MSRP

32. LEGAL AND ETHICAL ISSUES IN PRICING Predatory Pricing  Aggressive pricing to drive out newer, smaller rivals  After removal of rival, prices are raised again

33. LEGAL AND ETHICAL ISSUES IN PRICING Exaggerated Comparative Price Advertising  Using comparison prices of dubious validity  Product introduced at artificially high prices for a short time then dropped to a new low long- term price

34. LEGAL AND ETHICAL ISSUES IN PRICING Ethical Concerns  Price gouging laws  ATM fee practices  Raising prices for necessities in disaster areas

35. Supplemental Material

36. Price Flexing Discounts/Allowances Reasons base prices change over time:  Price Flexing - Discounts/Allowances To Consumer To Trade Trade-in Allowances Cash Discounts Rebates Functional Or Trade Seasonal Quantity Cash Sales Promotion

37. Trade-in Allowances Cash Discounts Rebates Used to encourage consumers to upgrade to newer or more expensive products To Consumer Price Flexing Discounts/Allowances

38. Seasonal or age- based discounts used to encourage purchases Trade-in Allowances Cash Discounts Rebates To Consumer Price Flexing Discounts/Allowances

39. After the purchase payment made to the consumer by the producer Trade-in Allowances Cash Discounts Rebates To Consumer Price Flexing Discounts/Allowances

40. Seasonal Quantity Cash Sales Promotion Compensate the trade for functions performed:  Buying & Selling  Transportation  Storage  Financing  Risk-taking  Providing Information  Standardizing & Grading Functional Or Trade To Trade Price Flexing Discounts/Allowances

41. Permits seasonal marketers to maintain steady production and to sustain operations in out-of-season lulls To Trade Seasonal Quantity Cash Sales Promotion Functional Or Trade Price Flexing Discounts/Allowances

42. Price WinterSpringSummerFall To Trade Seasonal Quantity Cash Sales Promotion Functional Or Trade Price Flexing Discounts/Allowances

43. Induce larger-quantity purchases and to reward customers for making fewer purchases but purchasing in larger quantities To Trade Seasonal Quantity Cash Sales Promotion Functional Or Trade Price Flexing Discounts/Allowances

44. Encourage prompt payment from customers. Invoice includes payment terms and period of time that the cash discount is available To Trade Seasonal Quantity Cash Sales Promotion Functional Or Trade Price Flexing Discounts/Allowances

45. Two percent off the total invoice price if paid within 10 days of the invoice date. Otherwise the total invoice price is due in 30 days 2/10, Net 30 To Trade Seasonal Quantity Cash Sales Promotion Functional Or Trade Price Flexing Discounts/Allowances

46. Used by producers to encourage greater purchases or used to induce retailers to provide shelf or display space To Trade Seasonal Quantity Cash Sales Promotion Functional Or Trade Price Flexing Discounts/Allowances

47. Off-Invoice Allowances Bill-Back Allowances Stocking Allowances To Trade Seasonal Quantity Cash Sales Promotion Functional Or Trade Price Flexing Discounts/Allowances

48. Geographic Pricing Policies FOBPricing Uniform Delivered Pricing ZonePricing Basing-PointPricing

49. Geographic Pricing Policies FOBPricing Uniform Delivered Pricing ZonePricing Basing-PointPricing Using freight absorption pricing (FOB - Free On Board) the seller pays or absorbs the transportation charges

50. Geographic Pricing Policies FOBPricing Uniform Delivered Pricing ZonePricing Basing-PointPricing Using zone pricing all consumers in the same zone pay the same transportation charge

51. Geographic Pricing Policies FOBPricing Uniform Delivered Pricing ZonePricing Basing-PointPricing Using basing-point pricing, all freight costs are priced as if they originated from the same basing point

52. Geographic Pricing Policies FOBPricing Uniform Delivered Pricing ZonePricing Basing-PointPricing Using uniform delivered pricing all consumers pay the same transportation charges (average shipping expense to all customers)

53. Prestige Pricing Pricing Policies Odd-Even Pricing Loss-Leader Pricing Product Line Pricing

54. Pricing Policies Odd-Even Pricing Loss-Leader Pricing Product Line Pricing Pricing at relatively high levels so as to convey an image of high quality or exclusivity Prestige Pricing

55. Odd-Even Pricing Product Line Pricing Pricing policy which offers products at prices below or near cost to attract consumers from competitors’ stores Loss-Leader Pricing Pricing Policies

56. Prestige Pricing Pricing Policies Odd-Even Pricing Loss-Leader Pricing Product Line Pricing Price lining is producing or marketing multiple products at different price points Bundling is marketing two or more products in a single package for a special price

57. Prestige Pricing Pricing Policies Loss-Leader Pricing Product Line Pricing Odd pricing refers to a price ending with an odd number just under a round number Even pricing is used to convey high quality Odd-Even Pricing