Lamb, Hair, McDaniel 2010-2011
CHAPTER 20
Setting the Right Price
1
Learning Outcomes
LO 1 Describe the procedure for setting the right
price
LO 2 Identify the legal and ethical constraints on
pricing decisions
LO 3 Explain how discounts, geographic pricing,
and other special pricing tactics can be
used to fine-tune the base price
2
Learning Outcomes
LO 4 Discuss product line pricing
LO 5 Describe the role of pricing during periods of
inflation and recession
3
How to Set a Price on a
Product
Describe the
procedure for
setting the
right price
LO1 4
How to Set a Price on a
Product or Service
Establish
Establish pricing
pricing goals
goals
Estimate
Estimate demand,
demand, costs,
costs, and
and profits
profits
Choose
Choose aa price
price strategy
strategy
Fine
Fine tune
tune with
with pricing
pricing tactics
tactics
Results lead to the right price
LO1 5
6
LO1
Status Quo
Sales-Oriented
Profit-Oriented
Establish Pricing Goals
Choose a Price Strategy
Price
Price Strategy
Strategy 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.
LO1 7
Choose a Price Strategy
Price
Price AAfirm
firmcharges
chargesaahigh
highintroductory
introductoryprice,
price,
Skimming
Skimming often
oftencoupled
coupledwith
withheavy
heavypromotion.
promotion.
AAfirm
firmcharges
chargesaarelatively
relativelylow
lowprice
pricefor
foraa
Penetration
Penetration product
productinitially
initiallyas
asaaway
waytotoreach
reachthe
the
Pricing
Pricing mass
massmarket.
market.
Status
StatusQuo
Quo Charging
Chargingaaprice
priceidentical
identicalto
toor
orvery
veryclose
close
Pricing
Pricing to
tothe
thecompetition’s
competition’sprice.
price.
LO1 8
Price Skimming
Inelastic Demand
Situations Unique Advantages/Superior
When
Price
Legal Protection of Product
Skimming
Is
Successful Technological Breakthrough
Blocked Entry to Competitors
LO1 9
Penetration Pricing
Advantages Disadvantages
Discourages or blocks Requires gear up for
competition from mass production
market entry
Selling large volumes
Boosts sales and at low prices
provides large profit
Strategy to gain market
increases
share may fail
Can justify production
expansion
LO1 10
Status Quo Pricing
Advantages Disadvantages
Simplicity Strategy may ignore
demand and/or cost
Safest route to long-
term survival for small
firms
LO1 11
Setting the Right Price
Establish
Establish
price
price
goals
goals High $
Estimate
Estimate demand,
demand,
costs,
costs, and
and profits
profits
Skimming
Choose
Choose aa
Status quo
price
price strategy
strategy
Penetration
Low $
Evaluate
Evaluate Fine-tune
Fine-tune
results
results base
base price
price
Set
Set price
price
$[Link]
$[Link]
LO1 12
The Legality and Ethics of
Price Strategy
Identify the legal and
ethical constraints
on pricing decisions
LO2 13
The Legality and Ethics of
Price Strategy
Unfair
Unfair Trade
Trade Practices
Practices
Price
Price Fixing
Fixing
Price
Price Discrimination
Discrimination
Predatory
Predatory Pricing
Pricing
LO2 14
The Legality and Ethics of
Price Strategy
Laws
Lawsthat
thatprohibit
prohibitwholesalers
wholesalers
Unfair
UnfairTrade
Trade and
andretailers
retailersfrom
fromselling
selling
Practices
Practices below
belowcost.
cost.
An
Anagreement
agreementbetween
betweentwo
two
Price
Price or
ormore
morefirms
firmsononthe
theprice
pricethey
they
Fixing
Fixing will
willcharge
chargefor
foraaproduct.
product.
LO2 15
Price Discrimination
The Robinson-Patman Act of 1936:
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.
LO2 16
Price Discrimination
The Robinson-Patman Act of 1936:
Defenses
Seller Defenses
Seller
Market
Market
Cost
Cost Competition
Competition
Conditions
Conditions
LO2 17
Predatory Pricing
Predatory
Predatory
Pricing
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.
LO2 18
Tactics for Fine-Tuning
the Base Price
Explain how discounts,
geographic pricing, and
other pricing tactics can
be used to fine-tune the
base price
LO3 19
Tactics for Fine-Tuning
the Base Price
Discounts
Discounts
Geographic
Geographicpricing
pricing
Special
Special pricing
pricingtactics
tactics
LO3 20
Discounts,
Allowances, Rebates,
and Value-Based Pricing
Quantity
Quantity Discounts
Discounts Promotional
PromotionalAllowances
Allowances
Cash
Cash Discounts
Discounts Rebates
Rebates
Functional
Functional Discounts
Discounts Zero
Zero Percent
Percent Financing
Financing
Seasonal
Seasonal Discounts
Discounts Value-Based
Value-Based Pricing
Pricing
LO3 21
Value-Based Pricing
Value-Based Setting the price at a
Pricing level that seems to the
customer to be a good
price compared to the
prices of other options.
LO3 22
Value-based Pricing: Step 1
Companies that set prices using a
cost-plus model—adding a
predetermined percentage to a
product’s cost/unit to produce a profit
—may be leaving money on the table.
Instead, a company should use the
cost-plus model to determine its
pricing threshold and then use value-
based pricing to set the best price.
Source: Elisabeth A. Sullivan, “Value Pricing: Smart Marketers Know Cost-Plus Can Be
LO
3 Costly,” MarketingNews, January 15, 2008. 23
Value-based Pricing: Step 2
How to determine value? It’s simple. Really.
Ask your customers: What do they like about
you? What don’t they like?
Their responses represent the perceived
value of your product in the marketplace.
The attributes that will determine the
perceived value of your product include
product quality, on-time delivery, customer
service, technical service, and price.
LO3 24
Value-based Pricing: Step 3
Now, ask customers what would be
an acceptable price, what would be
an expensive price, and what would
be a prohibitively expensive price.
The best price usually falls between
“expensive” and “prohibitively
expensive.”
Customers want value and they’re
willing to pay for it.
LO3 25
Pricing Products
Too Low
1. Managers attempt to buy market share through
aggressive pricing.
2. Managers tend to make pricing decisions based
on current costs, current competitor prices, and
short-term share gains rather than on long-term
profitability.
LO3 26
Geographic Pricing
The buyer absorbs the freight
FOB Origin
costs from the shipping point
Pricing
(“free on board”).
Uniform The seller pays the freight charges
Delivered and bills the purchaser an
Pricing identical, flat freight charge.
The U.S. is divided into zones, and
Zone Pricing a flat freight rate is charged to
customers in a given zone.
Freight The seller pays for all or part of
Absorption the freight charges and does not
Pricing pass them on to the buyer.
The seller designates a location as
Basing-Point
a basing point and charges all buyers
Pricing
the freight costs from that point.
LO3 27
Other Pricing Tactics
Single-Price Tactic All goods offered at the same price
Flexible Pricing Different customers pay different price
Professional Used by professionals with experience,
Services Pricing training or certification
Price Lining Several line items at specific price points
Leader Pricing Sell product at near or below cost
Lure customers through false or misleading
Bait Pricing
price advertising
Odd-number prices imply bargain
Odd-Even Pricing
Even-number prices imply quality
Combining two or more products in a
Price Bundling
single package
Two-Part Pricing Two separate charges to consume a single good
LO3 28
Consumer Penalties
Consumer Penalties If...
Businesses Impose
An irrevocable Additional
loss of revenue transaction costs
is suffered are incurred
LO3 29
Fine-Tuning the Base Price
Pricing Tactics
Other Consumer
Discounts Geographic Tactics Penalties
Quantity
Quantity
•• cumulative FOB Single price
cumulative origin
•• noncumulative
noncumulative
Flexible
Cash
Cash Uniform
delivered Professional
Functional
Functional services
(trade)
(trade)
Price lining
Seasonal Zone
Seasonal
Promotional Leader
Promotional
(trade)
(trade) Freight
absorption
Bait
Rebate
Rebate
Basing- Odd–even
0% point
0% Financing
Financing
Bundling
Value-based
Value-based
Unbundling
LO 3 Two-part
30
Product Line Pricing
Discuss product
line pricing
LO4 31
Product Line Pricing
Product
ProductLine
Line
Pricing
Pricing
Setting prices for an
entire line of products.
LO4 32
Relationships
among Products
Complementary
Complementary
Substitutes
Substitutes
Neutral
Neutral
LO4 33
Joint Costs
Joint
Joint Costs
Costs Costs that are shared in
the manufacturing and
marketing of several
products in a product
line.
LO4 34
Pricing during Difficult
Economic Times
Describe the role
of pricing during
periods of inflation
and recession
LO5 35
Inflation
Cost-Oriented
Cost-Oriented Tactics
Tactics
High
High Inflation
Inflation
Demand-Oriented
Demand-Oriented Tactics
Tactics
LO5 36
Cost-Oriented Tactics
Problems with 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.
LO5 37
Cost-Oriented Tactics
Delayed-quotation
pricing
Escalator pricing
Hold prices
constant, but
add new fees
LO5 38
Cost-Oriented Tactics
Maintaining
a Fixed
Gross Margin
Increased
Production
LO5 Costs
39
Demand-Oriented Tactics
Price
Price
Shading
Shading
The use of discounts by
salespeople to increase
demand for one or more
products in a line.
LO5 40
Demand-Oriented Tactics
Cultivate
Cultivate selected
selected demand
demand
Create
Create unique
unique offerings
offerings
Strategies
Strategies to
to
Make
Make Demand
Demand
More
More Inelastic
Inelastic Change
Change the
the package
package design
design
Heighten
Heighten buyer
buyer dependence
dependence
LO5 41
Recession
Value-Based
Value-Based Pricing
Pricing
Bundling
Bundling or
or Unbundling
Unbundling
LO5 42
Supplier Strategies
during Recession
Renegotiating
Renegotiating contracts
contracts
Offering
Offering help
help
Keeping
Keeping the
the pressure
pressure on
on
Paring
Paring down
down suppliers
suppliers
LO5 43
Pricing During
Inflation and Recession
Inflation Recession
Contract
Contract Value-based
product
product lines
lines
Cost-oriented Price Bundling
Cost-oriented Delayed-
Delayed-
tactics
tactics quotation
quotation pricing
pricing
Unbundling
Escalator
Escalator
pricing
pricing
New products
Select
Select Product
demand
demand New product
categories
Demand-oriented Unique
Unique
tactics offering Renegotiate
offering
contracts
Change
Change package
package
design Offer help
design
Suppliers
Increase
Increase buyer
buyer Keep pressure
dependence
dependence on suppliers
LO 5 Reduce number
of suppliers
44