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© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Slide 14-2
ARRIVINGAT THE
FINAL PRICE
CHAPTER
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
FIGURE 14-1 FIGURE 14-1 Steps in setting price
Slide 14-6
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Slide 14-7
FIGURE 14-2 FIGURE 14-2 Four approaches for selecting an approximate price level
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Slide 14-8
• Demand-Oriented Approaches
Skimming Pricing
Penetration Pricing
Prestige Pricing
STEP 4: SELECT ANAPPROPRIATE PRICE LEVEL
Price Lining
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Slide 14-9
FIGURE 14-3 FIGURE 14-3 Demand curves for two types of demand-oriented approaches
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Slide 14-11
• Demand-Oriented Approaches
Odd-Even Pricing
Target Pricing
Bundle Pricing
STEP 4: SELECT ANAPPROPRIATE PRICE LEVEL
Yield Management Pricing
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Slide 14-14
• Cost-Oriented Approaches
Standard Markup Pricing
Cost-Plus Pricing
STEP 4: SELECT ANAPPROPRIATE PRICE LEVEL
• Cost-Plus Percentage-of-Cost Pricing
• Cost-Plus Fixed-Fee Pricing
Experience Curve Pricing
• Markup on Cost
• Markup on Selling Price
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Slide 14-15
Rock Hall of Fame and Panasonic HDTV What cost-oriented approach is used by each?
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Slide 14-16
• Profit-Oriented Approaches
Target Profit Pricing
Target Return-On-Sales Pricing
STEP 4: SELECT ANAPPROPRIATE PRICE LEVEL
Target Return-On-Investment Pricing
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Slide 14-17
FIGURE 14-4FIGURE 14-4 Results of computer spreadsheet simulation to select price to achieve a target return on investment
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Slide 14-18
• Competition-Oriented Approaches
Customary Pricing
Above-, At-, or Below-Market Pricing
STEP 4: SELECT ANAPPROPRIATE PRICE LEVEL
Loss-Leader Pricing
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Slide 14-22
• One-Price versus Flexible-Price Policy
One-Price Policy (Fixed Pricing)
Flexible-Price Policy (Dynamic Pricing)
STEP 5: SET THE LIST ORQUOTED PRICE
• Clickstream
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Slide 14-23
99¢ Only Store What price policy is used?
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Slide 14-24
ETHICS AND SOCIAL RESPONSIBILITY ALERT
Flexible Pricing—Is There Race and Gender Discrimination in Bargaining
for a New Car?
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
• Company, Customer, and Competitive Effects on Pricing
Customer Effects
Company Effects
STEP 5: SET THE LIST ORQUOTED PRICE
• Product Line Pricing
Competitive Effects
• Price War
Slide 14-25
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Slide 14-26
Frito-Lay Tortilla Chips What is product-line pricing and why use it?
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Slide 14-27
Marginal Revenue
Marginal Analysis
STEP 5: SET THE LIST ORQUOTED PRICE
Marginal Cost
• Balancing Incremental Costs and Revenues
Elasticity of Demand
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Slide 14-28
FIGURE 14-5 FIGURE 14-5 The power of marginal analysis in real-world decisions
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Slide 14-29
FIGURE 14-6 FIGURE 14-6 Three special adjustments to list or quoted price
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Slide 14-30
Seasonal Discounts
Quantity Discounts
STEP 6: MAKE SPECIAL ADJUSTMENTS TO THE LIST
OR QUOTED PRICE
Trade (Functional) Discounts
Cash Discounts
• Discounts
• Noncumulative Quantity Discounts
• Cumulative Quantity Discounts
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Slide 14-32
FIGURE 14-7 FIGURE 14-7 The structure of trade discounts
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Slide 14-33
FIGURE 14-BFIGURE 14-B Markups for a manufacturer, wholesaler, and retailer on a home appliance sold to the consumer for $100
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Slide 14-34
Promotional Allowances
Trade-In Allowances
STEP 6: MAKE SPECIAL ADJUSTMENTS TO THE LIST
OR QUOTED PRICE
• Allowances
• Everyday Low Pricing
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Slide 14-36
Uniform Delivered Pricing
FOB Origin Pricing
STEP 6: MAKE SPECIAL ADJUSTMENTS TO THE LIST
OR QUOTED PRICE
• Geographical Adjustments
• Single-Zone Pricing
• Multiple-Zone Pricing
• FOB With Freight-Allowed (Absorption) Pricing
• Basing-Point Pricing
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
FIGURE 14-C FIGURE 14-C Example of basing-point pricing
Slide 14-37
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Slide 14-38
Price Fixing
STEP 6: MAKE SPECIAL ADJUSTMENTS TO THE LIST
OR QUOTED PRICE
• Legal and Regulatory Aspects of Pricing
• Horizontal Price Fixing
• Vertical Price Fixing (Resale Price Maintenance)
• Rule of Reason
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Slide 14-39
FIGURE 14-8 FIGURE 14-8 Pricing practices affected by legal restrictions
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Slide 14-40
Price Discrimination
STEP 6: MAKE SPECIAL ADJUSTMENTS TO THE LIST
OR QUOTED PRICE
• Legal and Regulatory Aspects of Pricing
• Cost Justification Defense
• Meet-The-Competition Defense
Deceptive Pricing
Geographical Pricing
Predatory Pricing
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Slide 14-41
FIGURE 14-9 FIGURE 14-9 Five most common deceptive pricing practices
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Slide 14-67
Skimming Pricing
Skimming pricing involves setting the highest initial price that customers really desiring the product are willing to pay.
Skimming pricing involves setting the highest initial price that customers really desiring the product are willing to pay.
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Slide 14-68
Penetration Pricing
Penetration pricing involves setting a low initial price on a new product to appeal immediately to the mass market.
Penetration pricing involves setting a low initial price on a new product to appeal immediately to the mass market.
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Slide 14-69
Prestige Pricing
Prestige pricing involves setting a high price so that quality- or status-conscious consumers will be attracted to the product and buy it.
Prestige pricing involves setting a high price so that quality- or status-conscious consumers will be attracted to the product and buy it.
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Slide 14-70
Price Lining
Price lining involves setting a the price of a line of products at a number of different specific pricing points.
Price lining involves setting a the price of a line of products at a number of different specific pricing points.
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Slide 14-71
Odd-Even Pricing
Odd-even pricing involves setting prices a few dollars or cents under an even number.Odd-even pricing involves setting prices a few dollars or cents under an even number.
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Slide 14-72
Target Pricing
Target pricing involves estimating the price that the ultimate consumer would be willing to pay for a product, working backward through markups taken by retailers and wholesalers to determine what price is charged to wholesalers, and then deliberately adjusting the composition and features of a product to achieve the target price to consumers.
Target pricing involves estimating the price that the ultimate consumer would be willing to pay for a product, working backward through markups taken by retailers and wholesalers to determine what price is charged to wholesalers, and then deliberately adjusting the composition and features of a product to achieve the target price to consumers.
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Slide 14-73
Bundle Pricing
Bundle pricing involves the marketing of two or more products in a single package price.
Bundle pricing involves the marketing of two or more products in a single package price.
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Slide 14-74
Yield Management Pricing
Yield management pricing involves the charging of different prices to maximize revenue for a set amount of capacity at any given time.
Yield management pricing involves the charging of different prices to maximize revenue for a set amount of capacity at any given time.
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Slide 14-75
Standard Markup Pricing
Standard markup pricing involves adding a fixed percentage to the cost of all items in a specific product class.
Standard markup pricing involves adding a fixed percentage to the cost of all items in a specific product class.
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Slide 14-76
Cost-Plus Pricing
Cost-plus pricing involves summing the total unit cost of providing a product or service and adding a specific amount to the cost to arrive at a price.
Cost-plus pricing involves summing the total unit cost of providing a product or service and adding a specific amount to the cost to arrive at a price.
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Slide 14-77
Experience Curve Pricing
Experience curve pricing is a method of pricing based on the learning effect, which holds that the unit cost of many products and services declines by 10 percent to 30 percent each time a firm’s experience at producing and selling them doubles.
Experience curve pricing is a method of pricing based on the learning effect, which holds that the unit cost of many products and services declines by 10 percent to 30 percent each time a firm’s experience at producing and selling them doubles.
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Slide 14-78
Target Profit Pricing
Target profit pricing involves setting an annual target of a specific dollar volume of profit.
Target profit pricing involves setting an annual target of a specific dollar volume of profit.
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Slide 14-79
Target Return-On-Sales Pricing
Target return-on-sales pricing involves setting a price to achieve a profit that is a specified percentage of the sales volume.
Target return-on-sales pricing involves setting a price to achieve a profit that is a specified percentage of the sales volume.
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Slide 14-80
Target Return-On-Investment Pricing
Target return-on-investment pricing involves setting a price to achieve an annual target return-on-investment (ROI).
Target return-on-investment pricing involves setting a price to achieve an annual target return-on-investment (ROI).
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Slide 14-81
Customary Pricing
Customary pricing involves setting a price that is dictated by tradition, a standardized channel of distribution,or other competitive factors.
Customary pricing involves setting a price that is dictated by tradition, a standardized channel of distribution,or other competitive factors.
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Slide 14-82
Above-, At-, or Below-Market Pricing
Above-, at-, or below-market pricing involves setting a market price for a product or product class based on a subjective feel for the competitors’ price or market price as the benchmark.
Above-, at-, or below-market pricing involves setting a market price for a product or product class based on a subjective feel for the competitors’ price or market price as the benchmark.
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Slide 14-83
Loss-Leader Pricing
Loss-leader pricing involves deliberately selling a product below its customary price, not to increase sales, but to attract customers’ attention in hopes that they will buy other products as well.
Loss-leader pricing involves deliberately selling a product below its customary price, not to increase sales, but to attract customers’ attention in hopes that they will buy other products as well.
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Slide 14-84
One-Price Policy
A one-price policy involves setting one price for all buyers of a product or service. Also called fixed pricing.
A one-price policy involves setting one price for all buyers of a product or service. Also called fixed pricing.
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Slide 14-85
Flexible-Price Policy
A flexible-price policy involves setting different prices for products and services depending on individual buyers and purchase situations. Also called dynamic pricing.
A flexible-price policy involves setting different prices for products and services depending on individual buyers and purchase situations. Also called dynamic pricing.
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Slide 14-86
Product Line Pricing
Product line pricing involves setting the price of a line of products at a number of different specific pricing points.
Product line pricing involves setting the price of a line of products at a number of different specific pricing points.
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Slide 14-87
Price War
A price war involves successive price cutting by competitors to increase or maintain their unit sales or market share.
A price war involves successive price cutting by competitors to increase or maintain their unit sales or market share.
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Slide 14-88
Quantity Discounts
Quantity discounts are reductions in unit costs for a larger order.Quantity discounts are reductions in unit costs for a larger order.
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Slide 14-89
Promotional Allowances
Promotional allowances are cash payments or extra amount of “free goods” awarded sellers in the channel of distribution for undertaking certain advertising or selling activities to promote a product.
Promotional allowances are cash payments or extra amount of “free goods” awarded sellers in the channel of distribution for undertaking certain advertising or selling activities to promote a product.
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Slide 14-90
Everyday Low Pricing
Everyday low pricing is the practice of replacing promotional allowances with lower manufacturer list prices.
Everyday low pricing is the practice of replacing promotional allowances with lower manufacturer list prices.
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Slide 14-91
FOB Origin Pricing
FOB origin pricing is the price the seller quotes that includes the cost of loading the product onto the vehicle. The seller names the location (factory or warehouse) where the loading is to occur. The buyer becomes responsible for picking the specific mode of transportation and paying for all transportation and handling costs.
FOB origin pricing is the price the seller quotes that includes the cost of loading the product onto the vehicle. The seller names the location (factory or warehouse) where the loading is to occur. The buyer becomes responsible for picking the specific mode of transportation and paying for all transportation and handling costs.
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Slide 14-92
Uniform Delivered Pricing
Uniform delivered pricing is the price the seller quotes includes all transportation costs.
Uniform delivered pricing is the price the seller quotes includes all transportation costs.
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Slide 14-93
Basing-Point Pricing
Basing-point pricing involves selecting one or more geographical locations (basing point) from which the list price for products plus freight expenses are charged to the buyer.
Basing-point pricing involves selecting one or more geographical locations (basing point) from which the list price for products plus freight expenses are charged to the buyer.
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Slide 14-94
Price Fixing
Price fixing involves a conspiracy among firms to set prices for a product.Price fixing involves a conspiracy among firms to set prices for a product.
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Slide 14-95
Price Discrimination
Price discrimination is the practice of charging different prices to different buyers for goods of like grade and quality.
Price discrimination is the practice of charging different prices to different buyers for goods of like grade and quality.
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Slide 14-96
Predatory Pricing
Predatory pricing is the practice of charging a very low price for a product with the intent of driving competitorsout of business.
Predatory pricing is the practice of charging a very low price for a product with the intent of driving competitorsout of business.
