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Copyright 2000 Prentice Hall13-1
Chapter 13
Pricing Methods
Copyright 2000 Prentice Hall13-2
Steps in Price Planning (Fig. 13.1)
Copyright 2000 Prentice Hall13-3
Pricing Strategies (Fig. 13.2)
Copyright 2000 Prentice Hall13-4
Price-Floor Pricing• Method that considers both costs and what can be done to assure that a plant can operate at its capacity.
•Sell some products at full price that covers all costs.
•Sell remaining products at price that covers just average variable costs.
Price-Floor Pricing• Method that considers both costs and what can be done to assure that a plant can operate at its capacity.
•Sell some products at full price that covers all costs.
•Sell remaining products at price that covers just average variable costs.
• Advantages: simple to calculate, and relatively safe.
• Disadvantages: doesn’t consider nature of the target market, demand, competition, the product’s life cycle, & product’s image.
• Advantages: simple to calculate, and relatively safe.
• Disadvantages: doesn’t consider nature of the target market, demand, competition, the product’s life cycle, & product’s image.
Cost-Plus Pricing
•Seller totals all the costs for the product and then adds the desired profit per unit.•Examples:
•Straight mark-up pricing 1. Estimate cost per unit of output, then 2. Add a markup
Cost-Plus Pricing
•Seller totals all the costs for the product and then adds the desired profit per unit.•Examples:
•Straight mark-up pricing 1. Estimate cost per unit of output, then 2. Add a markup
Pricing Strategies Based on Cost
Copyright 2000 Prentice Hall13-5
•Starts with a Customer-Pleasing Price and Works Backward to Costs.
•Extends Demand-Backward Pricing from the Consumer Back Through the Distribution Channel to the Manufacturer.
Demand-Backward Pricing
Chain-Markup Pricing
Pricing Strategies Based on Demand
Selling Price is Based on an Estimate of Volume or Quantity that a Firm Can Sell at Different Prices.
Copyright 2000 Prentice Hall13-6
Pricing Strategies Based on the Competition
Firms may price their products:– at the same or similar level as the
competition,– below the competition,– above the competition.
A price leadership strategy follows the industry leader by setting the same or similar prices.
Copyright 2000 Prentice Hall13-7
Pricing Strategies Based on Customers’ Needs
Strategies that focus on keeping customers for the long term.
May use a cost-of-ownership strategy:– price consumers pay for a product, plus the cost of
maintaining and using the product, less its resale (or salvage) value.
May use a value pricing or every day low pricing strategy:– firm sets prices that provide ultimate value or
price/benefit ratio to customers.
Copyright 2000 Prentice Hall13-8
New Product Pricing: Reasons for Using a Skimming Price
Skimming Price - Charging a High, Premium
Price
e.g. Strata Golf Balls
Skimming Price - Charging a High, Premium
Price
e.g. Strata Golf Balls
Product Benefits that Customers Want at Any Cost.
Product Benefits that Customers Want at Any Cost.
Little Chance that Competitors Can Enter the Market Quickly.
Little Chance that Competitors Can Enter the Market Quickly.
Several Customer Segments with Different Levels of Price Sensitivity.
Several Customer Segments with Different Levels of Price Sensitivity.
Copyright 2000 Prentice Hall13-9
Penetration PricingA New Product is Introduced at a Very Low Price
i.e. Intel’s Pentium chip
Penetration PricingA New Product is Introduced at a Very Low Price
i.e. Intel’s Pentium chip
Discourages Competitors
FromEntering the
Market
PioneeringBrand
Discourages Competitors
FromEntering the
Market
PioneeringBrand
New Product Pricing: Reasons for Using a Penetration Price
Low Price Encourages
Demand and Salesin the Early Stages
of the Product Life
Cycle
Copyright 2000 Prentice Hall13-10
Trial Pricing Pricing a new product low for a limited period
of time in order to lower the risk for a customer.
In trial pricing, the idea is to:– win customer acceptance first by offering a
low price, then– make profits later as buyers are converted to
regular-priced customers. Example: CA-Simply Money, trial price $7.00,
regular-priced $69.95.
Copyright 2000 Prentice Hall13-11
Pricing Tactics (Fig. 13.3)
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Pricing Tactics for Individual Products
Two-Part PricingTwo-Part Pricing– Two separate types of
payment required to purchase the product.
– e.g. Cell phone companies charge a monthly fee + per minute fees.
Payment PricingPayment Pricing– Seeks to make the
consumer think the price is ‘doable”.
– e.g. Three payments of $39.99 each.
– Monthly lease payments on a car.
Copyright 2000 Prentice Hall13-13
Pricing Tactics for Multiple Products
Price BundlingPrice Bundling– Selling two or more
goods or services as a single package for one price.
– e.g. Season music tickets for a single price, computer with a monitor, keyboard, and software.
Captive PricingCaptive Pricing– Pricing tactic a firm
uses when it has two products that work only when used together.
– Sells one at a very low-price (razor), and make a profit on second high-margin item (blades).
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Geographic Pricing
F.O.B. PricingF.O.B. PricingF.O.B. Origin: Customer PaysF.O.B. Delivered: Seller Pays
F.O.B. PricingF.O.B. PricingF.O.B. Origin: Customer PaysF.O.B. Delivered: Seller Pays
Zone PricingZone PricingCustomers in Different GeographicZones Pay Different Rates. e.g. UPS
Zone PricingZone PricingCustomers in Different GeographicZones Pay Different Rates. e.g. UPS
Freight Absorption PricingSeller Takes on Part or All of the
Cost of Shipping
Freight Absorption PricingSeller Takes on Part or All of the
Cost of Shipping
Uniform Delivered PricingAverage Shipping Cost is
Added to Price for all Customers
Uniform Delivered PricingAverage Shipping Cost is
Added to Price for all Customers
How Firms Handle the Cost of Shipping ProductsHow Firms Handle the Cost of Shipping Products
Copyright 2000 Prentice Hall13-15
Discounting for Members of the Channel
Trade or Functional Discounts
Quantity Discounts
CashDiscounts
SeasonalDiscounts
Copyright 2000 Prentice Hall13-16
Characteristics of
E-Commerce
Sellers OfferCustomized
Deals to Buyers
Sellers OfferCustomized
Deals to Buyers
Buyers MayComparison
Shop
Buyers MayComparison
Shop
Sellers GatherData About
Buying Habits
Sellers GatherData About
Buying Habits
Price is Used asa Competitive
Strategy
Price is Used asa Competitive
Strategy
Pricing With Electronic Commerce
Copyright 2000 Prentice Hall13-17
Internal ReferencePrices
Internal ReferencePrices
Buyers’ PricingExpectations
Buyers’ PricingExpectations
Price-Quality Inferences
Price-Quality Inferences
Psychological Issues in Pricing
Copyright 2000 Prentice Hall13-18
Psychological Pricing Strategies
Odd-Even Pricing– Marketers assume there is a psychological
response to odd prices that differs from the responses to even prices.
– $1.99 vs $2.00 Price Lining
– Similar items in a product line sell at different prices, called price points.
– Refrigerator prices: $400, $600, $800, $1,000.
Copyright 2000 Prentice Hall13-19
Deceptive Pricing Practices
Bait-and-Switch
PriceFixing
Horizontal and VerticalPrice Fixing
PriceFixing
Horizontal and VerticalPrice Fixing
Unfair SalesActs
Loss Leader Pricing
Unfair SalesActs
Loss Leader Pricing
Price Discrimination
Robinson-Patman Act
Price Discrimination
Robinson-Patman Act
Legal & Ethical Considerations in Pricing
Copyright 2000 Prentice Hall13-20
Chapter Summary
Understand key pricing strategies. Explain pricing tactics for individual
and multiple products. Describe the important
psychological aspects of pricing. Understand some of the legal and
ethical considerations in pricing.