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Setting the Right Price
Key Concepts
How to Set a Price on aProduct or Service
Fine tune with pricing tacticsFine tune with pricing tactics
Choose a price strategyChoose a price strategy
Estimate demand, costs, and profitsEstimate demand, costs, and profits
Establish pricing goalsEstablish pricing goals
Results lead to the right price
Establish Pricing Goals
Profit-Oriented
Sales-Oriented
Status Quo
Choose a Price Strategy
Status Quo Pricing
Status Quo Pricing
Price Skimming
Price Skimming
Penetration Pricing
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.
Why & When Price Skimming ?
SituationsWhenPrice
SkimmingIs Successful
SituationsWhenPrice
SkimmingIs Successful
Unique Advantages/Superior
Legal Protection of Product
Blocked Entry to Competitors
Technological Breakthrough
Inelastic Demand
Penetration Pricing
AdvantagesAdvantages DisadvantagesDisadvantages
Discourages or blocks competition from market entry PRICE AS BARRIER
Boosts sales and provides large profit increases
Can justify production expansion
Requires gear up for mass production
Have to sell large volumes at low prices
Strategy to gain market share may fail
Status Quo Pricing
AdvantagesAdvantages DisadvantagesDisadvantages
Simplicity
Safest route to long-term survival for small firms Fly under the radar
Strategy may ignore demand and/or cost
Setting the Right Price
Establishprice goals
Establishprice goals
Estimate demand,costs, and profits
Estimate demand,costs, and profits
Choose aprice strategy
Choose aprice strategy
Fine-tunebase price
Fine-tunebase price
Set price$x.yy
Set price$x.yy
Evaluateresults
Evaluateresults
Skimming
Status quo
Penetration
Low $
High $
The Legality and Ethics ofPrice Strategy
Unfair Trade PracticesUnfair Trade Practices
Price FixingPrice Fixing
Price DiscriminationPrice Discrimination
Predatory PricingPredatory Pricing
The Legality and Ethics ofPrice Strategy
Unfair TradePractices
Unfair TradePractices
Laws that prohibit wholesalers and retailers from selling below cost.
Laws that prohibit wholesalers and retailers from selling below cost.
PriceFixing
PriceFixing
An agreement between two or more firms on the price they will charge for a product.
An agreement between two or more firms on the price they will charge for a product.
Price Discrimination
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.
The Robinson-Patman Act of 1936:
Price Discrimination
The Robinson-Patman Act of 1936:
Seller Defenses Seller Defenses
CostCost MarketConditions
MarketConditions CompetitionCompetition
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.
Predatory Pricing
Predatory Pricing
Tactics for Fine-Tuning the Base Price
Special pricing tactics Special pricing tactics
DiscountsDiscounts
Geographic pricingGeographic pricing
Discounts, Allowances, Rebates, and Value-Based Pricing
Quantity DiscountsQuantity Discounts
Cash DiscountsCash Discounts
Functional DiscountsFunctional Discounts
Seasonal DiscountsSeasonal Discounts
Promotional AllowancesPromotional Allowances
RebatesRebates
Zero Percent FinancingZero Percent Financing
Value-Based PricingValue-Based Pricing
Value-Based Pricing
Value-BasedPricing
Value-BasedPricing
Setting the price at a level that
seems to the customer to be a
good price compared to the prices
of other options.
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.
Geographic Pricing
Basing-point pricing
Basing-point pricing
Freight absorptionpricing
Freight absorptionpricing
Zone pricingZone pricing
Uniform delivered pricing
Uniform delivered pricing
FOB origin pricingFOB origin pricing
Online
http://www.ups.com
Geographic Pricing
FOB OriginPricing
UniformDelivered
Pricing
Zone Pricing
FreightAbsorption
Pricing
Basing-PointPricing
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 designates a location as a basing point and charges all buyers
the freight costs from that point.
Other Pricing Tactics
Single-Price Tactic All goods offered at the same price
Flexible Pricing Different customers pay different price
Professional Services Pricing
Used by professionals with experience,training or certification
Price Lining Several line items at specific price points
Leader Pricing Sell product at near or below cost
Bait Pricing Lure customers through false or misleading price advertising
Odd-Even Pricing Odd-number prices imply bargainEven-number prices imply quality
Price Bundling Combining two or more products in a single package
Two-Part Pricing Two separate charges to consume a single good
Fine-Tuning the Base Price
Product Line Pricing
Setting prices for an entire line
of products.
Product LinePricing
Product LinePricing
Relationships among Products
ComplementaryComplementary
SubstitutesSubstitutes
NeutralNeutral
Inflation
Cost-Oriented TacticsCost-Oriented Tactics
High InflationHigh Inflation
Demand-Oriented TacticsDemand-Oriented Tactics
Cost-Oriented Tactics
IncreasedProduction
Costs
Dec
reas
edD
eman
dPrice
IncreaseMaintaininga Fixed
Gross Margin
Cost-Oriented Tactics
Delayed-quotationpricing
Escalator pricing
Hold pricesconstant, but add new fees
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.
Problems with Cost-Oriented TacticsProblems with Cost-Oriented Tactics
Demand-Oriented Tactics
The use of discounts by
salespeople to increase
demand for one or more
products in a line.
PriceShading
PriceShading
Demand-Oriented Tactics
Strategies to Make Demand More Inelastic
Strategies to Make Demand More Inelastic
Cultivate selected demandCultivate selected demand
Create unique offeringsCreate unique offerings
Change the package designChange the package design
Heighten buyer dependenceHeighten buyer dependence
Recession
Bundling or UnbundlingBundling or Unbundling
Value-Based PricingValue-Based Pricing
Supplier Strategies during Recession
Renegotiating contractsRenegotiating contracts
Offering helpOffering help
Keeping the pressure onKeeping the pressure on
Paring down suppliersParing down suppliers
Pricing During Inflation and Recession