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 pricing goals
Estimate demand, costs, and profits
Choose a price strategy
Fine tune with pricing tactics
Results lead to the right price
LO1
5
Establish Pricing Goals
Profit-Oriented
Sales-Oriented
Status Quo
LO1
6
Choose a Price Strategy
Price Strategy
LO1
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.
7
Choose a Price Strategy
Price
Skimming
A firm charges a high introductory price,
often coupled with heavy promotion.
Penetration
Pricing
A firm charges a relatively low price for a
product initially as a way to reach the
mass market.
Status Quo
Pricing
Charging a price identical to or very close
to the competition’s price.
LO1
8
Price Skimming
Inelastic Demand
Situations
When
Price
Skimming
Is
Successful
Unique Advantages/Superior
Legal Protection of Product
Technological Breakthrough
Blocked Entry to Competitors
LO1
9
Penetration Pricing
Advantages



Discourages or blocks
competition from
market entry
Boosts sales and
provides large profit
increases
Disadvantages

Requires gear up for
mass production

Selling large volumes
at low prices

Strategy to gain market
share may fail
Can justify production
expansion
LO1
10
Status Quo Pricing
Advantages

Simplicity

Safest route to longterm survival for small
firms
LO1
Disadvantages

Strategy may ignore
demand and/or cost
11
Setting the Right Price
Establish
price
goals
High $
Estimate demand,
costs, and profits
Skimming
Choose a
price strategy
Status quo
Penetration
Low $
Evaluate
results
LO1
Fine-tune
base price
Set price
$x.yy
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 Trade Practices
Price Fixing
Price Discrimination
Predatory Pricing
LO2
14
The Legality and Ethics of
Price Strategy
LO2
Unfair Trade
Practices
Laws that prohibit wholesalers
and retailers from selling
below cost.
Price
Fixing
An agreement between two
or more firms on the price they
will charge for a product.
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:
Seller Defenses
Cost
LO2
Market
Conditions
Competition
17
Predatory Pricing
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.
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
Geographic pricing
Special pricing tactics
LO3
20
Discounts,
Allowances, Rebates,
and Value-Based Pricing
Quantity Discounts
Promotional Allowances
Cash Discounts
Rebates
Functional Discounts
Zero Percent Financing
Seasonal Discounts
Value-Based Pricing
LO3
21
Value-Based Pricing
Setting
the
price
at
a
Value-Based
level that seems to the
Pricing
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 valuebased pricing to set the best price.
LO3
Source: Elisabeth A. Sullivan, “Value Pricing: Smart Marketers Know Cost-Plus Can Be
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
FOB Origin
Pricing
The buyer absorbs the freight
costs from the shipping point
(“free on board”).
Uniform
Delivered
Pricing
The seller pays the freight charges
and bills the purchaser an
identical, flat freight charge.
Zone Pricing
The U.S. is divided into zones, and
a flat freight rate is charged to
customers in a given zone.
Freight
Absorption
Pricing
The seller pays for all or part of
the freight charges and does not
pass them on to the buyer.
Basing-Point
Pricing
The seller designates a location as
a basing point and charges all buyers
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
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
Odd-Even Pricing
Price Bundling
Two-Part Pricing
LO3
Lure customers through false or misleading
price advertising
Odd-number prices imply bargain
Even-number prices imply quality
Combining two or more products in a
single package
Two separate charges to consume a single good
28
Consumer Penalties
Businesses Impose
Consumer Penalties If...
An irrevocable
loss of revenue
is suffered
LO3
Additional
transaction costs
are incurred
29
Fine-Tuning the Base Price
Pricing Tactics
Discounts
Quantity
• cumulative
• noncumulative
Geographic
Other
Tactics
FOB
origin
Single price
Consumer
Penalties
Flexible
Cash
Uniform
delivered
Functional
(trade)
Seasonal
Promotional
(trade)
Zone
Professional
services
Price lining
Leader
Freight
absorption
Bait
Rebate
0% Financing
Basingpoint
Odd–even
Bundling
LO3
Value-based
Unbundling
Two-part
30
Product Line Pricing
Discuss product
line pricing
LO4
31
Product Line Pricing
Product Line
Pricing
Setting prices for an
entire line of products.
LO4
32
Relationships
among Products
Complementary
Substitutes
Neutral
LO4
33
Joint Costs
Joint Costs
LO4
Costs that are shared in
the manufacturing and
marketing of several
products in a product
line.
34
Pricing during Difficult
Economic Times
Describe the role
of pricing during
periods of inflation
and recession
LO5
35
Inflation
Cost-Oriented Tactics
High Inflation
Demand-Oriented 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
LO5
Increased
Production
Costs
39
Demand-Oriented Tactics
Price
Shading
LO5
The use of discounts by
salespeople to increase
demand for one or more
products in a line.
40
Demand-Oriented Tactics
Cultivate selected demand
Strategies to
Make Demand
More Inelastic
Create unique offerings
Change the package design
Heighten buyer dependence
LO5
41
Recession
Value-Based Pricing
Bundling or Unbundling
LO5
42
Supplier Strategies
during Recession
Renegotiating contracts
Offering help
Keeping the pressure on
Paring down suppliers
LO5
43
Pricing During
Inflation and Recession
Inflation
Recession
Contract
product lines
Cost-oriented
tactics
Delayedquotation pricing
Value-based
Price
Bundling
Unbundling
Escalator
pricing
Select
demand
Demand-oriented
tactics
Product
New product
categories
Unique
offering
Change package
design
Increase buyer
dependence
LO5
New products
Renegotiate
contracts
Offer help
Suppliers
Keep pressure
on suppliers
Reduce number
of suppliers
44