CHAPTER
ARRIVING
AT THE
FINAL PRICE
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
Slide 14-2
FIGURE 14-1 Steps in setting price
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
Slide 14-6
FIGURE 14-2 Four approaches for selecting
an approximate price level
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Slide 14-7
STEP 4: SELECT AN
APPROPRIATE PRICE LEVEL
• Demand-Oriented Approaches
 Skimming Pricing
 Penetration Pricing
 Prestige Pricing
 Price Lining
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
Slide 14-8
FIGURE 14-3 Demand curves for two types
of demand-oriented approaches
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STEP 4: SELECT AN
APPROPRIATE PRICE LEVEL
• Demand-Oriented Approaches
 Odd-Even Pricing
 Target Pricing
 Bundle Pricing
 Yield Management Pricing
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
Slide 14-11
STEP 4: SELECT AN
APPROPRIATE PRICE LEVEL
• Cost-Oriented Approaches
 Standard Markup Pricing
• Markup on Cost
• Markup on Selling Price
 Cost-Plus Pricing
• Cost-Plus Percentage-of-Cost Pricing
• Cost-Plus Fixed-Fee Pricing
 Experience Curve Pricing
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
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Rock Hall of Fame and Panasonic HDTV
What cost-oriented approach is used by each?
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
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STEP 4: SELECT AN
APPROPRIATE PRICE LEVEL
• Profit-Oriented Approaches
 Target Profit Pricing
 Target Return-On-Sales Pricing
 Target Return-On-Investment Pricing
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
Slide 14-16
FIGURE 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
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STEP 4: SELECT AN
APPROPRIATE PRICE LEVEL
• Competition-Oriented Approaches
 Customary Pricing
 Above-, At-, or Below-Market Pricing
 Loss-Leader Pricing
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
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STEP 5: SET THE LIST OR
QUOTED PRICE
• One-Price versus Flexible-Price Policy
 One-Price Policy (Fixed Pricing)
 Flexible-Price Policy (Dynamic Pricing)
• Clickstream
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
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99¢ Only Store
What price policy is used?
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
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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
Slide 14-24
STEP 5: SET THE LIST OR
QUOTED PRICE
• Company, Customer, and Competitive
Effects on Pricing
 Company Effects
• Product Line Pricing
 Customer Effects
 Competitive Effects
• Price War
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
Slide 14-25
Frito-Lay Tortilla Chips
What is product-line pricing and why use it?
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
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STEP 5: SET THE LIST OR
QUOTED PRICE
• Balancing Incremental Costs and
Revenues
 Marginal Analysis
 Marginal Revenue
 Marginal Cost
 Elasticity of Demand
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
Slide 14-27
FIGURE 14-5 The power of marginal
analysis in real-world decisions
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FIGURE 14-6 Three special adjustments to
list or quoted price
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STEP 6: MAKE SPECIAL
ADJUSTMENTS TO THE LIST
OR QUOTED PRICE
• Discounts
 Quantity Discounts
• Noncumulative Quantity Discounts
• Cumulative Quantity Discounts
 Seasonal Discounts
 Trade (Functional) Discounts
 Cash Discounts
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FIGURE 14-7 The structure of trade
discounts
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FIGURE 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 14-33
STEP 6: MAKE SPECIAL
ADJUSTMENTS TO THE LIST
OR QUOTED PRICE
• Allowances
 Trade-In Allowances
 Promotional Allowances
• Everyday Low Pricing
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
Slide 14-34
STEP 6: MAKE SPECIAL
ADJUSTMENTS TO THE LIST
OR QUOTED PRICE
• Geographical Adjustments
 FOB Origin Pricing
 Uniform Delivered Pricing
• Single-Zone Pricing
• Multiple-Zone Pricing
• FOB With Freight-Allowed (Absorption) Pricing
• Basing-Point Pricing
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
Slide 14-36
FIGURE 14-C Example of basing-point pricing
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
Slide 14-37
STEP 6: MAKE SPECIAL
ADJUSTMENTS TO THE LIST
OR QUOTED PRICE
• Legal and Regulatory Aspects of Pricing
 Price Fixing
• Horizontal Price Fixing
• Vertical Price Fixing (Resale Price Maintenance)
• Rule of Reason
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
Slide 14-38
FIGURE 14-8 Pricing practices affected by
legal restrictions
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
Slide 14-39
STEP 6: MAKE SPECIAL
ADJUSTMENTS TO THE LIST
OR QUOTED PRICE
• Legal and Regulatory Aspects of Pricing
 Price Discrimination
• Cost Justification Defense
• Meet-The-Competition Defense
 Deceptive Pricing
 Geographical Pricing
 Predatory Pricing
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Slide 14-40
FIGURE 14-9 Five most common deceptive
pricing practices
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Skimming Pricing
Skimming pricing involves setting the
highest initial price that customers really
desiring the product are willing to pay.
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Penetration Pricing
Penetration pricing involves setting a
low initial price on a new product to
appeal immediately to the mass market.
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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.
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Slide 14-69
Price Lining
Price lining involves setting a the price of
a line of products at a number of different
specific pricing points.
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Odd-Even Pricing
Odd-even pricing involves setting prices a
few dollars or cents under an even number.
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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.
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
Slide 14-72
Bundle Pricing
Bundle pricing involves the marketing of
two or more products in a single package
price.
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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.
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
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Standard Markup Pricing
Standard markup pricing involves
adding a fixed percentage to the cost of
all items in a specific product class.
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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.
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Slide 14-76
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.
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
Slide 14-77
Target Profit Pricing
Target profit pricing involves setting an
annual target of a specific dollar volume
of profit.
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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.
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Target Return-On-Investment
Pricing
Target return-on-investment pricing
involves setting a price to achieve an
annual target return-on-investment (ROI).
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Customary Pricing
Customary pricing involves setting a
price that is dictated by tradition, a
standardized channel of distribution,
or other competitive factors.
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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.
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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.
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One-Price Policy
A one-price policy involves setting one
price for all buyers of a product or
service. Also called fixed pricing.
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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.
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
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Product Line Pricing
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
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Price War
A price war involves successive price
cutting by competitors to increase or
maintain their unit sales or market share.
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Quantity Discounts
Quantity discounts are reductions in unit
costs for a larger order.
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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.
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Everyday Low Pricing
Everyday low pricing is the practice of
replacing promotional allowances with
lower manufacturer list prices.
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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.
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
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Uniform Delivered Pricing
Uniform delivered pricing is the price
the seller quotes includes all
transportation costs.
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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.
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
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Price Fixing
Price fixing involves a conspiracy among
firms to set prices for a product.
© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
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Price Discrimination
Price discrimination is the practice of
charging different prices to different
buyers for goods of like grade and quality.
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Predatory Pricing
Predatory pricing is the practice of
charging a very low price for a product
with the intent of driving competitors
out of business.
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