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1Chap. 18 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
Setting the Right PriceSetting the Right Price
Prepared byPrepared byDeborah BakerDeborah Baker
Texas Christian UniversityTexas Christian University
Chapter 18
2Chap. 18 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
Learning ObjectivesLearning Objectives
1. Describe the procedure for settingthe right price.
2. Identify the legal and ethical constraints on pricing decisions.
3. Explain how discounts, geographic pricing, and other special pricing tactics can be used to fine-tune the base price.
3Chap. 18 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
Learning Objectives Learning Objectives (continued)(continued)
4. Discuss product line pricing.
5. Describe the role of pricing during periods of inflation and recession.
4Chap. 18 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
On Linehttp://www.dell.comhttp://www.ibm.comhttp://www.hp.comhttp://www.apple.com
On Linehttp://www.dell.comhttp://www.ibm.comhttp://www.hp.comhttp://www.apple.com
Learning Objective Learning Objective
Describe the procedure for setting the right price.
11
5Chap. 18 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
Steps in Setting the Right Steps in Setting the Right PricePrice
Results lead to the right price
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
11
6Chap. 18 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
Pricing ObjectivesPricing Objectives11
Profit-Oriented Pricing ObjectivesProfit-Oriented Pricing ObjectivesProfit-Oriented Pricing ObjectivesProfit-Oriented Pricing Objectives
Sales-Oriented Pricing ObjectivesSales-Oriented Pricing ObjectivesSales-Oriented Pricing ObjectivesSales-Oriented Pricing Objectives
Status Quo Pricing ObjectivesStatus Quo Pricing ObjectivesStatus Quo Pricing ObjectivesStatus Quo Pricing Objectives
7Chap. 18 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
Price StrategyPrice Strategy
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.
11
8Chap. 18 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
Choosing a Price StrategyChoosing a Price Strategy
Basic StrategiesBasic Strategiesforfor
Setting PricesSetting Prices
Basic StrategiesBasic Strategiesforfor
Setting PricesSetting Prices
Status Quo Pricing Status Quo Pricing
Price SkimmingPrice Skimming
Penetration PricingPenetration Pricing
11
9Chap. 18 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
Price SkimmingPrice Skimming
SituationsSituationswhenwhenPrice Price
SkimmingSkimmingIs Is
SuccessfulSuccessful
SituationsSituationswhenwhenPrice Price
SkimmingSkimmingIs Is
SuccessfulSuccessful
Unique Advantages/Superior
Legal Protection of Product
Blocked Entry to Competitors
Technological Breakthrough
Inelastic Demand
11
10Chap. 18 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
Penetration PricingPenetration Pricing
A pricing policy whereby
a firm charges a relatively
low price for a product
initially as a way to
reach the mass market.
11
On Linehttp://www.iflyswa.com
On Linehttp://www.iflyswa.com
11Chap. 18 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
Penetration PricingPenetration Pricing
AdvantagesAdvantagesAdvantagesAdvantages
Discourages or blocks competition from market entry
Boosts sales and provides large profit increases.
DisadvantagesDisadvantagesDisadvantagesDisadvantages
Requires gear up for mass production
Selling large volumes at low prices
Strategy to gain market share may fail
11
12Chap. 18 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
Status Quo PricingStatus Quo Pricing
AdvantagesAdvantagesAdvantagesAdvantages
Simplicity
Safest route to long-term survival for small firms
DisadvantagesDisadvantagesDisadvantagesDisadvantages
Strategy may ignore demand and/or cost
11
13Chap. 18 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
Learning Objective Learning Objective
Identify the legal and ethical constraints on pricing decisions.
22
14Chap. 18 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
The Legality and Ethics ofThe Legality and Ethics ofPrice StrategyPrice Strategy
Issues Issues That LimitThat LimitPricing Pricing DecisionsDecisions
Issues Issues That LimitThat LimitPricing Pricing DecisionsDecisions
Unfair Trade PracticesUnfair Trade Practices
Price FixingPrice Fixing
Price DiscriminationPrice Discrimination
Predatory PricingPredatory Pricing
22
15Chap. 18 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
Unfair Trade Practice ActsUnfair Trade Practice Acts
Laws that prohibit
wholesalers and retailers
from selling below cost.
22
16Chap. 18 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
Price FixingPrice Fixing
An agreement between two
or more firms on the
price they will charge
for a product.
22On Linehttp://www.altavista.comhttp://www.yahoo.com
On Linehttp://www.altavista.comhttp://www.yahoo.com
17Chap. 18 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
Price DiscriminationPrice Discrimination
The Robinson-Patman Act of 1936:
Prohibits any firm from selling to two or more different buyers at different prices if the result would lessen competition
22
18Chap. 18 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
Robinson-Patman Act Robinson-Patman Act DefensesDefenses
Seller Defenses Seller Defenses Seller Defenses Seller Defenses
CostCost MarketConditions
MarketConditions CompetitionCompetition
22
19Chap. 18 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
Predatory PricingPredatory 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.
22
20Chap. 18 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
Learning Objective Learning Objective
Explain how discounts, geographic pricing, and other special pricing tactics can be used to fine-tune the base price.
33
21Chap. 18 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
Tactics for Fine-Tuning Tactics for Fine-Tuning the Base Pricethe Base Price
Special Pricing Tactics Special Pricing Tactics
DiscountsDiscounts
Geographic PricingGeographic Pricing
33
22Chap. 18 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
Tactics for Fine-Tuning Tactics for Fine-Tuning the Base Pricethe Base Price
Quantity DiscountsQuantity Discounts
Cash DiscountsCash Discounts
Functional DiscountsFunctional Discounts
Seasonal DiscountsSeasonal Discounts
33
Promotional AllowancesPromotional Allowances
RebatesRebates
Value-Based PricingValue-Based Pricing
Zero Percent FinancingZero Percent Financing
On Linehttp://www.edmunds.com
On Linehttp://www.edmunds.com
23Chap. 18 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
Value-Based PricingValue-Based Pricing
The price is set at a level
that seems to the customer
to be a good price
compared to the prices of
other options.
33
24Chap. 18 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
Geographic PricingGeographic 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
Common Common Methods ofMethods ofGeographicGeographic
PricingPricing
Common Common Methods ofMethods ofGeographicGeographic
PricingPricing
33
25Chap. 18 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
Geographic PricingGeographic Pricing
FOB OriginPricing
FOB OriginPricing
The buyer absorbs the freight costs from the shipping point
(“free on board”).
The buyer absorbs the freight costs from the shipping point
(“free on board”).
UniformDelivered
Pricing
UniformDelivered
Pricing
The seller pays the freight charges and bills the purchaser an
identical, flat freight charge.
The seller pays the freight charges and bills the purchaser an
identical, flat freight charge.
33
26Chap. 18 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
On Linehttp://www.ups.com
On Linehttp://www.ups.com
Geographic PricingGeographic Pricing
Zone PricingZone Pricing
FreightAbsorption
Pricing
FreightAbsorption
Pricing
Basing-PointPricing
Basing-PointPricing
The U.S. is divided into zones and a flat freight rate is charged to
customers in a given zone.
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 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.
The seller designates a location as a basing point and charges all
buyers the freight costs from that point.
33
27Chap. 18 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
On Linewww.ford.com
On Linewww.ford.com
Special Pricing TacticsSpecial Pricing Tactics
Single-Price Tactic Single-Price Tactic
Flexible PricingFlexible Pricing
Professional Services PricingProfessional Services Pricing
Price LiningPrice Lining
Leader PricingLeader Pricing
Bait PricingBait Pricing
Odd-Even PricingOdd-Even Pricing
Price Bundling Price Bundling
Two-Part PricingTwo-Part Pricing
All goods offered at the same price All goods offered at the same price
Different customers pay different priceDifferent customers pay different price
Used by professionals with experience,training or certificationUsed by professionals with experience,training or certification
Several line items at specific price pointsSeveral line items at specific price points
Sell product at near or below costSell product at near or below cost
Lure customers through false or misleading price advertisingLure customers through false or misleading price advertisingOdd-number prices imply bargainEven-number prices imply qualityOdd-number prices imply bargainEven-number prices imply qualityCombining two or more products in a single package Combining two or more products in a single package
Two separate charges to consume a single goodTwo separate charges to consume a single good
33
28Chap. 18 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
Consumer PenaltiesConsumer Penalties
An irrevocable loss of revenue
is suffered
An irrevocable loss of revenue
is suffered
Additional transaction costs
are incurred
Additional transaction costs
are incurred
Businesses Impose Businesses Impose Consumer Penalties If...Consumer Penalties If...
Businesses Impose Businesses Impose Consumer Penalties If...Consumer Penalties If...
33On Linehttp://www.princesscruises.comhttp://www.carnival.com
On Linehttp://www.princesscruises.comhttp://www.carnival.com
29Chap. 18 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
Consumer Consumer PenaltiesPenalties
33
30Chap. 18 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
Learning Objective Learning Objective
Discuss product line pricing.
44
31Chap. 18 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
Product Line PricingProduct Line Pricing
Setting prices for an entire
line of products.
44
On Linehttp://www.beauty.com
On Linehttp://www.beauty.com
32Chap. 18 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
Relationships among Relationships among ProductsProducts
RelationshipsAmong Products
RelationshipsAmong Products
ComplementaryComplementary
SubstitutesSubstitutes
NeutralNeutral
44
33Chap. 18 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
Joint CostsJoint Costs
Costs that are shared in the
manufacturing and
marketing of several
products in a product line.
44
34Chap. 18 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
Learning Objective Learning Objective
Describe the role of pricing during periods of inflation and recession.
55
35Chap. 18 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
Pricing During Pricing During Difficult Economic TimesDifficult Economic Times
Demand-Oriented TacticsDemand-Oriented Tactics
Cost-Oriented TacticsCost-Oriented Tactics
High InflationHigh InflationPricing TacticsPricing TacticsHigh InflationHigh Inflation
Pricing TacticsPricing Tactics
55
36Chap. 18 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
Cost-Oriented TacticsCost-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 entire line
Problems with Problems with Cost-Oriented TacticsCost-Oriented Tactics
Problems with Problems with Cost-Oriented TacticsCost-Oriented Tactics
55
37Chap. 18 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
Cost-Oriented TacticsCost-Oriented Tactics
Delayed-Quotation
Pricing
Delayed-Quotation
Pricing
A firm price is not set until the item is either finished or delivered. A firm price is not set until the
item is either finished or delivered.
EscalatorPricing
EscalatorPricing
The final selling price reflects cost increases incurred between the
time the order is placed and when delivery is made.
The final selling price reflects cost increases incurred between the
time the order is placed and when delivery is made.
55
38Chap. 18 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
Cost-Oriented Tactics Cost-Oriented Tactics
IncreasedIncreasedProductionProduction
CostsCosts
Dec
reas
edD
ecre
ased
Dem
and
Dem
and
Price
Price
Increase
IncreaseMaintainingMaintaininga Fixed a Fixed
Gross MarginGross Margin
55
39Chap. 18 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
Price ShadingPrice Shading
The use of discounts by
salespeople to increase
demand for one or more
products in a line.
55
40Chap. 18 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
Demand-Oriented TacticsDemand-Oriented Tactics
Strategies Strategies to Make to Make Demand Demand
More InelasticMore Inelastic
Strategies Strategies to Make to Make Demand Demand
More InelasticMore Inelastic
Cultivate selected demandCultivate selected demand
Create unique offeringsCreate unique offerings
Change the package designChange the package design
Heighten buyer dependenceHeighten buyer dependence
55
41Chap. 18 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
Pricing During RecessionPricing During Recession
Bundling or UnbundlingBundling or Unbundling
Value-Based PricingValue-Based Pricing
RecessionRecessionPricing TacticsPricing Tactics
RecessionRecessionPricing TacticsPricing Tactics
55
On Linehttp://www.kroger.com
On Linehttp://www.kroger.com
42Chap. 18 Marketing 7e Lamb Hair McDaniel©2004 South-Western/Thomson Learning
Supplier Strategies Supplier Strategies During RecessionDuring Recession
Cost-SavingCost-SavingStrategies Strategies
withwithSuppliersSuppliers
Cost-SavingCost-SavingStrategies Strategies
withwithSuppliersSuppliers
Renegotiating contractsRenegotiating contracts
Offering helpOffering help
Keeping the pressure onKeeping the pressure on
Paring down suppliersParing down suppliers
55
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