Pricing

LEGAL AND ETHICAL ISSUES IN PRICING

"Sometimes people confuse norms with ethics — exploitation of child labour, bribery and kickbacks may be the norm, but that doesn't mean they're right." Joseph Reitz, co-director of the International Centre for Ethics in Business at the University of Kansas.

Everyday we are confronted with pricing decisions where the ethics are complex. As individual we speak to our own conscience. But if we are a business how do we identify the ethical dimension across our target market?

Its Saturday night and you decide to take your partner to see the latest Hollywood blockbuster movie. As you stand in the box office queue, you notice that the admission price is $7.50, plus a $2.50 surcharge for all screening on Friday and Saturday nights.

You are a customer of a major bank, and have free access to their network of ATM (cash) machines, as well as those of other banks who have signed reciprocal agreements with your bank. You have just learned that your bank has sold some of their ATM machines to a third party, who will operate and maintain them. Under this new agreement, there will be a small charge for cash withdrawals (typically £1.50 / Euro 2.20 / US$2.70) at these third-party managed ATMs.

TOTALLY ACCEPTABLE OR TOTALLY UNACCEPTABLE?

You’ve just read the following story in a newspaper:

"ABC Consumer Electronics Corp receives a small percentage of its goods back from customers, who argue the product is faulty, doesn’t do what they were expecting, or who have simply changed their mind. The company offers a `no questions asked`, full refund for goods returned within 2 weeks. But after cleaning and checking the goods, and if required making any repairs, the goods are the placed back in the warehouse and sold as new stock complete with a normal 12 months warranty".

You have just purchased a new pair of leather shoes. The next day you see the very same pair of shoes advertised by the store you purchased the shoes from, at 50% off the price you paid for your shoes.

Rather than renting a DVD for the evening, you decide to download a movie from the internet using your newly installed broadband connection. You pay £8 (the equivalent of Euro 12) for the movie with your credit card and enjoy it immensely. Next day, you ring your brother in France and recommend the movie to him. He tells you he’s also downloaded the movie from the French version of the same website but it only cost him Euro 10.

A beverage company has just launched a new brand of mineral water. The water is sourced from a major UK river, the normal public water supply in the region, and has been treated by a public utility to meet the highest standards. This costs the company almost nothing to buy. The company then subjects the water to additional filtration, adding some minerals and ozone, before marketing it with a foreign sounding name, pictures of Swiss mountains and promoting the water’s scientific and health benefits. The water sells for UK£1.00 / Euro 1.50 / US$1.80 per 500ml bottle.

You have just invested in $5,000 in stocks/shares of a recently listed Internet Service Provider (ISP). The company’s prospectus said the funds were sought "to improve and expand the company’s high speed internet network". A couple of weeks later you pick up a business newspaper and read an interview with the ISP`s CEO. A price war has just broken out and the CEO is quoted: "Thanks to the company’s recent public listing, we have a `war chest` deep enough to sustain any price war".

The Legality and Ethics ofPrice Strategy

Unfair Trade PracticesUnfair Trade Practices

Price FixingPrice Fixing

Price DiscriminationPrice Discrimination

Predatory PricingPredatory Pricing

Issues that limit pricing decisions:


Laws that prohibit wholesalers and retailers from selling below cost.

Laws that prohibit wholesalers and retailers from selling below cost.

Unfair Trade

Practices

Unfair Trade

Practices


PriceFixingPriceFixing

An agreement betweenbusiness competitors to sell the same product or service at the same price.

An agreement betweenbusiness competitors to sell the same product or service at the same price.

Price Discrimination

Price Discrimination

A seller price discriminates whenit charges different prices to different buyers.

A seller price discriminates whenit charges different prices to different buyers.


Price discrimination can be separated into degrees:

First-degree price discrimination. The practice of charging each consumer the maximum amount he is willing and able to pay.

Example:

1. The manager of Suez Canal charges different prices to different ships depending on their cargo, alternative routes, and other characteristics.

2. Also on the sale of both new and used cars. People will pay different prices for cars with identical features, and the salesperson must attempt to gauge the maximum price at which the car can be sold. This type of price discrimination often includes a bargaining aspect, where the consumer attempts to negotiate a lower price.


Second-degree price discrimination refers to companies charging lower prices for higher quantities. In companies where a client orders in bulk and is able to purchase a high number of the same items at once, the client may get a discounted rate. This rate would not apply to a client who only orders a few items at a time. Often exists in retail stores.


Third degree price discrimination is based on understanding the market, and occurs with great frequency. This type takes many different forms, but in all cases attempts to derive the most sales from each segmented “group” of consumers.

For example, senior citizens are considered a group, and are often offered discounts at movie theaters, for transportation, in restaurants, and even in retail stores where seniors may have a “senior day” each week that allows them to take a discount on merchandise. “Students” are another segmented group that may be offered lower prices. Both seniors and students have a higher elasticity of demand and can generally afford to pay less than the average worker.

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.

NEW PRODUCT PRICINGNEW PRODUCT PRICINGYou have only one chance to get new product prices right.

Set them too high

and lose valuable market opportunities.

Set them too low

and leave money at the table.

Stages in the Product Life Cycle

IntroductoryStage

GrowthStage

DeclineStage

PP HighHigh

PPStableStable

PPDecreaseDecrease

MaturityStage

PPDecreaseDecrease

StableStable

HighHigh

Cost: What does it cost to produce this product? How will costs be used to set pricing floors?

Perceived Value: what does the market really think of my product? How do they value it?

Competitive Positioning: How are my competitors positioned in the marketplace and how are their product lines valued by consumers?

Three factors are critical in setting new product prices.

NEW PRODUCT PRICING

SETTING THE RIGHT PRICEEstablish

price goals

Establishprice goals

Estimate demand,costs, and profits

Estimate demand,costs, and profits

Choose aprice strategy

Choose aprice strategy

Fine-tunebase priceFine-tunebase price

Set price$x.yy

Set price$x.yy

Evaluateresults

Evaluateresults

Skimming

Status quo

PenetrationLow P

High P

Three main categories for fine-tuning the base price

Discounts, allowances, rebates and value based pricing

Geographic pricing Other pricing tactics

Discounts, Allowances, Rebates, and Value-Based Pricing

Lower prices are given to those that pay promptly, order a large quantity, or perform some functions to the manufacturer.

Value based pricing starts with the customer, considers the competition and costs and then determines the price.

Additional tactics in this category include seasonal discounts, promotion allowances, rebates (cash refunds) and zero percent financing.

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.

Geographic pricing tactics

Ways of moderating the impact of shipping costs on distant customers.

Includes FOB origin pricing, uniform delivered pricing, zone pricing, freight absorption pricing, and basing point pricing.

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 TacticsSingle-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

Consumer Penalties

An irrevocable loss of revenue

is suffered

Additional transaction costs

are incurred

Businesses Impose Consumer Penalties If...

FINE TUNING THE BASE PRICE