Chapter 20 Setting the Right Price EXTRA CREDITS FINAL What info 1 PhD student research link survey questionnaire raffle posted on SPARK by 4 21 2 Online questionnaire for Marketing 301 posted on SPARK on MAY 2nd Learning objectives on the cards in the back of the book grey cards Last Monday of classes TA s will review 50 questions How to Set a Price on a Product or Service 1 Establish pricing goals Profit Oriented Sales Oriented Status Quo 2 Estimate demand costs profits 3 Choose a price strategy Price 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 Price Skimming a firm charges a high introductory price often coupled with heavy promotion Situations when Price Skimming is Successful inelastic demand unique advantages superior legal protection of product technological breakthrough blocked entry to competitors Penetration Pricing a firm charges a relatively low price for a product initially as a way to reach the mass market Advantages 1 Discourages or blocks competition from market entry 2 Boosts sales provides large profit increases 3 Can justify production expansion Disadvantages 1 Requires gear up for the mass production 2 Selling large volumes at low prices 3 Strategy to gain market share may fail Status Quo Pricing charging a price identical to or very close to the competition s price Advantages 1 Simplicity 2 Safest route to long term survival for small firms Disadvantages 1 Strategy may ignore demand and or cost 4 Fine tune with pricing tactics Discounts allowances rebates value based prcing Quantity discounts cash discounts functional discounts seasonal discounts promotional allowances rebates 0 financing value based prcing Value based pricing setting the price at a level that seems to the customer to be a good price compared to prices of other options 1 Step 1 2 Steap 2 a Companies that set prices using a cost plus model b addings 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 value based pricing to set the best price a How to determine value Ask customers what do they like about you What don t they like b Their responses represent the perceived value of your product in the marketplace c Attributes that will determine the perceived value of you product include product quality on time delivery customer service technical service price 3 Step 3 a Ask customers what would be an acceptable price what would be expensive what would be a prohibitively expensive price b Best price falls between expensive prohibitively c Customers want value and they re willing to pay for it expensive Pricing products too low 1 Mangers attempt to buy markets through aggressive pricing 2 Managers tend to make pricing decisions based on current costs current competitor prices short term share gains rather than on long term profitability 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 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 Geographic Pricing Special Pricing tactics Single price tactic all goods offered at the same price Flexible pricing different customers pay different price Profession services pricing used by professionals with experience training or certification Price lining several line items at specific price points Leader pricing sell product near or below costs Bait pricing lure customers through false or misleading price advertising Odd even pricing odd number prices imply bargain even number prices Price bundling combining 2 products in a single package 2 part pricing 2 separate charges to consume a single good l imply quality A Consumer Penalties n i s s u f f e r e d a r e i i r r e v o c a b A e d d i t i o n a l e s o p m I s e s s e n s u B i f I s e i t l a n e P r e m u s n o C o s s o f r e v t r e a n n u s e a c t i o n c o s t s n c u r r e 5 Results lead to the right price d Legality Ethics of Price Strategy Unfair Trade Practices l Price Fixing 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 2 purchasers products sold must be commodities or tangible goods product sold must be of like grade quality there must be significant competitive injury Predatory Pricing competitors out of business or out of a market Product Line Pricing setting prices for an entire line of products laws that prohibit wholesalers and retailers from selling below costs an agreement between 2 firms on the price they will charge for a product Seller Defenses Seller Defenses CostCost Market Market Competition ConditionsCompetition Conditions the practice of charging a very low price for a product with the intent of driving Relationships among Products Complementary Complementary Substitutes Substitutes Neutral Neutral inflation cost oriented tactics problems demand oriented tactics for one or more products in a line Recession Value Based Pricing Bundling or Unbundling supplier strategies renegotiating contracts offering help keeping the pressure on paring down suppliers Joint Costs costs that are shared in the manufacturing and marketing of several products in a product line Pricing Based on Economy Difficult times a high volume of sales on an item with low profit margin make the itme highly profitable eliminating a product may reduce economies of scale eliminateing a product may affect the price quality image of the entire line delayed quotation pricing escalator pricing hold prices constatnt but add new fees may still e D e r c e s a price shading the use of discounts by salespeople to increse demand P r ic e I n e e c r as Maintaining e d a a Fixed D d m n Gross Margin Increased Production Costs