Chapter 20- Setting the Right PriceEXTRA CREDITS:1. PhD student research: link survey/questionnaire & raffle  posted on SPARK by 4/212. Online questionnaire for Marketing 301  posted on SPARK on MAY 2ndFINAL (What info)- Learning objectives on the cards in the back of the book (grey cards)- Last Monday of classes, TA’s will review - 50 questionsHow to Set a Price on a Product or Service1. Establish pricing goals- Profit-Oriented- Sales-Oriented- Status Quo2. Estimate demand, costs, & profits3. 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 entry2. Boosts sales & provides large profit increases3. Can justify production expansion- Disadvantages:1. Requires gear up for the mass production2. Selling large volumes at low prices3. Strategy to gain market share may fail- Status Quo Pricing: charging a price identical to or very close to the competition’sprice- Advantages: 1. Simplicity2. Safest route to long-term survival for small firms- Disadvantages:1. Strategy may ignore demand and/or cost4. 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 options1. Step 1: a. Companies that set prices using a cost-plus model—addings a predetermined percentage to a product’s cost/unitto produce a profit—may be leaving money on the tableb. Instead, a company should use the cost-plus model to determine its pricing threshold and then use value-based pricing to set the best price2. Steap 2: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 marketplacec. Attributes that will determine the perceived value of you product include product quality, on-time delivery, customerservice, technical service, & price3. Step 3:a. Ask customers what would be an acceptable price, what would be expensive, & what would be a prohibitively expensive priceb. Best price falls between “expensive” & “prohibitively expensive”c. Customers want value and they’re willing to pay for it- Pricing products too low:1. Mangers attempt to buy markets through aggressive pricing2. Managers tend to make pricing decisions based on current costs, current competitor prices, & short-term share gains rather than on long term profitability- 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 thepurchaser 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- 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 certificationSeller Defenses Seller Defenses CostCostMarketConditionsMarketConditionsCompetitionCompetition- 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 imply quality- Price bundling: combining 2 + products in a single package- 2-part pricing: 2 separate charges to consume a single good- Consumer Penalties-5. Results lead to the right priceLegality & Ethics of Price Strategy-Unfair Trade Practices-laws that prohibit wholesalers and retailers from selling below costs-Price Fixing-an agreement between 2+ firms on the price they will charge for a product-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 ortangible goods-product sold must be of like grade &quality-there must be significant competitive injury-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 marketProduct Line Pricing-setting prices for an entire line of productsAn irrevocable loss of revenueis sufferedAdditional transaction costsare incurred Businesses Impose Consumer Penalties If...ComplementaryComplementarySubstitutesSubstitutesNeutralNeutralIncreasedProductionCostsDecreasedDemandPrice IncreaseMaintaininga Fixed Gross MarginRelationships among ProductsJoint Costs-costs that are shared in the manufacturing and marketing of several products in a product linePricing Based on Economy (Difficult times)-inflation: -cost-oriented tactics(problems)-a high volume of sales on an item with low profit margin may stillmake the itme highly profitable-eliminating a product may reduce economies of scale-eliminateing a product may affect the price-qualityimage of the entire line-delayed-quotation pricing-escalator pricing-hold prices constatnt, but add new fees-demand-oriented tactics:-price shading: the use of discounts by salespeople to increse demandfor 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