Chapter 20 Setting the Right Price 20 1 How to Set a Price on a Product Fine tune the base price with pricing tactics Establish pricing goals Estimate demand costs and profits Choose a price strategy to help determine a base price All pricing objectives have trade offs that managers must weigh Price strategy a basic long term pricing framework that establishes the initial price for a product and the intended direction for price movements over the product life cycle A company s freedom in determining a price depends on market conditions and other elements of the marketing mix Price skimming a pricing policy whereby a firm charges a high introductory price often coupled with heavy promotion market plus approach o Used for new products when it is perceived by the target market as o Use skimming and then lower prices over time sliding down the having unique advantages demand curve o Will encourage competitors to enter the market o Luxury retailers use anchoring high priced product that may never sell but makes everything else look cheap by comparison Penetration pricing a pricing policy whereby a firm charges a relatively low price for a product initially as a way to reach the mass market o Discourage competition o Effective in a price sensitive market Status quo pricing charging a price identical to or very close to the competition s price o Advantage simplicity o Disadvantage may ignore demand or costs or both 20 2 The Legality of Price Strategy from selling below cost Unfair trade practice acts laws that prohibit wholesalers and retailers o Protect small local firms from giants like Wal Mart Price fixing an agreement between two or more firms on the price they will Price discrimination the seller charges different prices to different charge for a product illegal customers for the same product 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 20 3 Tactics for Fine Tuning the Base Price Base price the general price level at which the company expects to sell the good service The general price level is correlated with the pricing policy above the market price skimming at the market status quo pricing below the market penetration pricing A base price can be lowered through the use of discounts allowances rebates low or zero percent financing and value based pricing Quantity discount a price reduction offered to buyers buying in multiple units or above a specified dollar amount Cumulative quantity discount a deduction from list price that applies to the buyer s total purchases made during a specific period encourage customer loyalty Noncumulative quantity discount a deduction from list price that applies to a single order rather than to the total volume of orders placed during a certain period encourage orders in large quantities Cash discount a price reduction offered to a consumer an industrial user or a marketing intermediary in return for prompt payment of a bill Functional discount trade discount a discount to wholesalers and retailers for performing channel functions Seasonal discounts a price reduction for buying merchandise out of season Promotional allowance trade allowance a payment to a dealer for promoting the manufacturer s products Rebate a cash refund given for the purchase of a product during a specific period Zero percent financing purchasers can borrow money to pay for new cars with no interest charge Value based pricing setting the price at a level that seems to the customer to be a good price compared to the prices of other options firm is customer driven Pricing products too low can happen bc managers attempt to buy market share through aggressive pricing and managers have a natural tendency to want to make decisions that can be justified objectively Geographic pricing tactics o FOB origin pricing a price tactic that requires the buyer to absorb the freight costs from the shipping point free on board o Uniform delivered pricing a price tactic in which the seller pays the actual freight charges and bills every purchaser an identical flat freight charge o Zone pricing a modification of uniform delivered pricing that divides the US or the total market into segments zones and charges a flat freight rate to all customers in a given zone o Freight absorption pricing a price tactic in which the seller pays all or part of the actual freight charges and does not pass them onto the buyer o Basing point pricing a price tactic that charges freight from a given basing point regardless of the city from which the goods are shipped Single price tactic a price tactic that offers all goods and services at the same price or perhaps two or three prices o Simplified pricing system and minimal clerical errors o Rising costs are a headache o Sometimes it can open the door to competition Flexible pricing variable pricing a price tactic in which different customers pay different prices for essentially the same merchandise bought in equal quantities o Sale of shopping goods specialty merchandise industrial goods o Lack of consistent profit margins tendency for salespeople to lower the price to make a sale price way among sellers Trade ins example cars Professional services pricing used by people with lengthy experience training and certification by a licensing board Price lining the practice of offering a product line with several items at specific price points wireless providers o Reduces confusion o A seller can reach several market segments Leader pricing loss leader pricing a price tactic in which a product is sold near or even below cost in the hope that shoppers will buy other items once they are in the store o Used on well known items that consumers can easily recognize Bait pricing a price tactic that tries to get consumers into a store through false or misleading price advertising and the uses high pressure selling to persuade consumers to buy more expensive merchandise Odd even pricing psychological pricing a price tactic that uses odd numbered prices to connote bargains and even numbered prices to imply quality Price bundling marketing two or more products into a single package for a special price product Unbundling reducing the bundle of services that comes with the basic Two part pricing a price tactic that charges two separate amounts to Consumer penalty an extra fee paid by the consumer for violating the consume a single good service terms of the purchase agreement 20 4 Product
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