Chaper 14: Arriving At The Final Price

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Step 4: Select an approximate price level

4 Approaches:

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1) Demand-Oriented
2) Cost-oriented
3) Profit- Oriented
4) Competition-oriented

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1) Demand Oriented Pricing Approaches

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*weigh expected customer tastes more heavily than cost, profit, and competition
Skimming/Penetration
Prestige
Price lining
Odd-even
Target
Bundle
Yield Management

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Skimming Pricing

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setting the highest initial price that customers really desiring the product are willing to pay.

First customers are inelastic to changes in price.
Firm lowers price when more sensitive customer segments need to be attracted.

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Skimming is an effective strategy when:

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1) enough people will buy at initial high proce
2) high price wont attract competition
3) lowering price has small effect on increasing sales and reducing unt cost
4) high price is interpreted as high quality
4)

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Penetration Priceing

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Setting a low initial price on a new product to appeal to a mass market
EX. Nintendo DS

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Conditions for penetration pricing:

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1) many segments of the market are price sensitive (Elastic Demand)
2) low initial price discourages competitors
3) unit production and marketing costs fall dramatically as production increses

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Prestige Pricing

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setting a high price so that quality- or status- conscious customers will be attracted to the product and buy it

*has a backward bending demand curve!: if price is lowered beyond a certain point, demand for that item actually falls
EX. Rolls-Royce

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Price Lining

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a firm that is selling not just a single product, but a line of products may price them at a number of different specific pricing points
EX.Line of slacks at $59, $79, $99
*Demand is elastic at these price points but inelastic b/w them

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Odd-Even Pricing

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setting prices a few cents or dollars under an even number

Theory: consumers see "19.99" as closer to 19 than to 20
-Demand increases if priced at 19.99 (evidence says not really true)

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Target pricing

Demand Minus and Chain Markup (Notes)

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Estimating price the ultimate consumer would be willing to pay for the product and work backward through markups taken by retailers and wholesales to determine the price they charge retailers and wholesalers for the product.

results in the manufacturer deliberately adjusting the composition and features of a product to achieve the target price to consumers

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Bundle Pricing

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the marketing of two or more products in a single package price

EX. Vacation Packages like Delta ticket, car rental, and hotel
- Value of package should be greater than single item(dont have to make separate purchases)

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Yield Management Pricing

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the charging of different prices to maximize revenue for a set amount of capacity at any given time

*varying prices by time, day, week, or season

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2) Cost- Oriented Approaches

*BEP(CH 13) goes with this

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Standard Markup
Cost-Plus
Experience Curve
*stressing the cost side of the pricing problem, not the demand side.
Looking at the production and marketing costs and adding enough to cover direct expenses, overhead and profit

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Standard Markup Pricing

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adding a fixed percentage to the cost of all items in a specific product class.

NOTES: P=COG/[(100-%Markup)/100]
*high volume stuff= smaller markup

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Cost-Plus Pricing

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summing the total unit cost of providing a product or service and adding a specific amount to the cost to arrive at a price.

most commonly used for business products. Also law firms

*two forms

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cost-plus-a-percentage-of-cost pricing

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a fixed percentage is added to the total unit cost

*used to price one few-of-a-kind items (Hotel construction cost)

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cost-plus fixed-fee pricing

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the supplier is reimbursed for all costs, regardless of what they turn out to be, but is allowed only a fixed fee as profit that is independent of the final cost of the project. EX. Cost of the shuttle=1.2B
and a $100m fee. Costs actually=$2B, fee stays at $100m

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Experience Curve Pricing

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based on the learning effect, which holds that the unit the unit cost of many products and services declines by 10% to 30% each time the firm's experience at producing and selling them doubles

*predictable enough that the average cost can be estimated mathematically
EX. "Costs fall by 15% each time the volume doubles"
-100th unit is 85% of the cost of the 50th unit ($100->$85)

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3)Profit-Oriented Pricing

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balancing of revenues and costs

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A) Target Profit Pricing (NOTES)

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an annual target of a specific dollar value of profit

NOTES: P= (TFC+TVC+Total Profit) /# units produced

*related to Break Even Pricing. Profit ends up looking like another cost.

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B)Target Return on Sales Pricing


*not in notes

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used to set the typical prices that will give the firm a profit that is a specified percentage of the SALES received

*has a benchmark for sales or investment used to achieve the target that TPP doesn't have

Target profit/Total Revenue

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c) Target Return on Investment Pricing (NOTES)

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method of setting profit to meet the target return that investors wish to receive

P= [TFC+TVC+(Investmt x ROI)]/ standard # units

*INV x ROI same as target profit

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4)Competition Based Pricing

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price setter stresses importance of what competitors or "the market" is doing.

Customary,
Above-, At- or Below
Loss-Leader

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A) Customary Pricing

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used for products where tradition, a standardized channel of distribution, or other competitive factors dictate the price.
EX. Swiss watches

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B) Above-, At-, or Below- Market Pricing

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setting a market price for a product or product class based on subjective feel for competitor's price or market price as the benchmark.
EX. Rolex is "most expensive on the market" =above market

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C) Loss-Leader Pricing

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Deliberately selling a product below its' customary price, not to increase sales, but to attract customer's attention in hopes that they will buy other products as well.

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STEP 5: Set the list or quoted price

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Steps 1-4: set a price that seems reasonable

5: set specific list or quoted price

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One-price policy

aka.fixed pricing

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setting one price for all of the buyers of a good or service.

Used more often than flexible in the US

"no haggle pricing
**Administered pricing in NOTES

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Flexable-Price Policy

aka. dynamic pricing

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setting different prices for products and services depending on individual buyers and purchase situations
*Participative Pricing in NOTES

Used in ONLINE purchases.
Some customers may pay more than others of same product.

Prices change in response to costs, competition and customers demands

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Company Effects on Pricing

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-Price of a single product must consider the price of other items in its it's product line or related product lines on its product mix. ie.Complements and substitutes.

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Product-line pricing

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the setting of prices for all of the products on a product line. (Difficult task for manager)

Goal: cover costs and produce profit for the entire line!
Determine: 1)the lowest-priced product 2) the highest priced product, and 3) Price "differentials" of all other products.

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Customer Effects on Pricing

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weighing the factors that matter to the ultimate consumer

PRICE/QUALITY relationship

*looking at prices for manufacturers too

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Competitive Effects on Pricing

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managers must consider the reaction of competitors to changes in the price
see PRICE vs. NONPRICE competition and
PRICE LEADER/FOLLOWER in NOTEs

*price war

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Price War

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successive price cutting by competitors to maintain or increase their unit or market share.

*usually results in profit loss for all competitors (Airlines)
Conditions: 1)the company has a costor tech. advantage over comprtitors, 2) demand will grow if P decreases 3) price cut is for specific items, not ALL.

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Balancing Incremental Costs and Revenues

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*marginal analysis= balancing incremental costs and revenues
EX.-using marginal rev.,cost, and elasticity of demand to determine how many extra units need to be sold, extra salespeople to hire etc.

ADV- very useful
DISADV- hard to get necessary data

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STEP 6: Make special sales adjustments to the List or Quoted price

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Discounts
Allowances
Geographical Adjustments

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Discounts

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reductions from the list price that the seller gives to the buyer as a reward for for some activity of the buyer that is favorable to the seller

Discounts,Seasonal, Trade (Functional), Cash Discounts

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a. Quantity Discounts

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reductions in the unit costs of a large order, used to encourage customers to buy larger quantities of a product
EX. $1 for 100 copies, $.05 for 200

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two types of quantity discounts

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*noncumulative= based on the size of the order, not a series of orders
Goal: ship large # at one time

*cumulative= accumulation of purchases over a given period
Goal: encourage repeat buying

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b. seasonal discounts

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encourage buyers to stock inventory earlier than their normal demand would require

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c. trade (functional) discounts

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reward for wholesalers and retailers for marketing functions that they will perform in the future.
Reductions on the list price based on:
1) where firm is in channel
2) marketing activities they are expected to perform in the future

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d. cash discounts

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offered by manufacturers to encourage retailers to pay their bills quickly

"Subtract x amt if payment is within y number of days"

also offered to consumers

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Allowances

Back 43

reductions from the list or quoted prices to buyers for performing some activity
*same as discounts?

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a. trade-in allowance

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a price reduction given when a used product is part of the payment of a new product
EX. Car trade in

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b. Promotional Allowances

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allowances for undertaking certain advertising or selling activities to promote a product.

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Everyday low pricing

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the practice of replacing promotional allowances with lower manufacturer list prices.

*used in place of promotional allowances, which have a higher cost

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Geographical Adjustments

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used by manufacturers or wholesalers to list or quoted prices to reflect the cost of transportation of the products from the seller to the the buyer.

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a. FOB Origin Pricing

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the price the seller quotes that includes the cost of loading the product onto the vehicle. Selle names the factory/ location where loading is to occur. Buyer is responsible for picking the mode of transportation and paying for all of the transportation and handling costs.

Title passes buyer at point of loading.

FOB= free on board; the seller pays for cost of transport

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b. Uniform Delivered Pricing

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the price the seller quotes includes all transport costs

"FOB buyer's location"
Seller takes care of cost of transport, damage, freight charge.

Four Forms...

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1) single-zone pricing (or postage stamp pricing

2)multiple-zone pricing

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1)all buyers pay the same delivered price for the products regardless of their distance from the seller

2) delivered price that divides the selling territory into geographic areas or zones

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3) FOB with freight allowed pricing (or freight absorption pricing)

4) **Basing-Point Pricing

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3) price is quoted by the seller as " FOB plant-freight allowed". Buyer is allowed to deduct freight expenses from the price of goods, so the seller absorbs transport cost.

4) selecting one or more geographical locations (basing point) from which the list price for products plus charged to the buyer

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Legal and Regulatory Aspects of Pricing

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price fixing, price discrimination, deceptive pricing, geographical pricing, predatory pricing

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Price Fixing

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conspiracy among forms to set the prices for a product

per se illegal under the Sherman Act

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a. Horizontal PF

b. Vertical PF

c. rule of reason

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a. two or more competitors explicitly or implicitly set prices

b. controlling agreements between independent buyers and sellers (manufacturer and retailer) whereby sellers are required to not sell products below certain price
"retail price maintenance"

*illegal when enforced by coercion
c. considering the specific circumstances before considering illegal

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Price discrimination

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The practice of charging different prices to different buyers for goods of like grade and quality (amended in the Robinson-Patman Act)

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Defenses against Price discrimination:

a. cost justification

b. meeting changing market conditions

c. Meet-the-competition defense

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a. when differences charged to customers do not exceed differences in costs of manufacture, sale, and delivery resulting from different methods or quantities in which good are sold and delivered to buyers.

b. when price differences result from this it isnt illegal

c. price differences are quoted to selected buyers in good faith to meet competitors' prices and are not intended to injure competition

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Deceptive Pricing:

a. Bait and switch

b. Bargains conditional on other purchases

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Price deals that mislead consumers

a. offer very low price on product to get customer to store , but customer is persuaded to buy a higher priced product

b. Buy one get one free; 2 for price of 1; first items price cant be inflated

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c. comparable value comparisons

d. Comparisons with suggested prices

e. Former price comparisons

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c. Retail value= 100, our price= 85 must be verified

d. claim that manftr. price is higher than firms price may be deceptive

e. seller claim that price was reduced must not be deceptive

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geographical pricing

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FOB origin, FOB freight allowed etc, are illegal if conspiracy exists to set prices

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Predatory Pricing (IN NOTES too)

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the practice of charging a very low price for a product with the intent of driving competitors out of business

Once competitors have been driven out firm raises price