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Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. LEARNING OBJECTIVES (LO) AFTER READING CHAPTER 14, YOU SHOULD BE ABLE TO: LO 14-1 LO 14-2 Describe how to establish the “approximate price level” using demand-oriented, cost-oriented, profit-oriented, and competitionoriented approaches. Recognize the major factors considered in deriving a final list or quoted price from the approximate price level. 14-2 LEARNING OBJECTIVES (LO) AFTER READING CHAPTER 14, YOU SHOULD BE ABLE TO: LO 14-3 LO 14-4 Identify the adjustments made to the approximate price level on the basis of discounts, allowances, and geography. Name the principal laws and regulations affecting specific pricing practices. 14-3 VIZIO, INC.—WHERE VISION MEETS VALUE™ IN HDTV 14-4 FIGURE 14-1 The six steps in setting price. The first three steps were covered in Chapter 13 and the last three steps in Chapter 14. 14-5 FIGURE 14-2 Four approaches for selecting an approximate price level 14-6 LO 14-1 STEP 4: SELECT AN APPROPRIATE PRICE LEVEL DEMAND-ORIENTED PRICING APPROACHES Skimming Pricing Penetration Pricing Prestige Pricing Price Lining Rolex Ad 14-7 LO 14-1 MARKETING MATTERS Energizer’s Lesson in Price Perception—Value 14-8 FIGURE 14-3 For prestige pricing, the demand curve for high-quality products is backwards sloping 14-9 FIGURE 14-4 For price lining, the demand curve is elastic at each price point but inelastic between price points 14-10 LO 14-1 STEP 4: SELECT AN APPROPRIATE PRICE LEVEL DEMAND-ORIENTED PRICING APPROACHES Odd-Even Pricing Bundle Pricing Target Pricing Yield Mgmt Pricing 14-11 LO 14-1 STEP 4: SELECT AN APPROPRIATE PRICE LEVEL COST-ORIENTED PRICING APPROACHES Standard Markup Pricing • Cost Cost-Plus Pricing • Cost-Plus Percentageof-Cost Pricing • Selling Price • Cost-Plus Fixed-Fee Pricing Experience Curve Pricing 14-12 FIGURE 14-A Markups for a manufacturer, wholesaler, and retailer on a home appliance sold to consumers for $100 14-13 LO 14-1 STEP 4: SELECT AN APPROPRIATE PRICE LEVEL PROFIT-ORIENTED PRICING APPROACHES Target Profit Pricing Target Returnon-Sales Pricing Target Return-onInvestment Pricing 14-14 FIGURE 14-5 Results of a spreadsheet simulation to select a price that will achieve a target return on investment 14-15 LO 14-1 STEP 4: SELECT AN APPROPRIATE PRICE LEVEL COMPETITION-ORIENTED PRICING APPROACHES Customary Pricing Above-, At-, or Below-Market Pricing Loss-Leader Pricing 14-16 LO 14-1 USING MARKETING DASHBOARDS Are Red Bull Prices Above, At, or Below the Market? Price Premium (%) Price Premium (%) = Dollar Sales ($) Market Share for a Brand –1 Unit Volume (#) Market Share for a Brand 14-17 LO 14-2 STEP 5: SET THE LIST OR QUOTED PRICE CHOOSE A PRICE POLICY Fixed-Price Policy Dynamic Pricing Policy • Clickstream 14-18 MAKING RESPONSIBLE DECISIONS LO 14-2 Dynamic Pricing—Is There Discrimination in Bargaining for a New Car? 14-19 LO 14-2 STEP 5: SET THE LIST OR QUOTED PRICE CONSIDER THESE EFFECTS ON PRICING Company Effects • Product-Line Pricing Customer Effects Competitive Effects • Price War • When to Consider Price Cutting 14-20 LO 14-2 STEP 5: SET THE LIST OR QUOTED PRICE BALANCE INCREMENTAL COSTS AND REVENUES Marginal Analysis • How Many Extra Units to Sell for a $1,000 Advertisement? • Should 3 More Salespeople be Hired? 14-21 FIGURE 14-6 Expected incremental revenue from pricing and other marketing actions must more than offset incremental costs to achieve incremental profit 14-22 FIGURE 14-7 Three special adjustments to list or quoted price include discounts, allowances, and geographical adjustments 14-23 LO 14-3 STEP 6: MAKE SPECIAL ADJUSTMENTS TO THE LIST OR QUOTED PRICE DISCOUNTS Quantity Discounts • Noncumulative Quantity Discounts • Cumulative Quantity Discounts Seasonal Discounts 14-24 LO 14-3 STEP 6: MAKE SPECIAL ADJUSTMENTS TO THE LIST OR QUOTED PRICE DISCOUNTS Trade (Functional) Discounts Cash Discounts 14-25 FIGURE 14-8 The structure of trade discounts affects the manufacturer’s selling price and the margins made by resellers in the marketing channel 14-26 LO 14-3 STEP 6: MAKE SPECIAL ADJUSTMENTS TO THE LIST OR QUOTED PRICE ALLOWANCES Trade-In Allowances Promotional Allowances • Everyday Low Pricing (EDLP) 14-27 MARKETING MATTERS LO 14-3 Everyday Low Prices at the Supermarket = Everyday Low Profits—Creating Customer Value at a Cost 14-28 LO 14-3 STEP 6: MAKE SPECIAL ADJUSTMENTS TO THE LIST OR QUOTED PRICE GEOGRAPHICAL ADJUSTMENTS FOB Origin Pricing 14-29 LO 14-3 STEP 6: MAKE SPECIAL ADJUSTMENTS TO THE LIST OR QUOTED PRICE GEOGRAPHICAL ADJUSTMENTS Uniform Delivered Pricing • Single-Zone Pricing U.S. Postal Service Priority Mail Flat Rate Prices from Denver to anywhere in the U.S. Envelope: $5.60 Small Box: $5.80 Medium Box: $12.35 Large Box: $16.85 14-30 LO 14-3 STEP 6: MAKE SPECIAL ADJUSTMENTS TO THE LIST OR QUOTED PRICE GEOGRAPHICAL ADJUSTMENTS Uniform Delivered Pricing • Multiple-Zone Pricing 14-31 LO 14-3 STEP 6: MAKE SPECIAL ADJUSTMENTS TO THE LIST OR QUOTED PRICE GEOGRAPHICAL ADJUSTMENTS Uniform Delivered Pricing • FOB with Freight-Allowed Pricing • Freight Absorption Pricing 14-32 LO 14-3 STEP 6: MAKE SPECIAL ADJUSTMENTS TO THE LIST OR QUOTED PRICE GEOGRAPHICAL ADJUSTMENTS Uniform Delivered Pricing • Basing-Point Pricing 14-33 FIGURE 14-9 Several pricing practices are affected by legal and regulatory restrictions, which benefit both consumers and firms 14-34 LO 14-4 STEP 6: MAKE SPECIAL ADJUSTMENTS TO THE LIST OR QUOTED PRICE LEGAL & REGULATORY ASPECTS OF PRICING Price Fixing • Horizontal Price Fixing • Vertical Price Fixing Resale Price Maintenance • Rule of Reason 14-35 LO 14-4 STEP 6: MAKE SPECIAL ADJUSTMENTS TO THE LIST OR QUOTED PRICE LEGAL & REGULATORY ASPECTS OF PRICING Price Discrimination Deceptive Pricing Geographical Pricing Predatory Pricing 14-36 FIGURE 14-10 Five most common deceptive pricing practices 14-37 MARKETING INSITE LO 14-4 So You Think You Know What “Free” Means? Think Again 14-38 VIDEO CASE 14 CARMEX [B]: SETTING THE PRICE OF THE NUMBER ONE LIP BALM 14-39