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Introduction to Chapter 20: Setting the Right Price Designed & Prepared by Laura Rush B-books, Ltd. Copyright Cengage Learning 2013 All Rights Reserved 1 Learning Outcomes LO1 Describe the procedure for setting the right price LO2 Identify the legal and ethical constraints on pricing decisions LO3 Explain how discounts, geographic pricing, and other pricing tactics can be used to finetune the base price LO4 Discuss product line pricing LO5 Describe the role of pricing during periods of inflation and recession Copyright Cengage Learning 2013 All Rights Reserved 2 Establish Pricing Goals Profit-Oriented Sales-Oriented Status Quo Copyright Cengage Learning 2013 All Rights Reserved 3 Choose a Price Strategy Price skimming - A firm charges a high introductory price, often coupled with heavy promotion. Penetration Pricing - A firm charges a relatively low price for a product initially as a way to reach the mass market. Status Quo Pricing - Charging a price identical to or very close to the competition’s price. Copyright Cengage Learning 2013 All Rights Reserved 4 The Legality and Ethics of Price Strategy Unfair Trade Practices Price Fixing Price Discrimination Predatory Pricing Copyright Cengage Learning 2013 All Rights Reserved 5 Tactics for Fine-Tuning the Base Price Discounts Geographic pricing Special pricing tactics Copyright Cengage Learning 2013 All Rights Reserved 6 Discounts, Allowances, Rebates, and Value-Based Pricing Quantity Discounts Promotional Allowances Cash Discounts Rebates Functional Discounts Zero Percent Financing Seasonal Discounts Markdown Money Value-Based Pricing Copyright Cengage Learning 2013 All Rights Reserved 7 Pricing Products Too Low 1. Managers attempt to buy market share through aggressive pricing. 2. Managers tend to make pricing decisions based on current costs, current competitor prices, and short-term share gains rather than on long-term profitability. Copyright Cengage Learning 2013 All Rights Reserved 8 Geographic Pricing FOB origin pricing Uniform delivered pricing Zone pricing Freight absorption pricing Basing-point pricing Copyright Cengage Learning 2013 All Rights Reserved Online http://www.ups.com 9 Other Pricing Tactics Single-Price Tactic All goods offered at the same price Flexible Pricing Different customers pay different price Professional Services Pricing Used by professionals with experience, training or certification Price Lining Several line items at specific price points Leader Pricing Sell product at near or below cost Bait Pricing Odd-Even Pricing Price Bundling Lure customers through false or misleading price advertising Odd-number prices imply bargain Even-number prices imply quality Combining two or more products in a single package Two-Part Pricing Two separate charges to consume a single good Pay What You Want Allowing customers to pay what they think a product is worth Consumer Penalties Businesses Impose Consumer Penalties If... An irrevocable loss of revenue is suffered Additional transaction costs are incurred Online http://www.princesscruises.com http://www.carnival.com Copyright Cengage Learning 2013 All Rights Reserved 11 Product Line Pricing Setting prices for an entire line of products. Online http://www.beauty.com Copyright Cengage Learning 2013 All Rights Reserved 12 Relationships Among Products Complementary Substitutes Neutral Copyright Cengage Learning 2013 All Rights Reserved 13 Joint Costs Costs that are shared in the manufacturing and marketing of several products in a product life. Copyright Cengage Learning 2013 All Rights Reserved 14 Inflation Cost-Oriented Tactics High Inflation Demand-Oriented Tactics Copyright Cengage Learning 2013 All Rights Reserved 15 Cost-Oriented Tactics Delayed-quotation Escalator pricing pricing Hold prices constant, but add new fees Copyright Cengage Learning 2013 All Rights Reserved 16 Demand-Oriented Tactics Cultivate selected demand Strategies to Make Demand More Inelastic Create unique offerings Change the package design Heighten buyer dependence Copyright Cengage Learning 2013 All Rights Reserved 17 Recession Value-Based Pricing Bundling or Unbundling Copyright Cengage Learning 2013 All Rights Reserved 18 Supplier Strategies During Recession Renegotiating contracts Offering help Keeping the pressure on Paring down suppliers Copyright Cengage Learning 2013 All Rights Reserved 19