Marketing chapter 14a arrival at the final price

STEP 4: SELECT AN APPROXIMATE PRICE LEVELDEMAND-ORIENTED PRICING APPROACHES LO1  Skimming Pricing  Penetration Pricing  Prestige Pricing  Price Lining 14-6... Slide 14-14• Cost-Ori

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LO1 Describe how to establish the

“approximate price level” using demand-oriented, cost-oriented, profit-oriented, and competition- oriented approaches.

Recognize the major factors considered in deriving a final list or quoted price from the approximate price level.

LO2

LEARNING OBJECTIVES (LO)

AFTER READING CHAPTER 14, YOU SHOULD BE ABLE TO:

14-2

LO3 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.

LO4

LEARNING OBJECTIVES (LO)

AFTER READING CHAPTER 14, YOU SHOULD BE ABLE TO:

14-3

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.

14-4

FIGURE 14-2 Four approaches for selecting

an approximate price level

14-5

STEP 4: SELECT AN APPROXIMATE PRICE LEVEL

DEMAND-ORIENTED PRICING APPROACHES

LO1

 Skimming

Pricing

 Penetration Pricing

 Prestige

Pricing

 Price Lining

14-6

FIGURE 14-3 Demand curves for two

demand-oriented pricing approaches

14-7

STEP 4: SELECT AN APPROXIMATE PRICE LEVEL

DEMAND-ORIENTED PRICING APPROACHES

Slide 14-12

Concept Check

1 What are the circumstances in pricing a

new product that might support skimming or penetration pricing?

A: A firm introducing a new product can

use either skimming pricing to set the

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

or penetration pricing to set a low initial price to appeal immediately to

the mass market.

Slide 14-13

Concept Check

2 What is odd-even pricing?

A: Odd-even pricing involves setting

prices a few dollars or cents under

an even number Psychologically,

a $499.99 price feels lower than

$500.00, even though the difference

is 1¢.

Slide 14-14

• Cost-Oriented Approaches

– Price is set by looking at the production

and marketing costs and then adding

enough to cover direct expenses,

overhead, and profit

STEP 4: SELECT AN APPROPRIATE PRICE LEVEL

• Cost-Plus Percentage-of-Cost Pricing

• Cost-Plus Fixed-Fee Pricing

– most common in B2B in service sector

• Markup on Cost

• Markup on Selling Price

Slide 14-14

• Cost-Oriented Approaches

 Standard Markup Pricing

STEP 4: SELECT AN APPROPRIATE PRICE LEVEL

• Markup on Cost

• Markup on Selling Price

What Is Markup?

● Markup is the dollar amount added to the product

cost to determine its selling price

● Markup is often expressed as a percentage

5-14 WHAT IS MARKUP?

$1.00 = cost to retailer

$1.00 = dollar markup

$2.00 = selling price

5-15 WHAT IS PERCENT MARKUP?

● It depends on whether you use

5-18 Example of Markup on Selling Price in

Channel of Distribution

STEP 4: SELECT AN APPROXIMATE PRICE LEVEL

PROFIT-ORIENTED PRICING APPROACHES

 Target Profit Pricing – setting an annual target

of a specific dollar volume of profit

Profit = Total revenue – Total Cost

= (P x Q) – [FC + (UVC x Q)]

STEP 4: SELECT AN APPROPRIATE PRICE LEVEL

 Target Return-On-Sales Pricing – setting a

price to achieve a profit that is a

specified percentage of sales volume

STEP 4: SELECT AN APPROPRIATE PRICE LEVEL

 Target Return-On-Investment Pricing – setting

a price to achieve an annual target return on investment

ROI = Net Profit after taxes / Investment

STEP 4: SELECT AN APPROPRIATE PRICE LEVEL

STEP 4: SELECT AN APPROXIMATE PRICE LEVEL

COMPETITION-ORIENTED PRICING APPROACHES

 Customary Pricing – setting a price that is dictated by tradition, standard channel of distribution

STEP 4: SELECT AN APPROXIMATE PRICE LEVEL

COMPETITION-ORIENTED PRICING APPROACHES

 Above-, At-, or Below-Market Pricing – setting market price based on subjective feel for

competitors’ price or market price as the

benchmark

STEP 4: SELECT AN APPROXIMATE PRICE LEVEL

COMPETITION-ORIENTED PRICING APPROACHES

 Loss-Leader Pricing – deliberately setting

price below its customary price, not to

increase sales, but to attract customers’ attention in hopes they will buy other

products as well

STEP 4: SELECT AN APPROXIMATE PRICE LEVEL

COMPETITION-ORIENTED PRICING APPROACHES

STEP 5: SET THE LIST

Slide 14-22

• One-Price versus Flexible-Price

Policy

 One-Price Policy (Fixed Pricing)

 Car dealers, “$1 Stores”

 Flexible-Price Policy (Dynamic Pricing) –

Setting different prices depending on

individual buyers and purchase situation

STEP 5: SET THE LIST OR

QUOTED PRICE

• Clickstream

• Viewed as discriminatory

STEP 5: SET THE LIST OR QUOTED PRICE

COMPANY, CUSTOMER, AND COMPETITIVE EFFECTS ON PRICING

FIGURE 14-5 Expected incremental revenue

from pricing and other marketing actions

must more than offset incremental costs to

achieve incremental profit

14-36

FIGURE 14-6 Three special adjustments to

list or quoted price include discounts,

allowances, and geographical adjustments

14-37

STEP 6: MAKE SPECIAL ADJUSTMENTS

TO THE LIST OR QUOTED PRICE

• Noncumulative Quantity Discounts

• Cumulative Quantity Discounts

14-38

STEP 6: MAKE SPECIAL ADJUSTMENTS

TO THE LIST OR QUOTED PRICE

STEP 6: MAKE SPECIAL ADJUSTMENTS

TO THE LIST OR QUOTED PRICE

STEP 6: MAKE SPECIAL ADJUSTMENTS

TO THE LIST OR QUOTED PRICE

GEOGRAPHICAL ADJUSTMENTS

LO3

 FOB Origin Pricing

 Uniform Delivered Pricing

FIGURE 14-C Example of basing-point

pricing

14-43

FIGURE 14-8 Several pricing practices are

affected by legal and regulatory restrictions,

which benefit both consumers and firms

14-44

STEP 6: MAKE SPECIAL ADJUSTMENTS

TO THE LIST OR QUOTED PRICE

LEGAL & REGULATORY ASPECTS OF PRICING

LO4

 Price Fixing

• Horizontal Price Fixing

• Vertical Price Fixing

• Rule of Reason

 Resale Price Maintenance

14-45

STEP 6: MAKE SPECIAL ADJUSTMENTS

TO THE LIST OR QUOTED PRICE

LEGAL & REGULATORY ASPECTS OF PRICING

LO4

 Price Discrimination

 Deceptive Pricing

14-46

FIGURE 14-9 Five most common deceptive

pricing practices

14-47

STEP 6: MAKE SPECIAL ADJUSTMENTS

TO THE LIST OR QUOTED PRICE

LEGAL & REGULATORY ASPECTS OF PRICING

LO4

 Geographical Pricing

 Predatory Pricing

14-48

Skimming Pricing

Skimming pricing is used when

introducing a new or innovative

product, and involves setting the

highest initial price that customers really desiring the product are

willing to pay

14-49

Penetration Pricing

Penetration pricing involves

setting a low initial price on a

new product to appeal

immediately to the mass market

14-50

Prestige Pricing

Prestige pricing involves setting

a high price so that quality- or

status-conscious consumers will

be attracted to the product and

buy it

14-51

Price Lining

Price lining involves setting the

price of a line of products at a

number of different specific

pricing points

14-52

Odd-Even Pricing

Odd-even pricing involves setting

prices a few dollars or cents under

an even number

14-53

Target Pricing

Target pricing consists of (1) estimating

the price that ultimate consumers would

be willing to pay for a product, (2) working

backward through markups taken by

retailers and wholesalers to determine

what price to charge wholesalers, and

then (3) deliberately adjusting the

composition and features of the product

to achieve the target price to consumers.

14-54

Bundle Pricing

Bundle pricing involves the

marketing of two or more products

in a single package price

14-55

Yield Management Pricing

Yield management pricing

involves the charging of different

prices to maximize revenue for

a set amount of capacity at any

given time

14-56

Standard Markup Pricing

Standard markup pricing

involves adding a fixed

percentage to the cost of all

items in a specific product class

14-57

Cost-Plus Pricing

Cost-plus pricing involves

summing the total unit cost of

providing a product or service

and adding a specific amount to

the cost to arrive at a price

14-58

Experience Curve Pricing

Experience curve pricing is a method

of pricing based on the learning effect,

which holds that the unit cost of many

products and services declines by

10 percent to 30 percent each time a

firm’s experience at producing and selling

them doubles, resulting in possible rapid

price reductions.

14-59

Target Profit Pricing

Target profit pricing involves

setting an annual target of a

specific dollar volume of profit

14-60

Target Return-on-Sales Pricing

Target return-on-sales pricing

involves setting a price to achieve

a profit that is a specified

percentage of the sales volume

14-61

Target Return-on-Investment Pricing

Target return-on-investment

pricing involves setting a price

to achieve an annual target

return-on-investment (ROI)

14-62

Customary Pricing

Customary pricing involves

pricing setting a price that is

Above-, At-, or Below-Market Pricing

Above-, at, or below-market

pricing involves setting a market

price for a product or product

class based on a subjective feel

for the competitors’ price or

market price as the benchmark

14-64

Loss-Leader Pricing

Loss-leader pricing involves

deliberately selling a product

below its customary price, not

to increase sales, but to attract

customers’ attention in hopes

that they will buy other products

as well

14-65

One-Price Policy

A one-price policy involves

setting one price for all buyers of

a product or service Also called

fixed pricing.

14-66

Flexible Price Policy

A flexible price policy involves

setting different prices for

products and services depending

on individual buyers and purchase

situations Also called dynamic

pricing.

14-67

Product Line Pricing

Product line pricing involves

the setting of prices for all items

in a product line to cover the total

cost and produce a profit for the

complete line, not necessarily for

each item

14-68

Price War

A price war involves successive

price cutting by competitors to

increase or maintain their unit

sales or market share

14-69

Quantity Discounts

Quantity discounts are

reductions in unit costs for a

larger order

14-70

Promotional Allowances

Promotional allowances are

cash payments or extra amount

of “free goods” awarded sellers

in the channel of distribution for

undertaking certain advertising

or selling activities to promote a

product

14-71

Everyday Low Pricing (EDLP)

Everyday low pricing (EDLP)

is the practice of replacing

promotional allowances with

lower manufacturer list prices

14-72

FOB Origin Pricing

FOB origin pricing is the “free on

board” (FOB) price the seller quotes

that includes only the cost of loading

the product onto the vehicle and

specifies the name of the location

where the loading is to occur (seller’s

factory or warehouse).

14-73

Uniform Delivered Pricing

Uniform delivered pricing is

the price that the seller quotes

includes all transportation costs

14-74

Basing-Point Pricing

Basing-point pricing involves

selecting one or more

geographical locations (basing

point) from which the list price for

products plus freight expenses

are charged to the buyer

14-75

Price Fixing

Price fixing involves a conspiracy

among firms to set prices for a

product

14-76

Price Discrimination

Price discrimination is the

practice of charging different

prices to different buyers for

goods of like grade and quality

14-77

Predatory Pricing

Predatory pricing is the practice

of charging a very low price for a

product with the intent of driving

competitors out of business

14-78