Fundamental Of MarketingMKT243

Chapter 12Setting the Right Price

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Slide Outline• How to set a price on a product• The legality and ethics of price strategy• Tactics for fine tuning the base price• Product line pricing• Pricing during inflation and recession• Price adjustment strategy

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The 4-step of Setting the Right Price

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Establishing Pricing Goals

Estimate Demand, Cost and Profits

Choose a price strategy

Fine tune the base priceWith pricing tactics

Result lead to The right price

The 4-step of Setting the Right Price

1. Establishing pricing goals-Setting specific goals (objective: Profit-oriented, Sales-oriented or Status quo)-All pricing objectives have trade-offs that managers must weight.

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The 4-step of Setting the Right Price

2. Estimate demand, costs, and profit-Estimating total revenue at a variety level of prices, determine, determine costs for each price, then estimate how much profit and how much market share can be earned.-3 basic approaches of price strategy

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The 4-step of Setting the Right Price

3. Choose a Price Strategy-Price strategy-A basic, long-term pricing framework, which established the initial price for a product and the intended direction for price movements over the product life cycle-Setting a competitive price in a specific market segment

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The 4-step of Setting the Right Price

a) Price SkimmingMarket-skimming pricing is a strategy with high initial prices to “skim”

revenue layers from the marketThe company charges a high introductory price due to the heavy promotionAlso known as “market-plus” approach

Provided that:• Product quality and image must support the price• Buyers must want the product at the price• Costs of producing the product in small volume should not cancel the

advantage of higher prices• Competitors should not be able to enter the market easily

Pricing Strategies

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The 4-step of Setting the Right Price

b) Penetration PricingMarket-penetration pricing sets a low initial price in order to

penetrate the market quickly and deeply to attract a large number of buyers quickly to gain market share

The company charges a relatively low introductory price for a product to reach a mass market and to attract large number of buyers

Provided that:• Price sensitive market• Inverse relationship of production and distribution cost to

sales growth• Low prices must keep competition out of the market

Pricing Strategies

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The 4-step of Setting the Right Price

c) Status Quo PricingStatus Quo pricing is charging the customer with

price that are identical to every close competition’s price.

Also know as meeting the competitor or Going Rate Pricing

Advantages-SimpleDisadvantages-This strategy may ignore demand or

cost or both

Pricing Strategies

Pricing Objectives vs. Pricing Strategy

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Status Quo Oriented Status Quo Oriented

Profit OrientedProfit Oriented

Sales OrientedSales Oriented

Status Quo Pricing Status Quo Pricing

Price SkimmingPrice Skimming

Penetration PricingPenetration Pricing

OBJECTIVES

STRATEGIES

The Legality and Ethics of Price Strategy

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Unfair Trade PracticesUnfair Trade Practices

Price FixingPrice Fixing

Price DiscriminationPrice Discrimination

Predatory PricingPredatory Pricing

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Legality & Ethics of Price Strategy

i. Unfair trade practices-‘Unfair trade practice acts’ prohibit wholesaler and retailers from selling a product below cost-Reason-to protect small local firms from giant company.

ii. Pricing Fixing-An agreement between 2 or more firms on the price they will charge for a product

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Legality & Ethics of Price Strategy

iii. Price Discrimination-Offering different prices buyers and giving different supplementary services for different buyers.

iv. Predatory PricingA tactics that charging a very low price for a product with the intent of driving competitors out of business or out of a market

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Robinson-Patman Act Defenses for seller to Charge Price

Discrimination

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Seller Defenses Seller Defenses Seller Defenses Seller Defenses

CostCost MarketConditions

MarketConditions CompetitionCompetitionCostCost

The 4-step of Setting the Right Price

4. Fine-tune the base price with pricing tactics-Fine tuning techniques are short-run approaches to adjust the base price for competition, to cater unique demand and meet promotional and positioning goals.-Include various sorts of discount, geographic pricing and other pricing tactics

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Tactics for Fine-Tuning the Base Price

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Special pricing tactics Special pricing tactics

Discounts, Allowances, Rebates & Value-based pricing

Discounts, Allowances, Rebates & Value-based pricing

Geographic pricingGeographic pricing

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Discount, Allowances, rebate and Value Based Pricing

• Quantity discount• Cash Discount• Functional discount/ trade discount• Seasonal discount• Promotional allowance/ trade allowances• Rebates• Zero percent financing• Value base pricing

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Geographic Pricing

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Basing-point pricing

Basing-point pricing

Freight absorptionpricing

Freight absorptionpricing

Zone pricingZone pricing

Uniform delivered pricing

Uniform delivered pricing

FOB origin pricingFOB origin pricing

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Special Pricing Tactics

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Single-Price TacticSingle-Price Tactic

Flexible PricingFlexible Pricing

Professional ServicesProfessional Services

Price LiningPrice Lining

Leader Pricing Leader Pricing

Bait PricingBait Pricing

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Odd-Even PricingOdd-Even Pricing

BundlingBundling

(Unbundling)(Unbundling)

Two-Part PricingTwo-Part Pricing

Pricing During Difficult Economic Times

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Demand-Oriented TacticsDemand-Oriented Tactics

Cost-Oriented TacticsCost-Oriented Tactics

High InflationHigh InflationHigh InflationHigh Inflation

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Supplier Strategies During Recession

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Renegotiating contractsRenegotiating contracts

Offering helpOffering help

Keeping the pressure onKeeping the pressure on

Paring down suppliersParing down suppliers

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