copyright 2000 prentice hall13-1 chapter 13 pricing methods

Copyright 2000 Prentice Hall13-1

Chapter 13

Pricing Methods


Steps in Price Planning (Fig. 13.1)


Pricing Strategies (Fig. 13.2)


Price-Floor Pricing• Method that considers both costs and what can be done to assure that a plant can operate at its capacity.

•Sell some products at full price that covers all costs.

•Sell remaining products at price that covers just average variable costs.

Price-Floor Pricing• Method that considers both costs and what can be done to assure that a plant can operate at its capacity.

•Sell some products at full price that covers all costs.

•Sell remaining products at price that covers just average variable costs.

• Advantages: simple to calculate, and relatively safe.

• Disadvantages: doesn’t consider nature of the target market, demand, competition, the product’s life cycle, & product’s image.

• Advantages: simple to calculate, and relatively safe.

• Disadvantages: doesn’t consider nature of the target market, demand, competition, the product’s life cycle, & product’s image.

Cost-Plus Pricing

•Seller totals all the costs for the product and then adds the desired profit per unit.•Examples:

•Straight mark-up pricing 1. Estimate cost per unit of output, then 2. Add a markup

Cost-Plus Pricing

•Seller totals all the costs for the product and then adds the desired profit per unit.•Examples:

•Straight mark-up pricing 1. Estimate cost per unit of output, then 2. Add a markup

Pricing Strategies Based on Cost


•Starts with a Customer-Pleasing Price and Works Backward to Costs.

•Extends Demand-Backward Pricing from the Consumer Back Through the Distribution Channel to the Manufacturer.

Demand-Backward Pricing

Chain-Markup Pricing

Pricing Strategies Based on Demand

Selling Price is Based on an Estimate of Volume or Quantity that a Firm Can Sell at Different Prices.


Pricing Strategies Based on the Competition

Firms may price their products:– at the same or similar level as the

competition,– below the competition,– above the competition.

A price leadership strategy follows the industry leader by setting the same or similar prices.


Pricing Strategies Based on Customers’ Needs

Strategies that focus on keeping customers for the long term.

May use a cost-of-ownership strategy:– price consumers pay for a product, plus the cost of

maintaining and using the product, less its resale (or salvage) value.

May use a value pricing or every day low pricing strategy:– firm sets prices that provide ultimate value or

price/benefit ratio to customers.


New Product Pricing: Reasons for Using a Skimming Price

Skimming Price - Charging a High, Premium

Price

e.g. Strata Golf Balls

Skimming Price - Charging a High, Premium

Price

e.g. Strata Golf Balls

Product Benefits that Customers Want at Any Cost.

Product Benefits that Customers Want at Any Cost.

Little Chance that Competitors Can Enter the Market Quickly.

Little Chance that Competitors Can Enter the Market Quickly.

Several Customer Segments with Different Levels of Price Sensitivity.

Several Customer Segments with Different Levels of Price Sensitivity.


Penetration PricingA New Product is Introduced at a Very Low Price

i.e. Intel’s Pentium chip

Penetration PricingA New Product is Introduced at a Very Low Price

i.e. Intel’s Pentium chip

Discourages Competitors

FromEntering the

Market

PioneeringBrand

Discourages Competitors

FromEntering the

Market

PioneeringBrand

New Product Pricing: Reasons for Using a Penetration Price

Low Price Encourages

Demand and Salesin the Early Stages

of the Product Life

Cycle


Trial Pricing Pricing a new product low for a limited period

of time in order to lower the risk for a customer.

In trial pricing, the idea is to:– win customer acceptance first by offering a

low price, then– make profits later as buyers are converted to

regular-priced customers. Example: CA-Simply Money, trial price $7.00,

regular-priced $69.95.


Pricing Tactics (Fig. 13.3)


Pricing Tactics for Individual Products

Two-Part PricingTwo-Part Pricing– Two separate types of

payment required to purchase the product.

– e.g. Cell phone companies charge a monthly fee + per minute fees.

Payment PricingPayment Pricing– Seeks to make the

consumer think the price is ‘doable”.

– e.g. Three payments of $39.99 each.

– Monthly lease payments on a car.


Pricing Tactics for Multiple Products

Price BundlingPrice Bundling– Selling two or more

goods or services as a single package for one price.

– e.g. Season music tickets for a single price, computer with a monitor, keyboard, and software.

Captive PricingCaptive Pricing– Pricing tactic a firm

uses when it has two products that work only when used together.

– Sells one at a very low-price (razor), and make a profit on second high-margin item (blades).


Geographic Pricing

F.O.B. PricingF.O.B. PricingF.O.B. Origin: Customer PaysF.O.B. Delivered: Seller Pays

F.O.B. PricingF.O.B. PricingF.O.B. Origin: Customer PaysF.O.B. Delivered: Seller Pays

Zone PricingZone PricingCustomers in Different GeographicZones Pay Different Rates. e.g. UPS

Zone PricingZone PricingCustomers in Different GeographicZones Pay Different Rates. e.g. UPS

Freight Absorption PricingSeller Takes on Part or All of the

Cost of Shipping

Freight Absorption PricingSeller Takes on Part or All of the

Cost of Shipping

Uniform Delivered PricingAverage Shipping Cost is

Added to Price for all Customers

Uniform Delivered PricingAverage Shipping Cost is

Added to Price for all Customers

How Firms Handle the Cost of Shipping ProductsHow Firms Handle the Cost of Shipping Products


Discounting for Members of the Channel

Trade or Functional Discounts

Quantity Discounts

CashDiscounts

SeasonalDiscounts


Characteristics of

E-Commerce

Sellers OfferCustomized

Deals to Buyers

Sellers OfferCustomized

Deals to Buyers

Buyers MayComparison

Shop

Buyers MayComparison

Shop

Sellers GatherData About

Buying Habits

Sellers GatherData About

Buying Habits

Price is Used asa Competitive

Strategy

Price is Used asa Competitive

Strategy

Pricing With Electronic Commerce


Internal ReferencePrices

Internal ReferencePrices

Buyers’ PricingExpectations

Buyers’ PricingExpectations

Price-Quality Inferences

Price-Quality Inferences

Psychological Issues in Pricing


Psychological Pricing Strategies

Odd-Even Pricing– Marketers assume there is a psychological

response to odd prices that differs from the responses to even prices.

– $1.99 vs $2.00 Price Lining

– Similar items in a product line sell at different prices, called price points.

– Refrigerator prices: $400, $600, $800, $1,000.


Deceptive Pricing Practices

Bait-and-Switch

PriceFixing

Horizontal and VerticalPrice Fixing

PriceFixing

Horizontal and VerticalPrice Fixing

Unfair SalesActs

Loss Leader Pricing

Unfair SalesActs

Loss Leader Pricing

Price Discrimination

Robinson-Patman Act

Price Discrimination

Robinson-Patman Act

Legal & Ethical Considerations in Pricing


Chapter Summary

Understand key pricing strategies. Explain pricing tactics for individual

and multiple products. Describe the important

psychological aspects of pricing. Understand some of the legal and

ethical considerations in pricing.

copyright 2000 prentice hall13-1 chapter 13 pricing methods

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