Chapter 14 Pricing Strategies and Determination Harcourt, Inc.

chapter 14

Pricing Strategies and Determination

Harcourt, Inc.

Dr. Rosenbloom

ObjectivesObjectives

Explain pricing factorsExplain pricing factors Compare and contrast cost-based Compare and contrast cost-based

pricing methodspricing methods Identify strategic concerns important Identify strategic concerns important

in pricing decisionsin pricing decisions

Dr. Rosenbloom

ObjectivesObjectives

Evaluate reasons why base prices Evaluate reasons why base prices change over timechange over time

Understand new technology Understand new technology implications for pricing behavior, implications for pricing behavior, especially price customizationespecially price customization

Dr. Rosenbloom

What is Price?What is Price?

Price is the sacrifice that one party Price is the sacrifice that one party pays another to receive something pays another to receive something in exchangein exchange

For our case, price is a monetary For our case, price is a monetary value charged by an organization value charged by an organization for the sales of its productsfor the sales of its products

Dr. Rosenbloom

PricingPricing

The Martin AgencyThe Martin Agency

Fairfield InnsFairfield Inns

http://www.martinagency.com/

Dr. Rosenbloom

PricingPricing

Hal Riney and Hal Riney and PartnersPartners

Alamo Car RentalAlamo Car Rental

Dr. Rosenbloom

Determining the Base PriceDetermining the Base Price

Cost-Plus PricingCost-Plus Pricing Easiest, Often misleadingEasiest, Often misleading A simple allocation of fixed and A simple allocation of fixed and

variable costsvariable costs Standard mark-up - a standard profit Standard mark-up - a standard profit

marginmargin Target return pricing - a standard Target return pricing - a standard

amount of profit per itemamount of profit per item Ignores demand (price sensitivity) and Ignores demand (price sensitivity) and

fails to account for competitionfails to account for competition

Dr. Rosenbloom


Demand PricingDemand Pricing Based on the elasticity of demandBased on the elasticity of demand

• Higher prices are favored with inelastic– Price increases offset volume losses

• Lower prices are favored with elastic– Volume increases offset price reductions

• Consumers are indifferent with unitary demand

Breakeven analysisBreakeven analysis Demand schedulesDemand schedules

Dr. Rosenbloom


Demand PricingDemand Pricing Profit-MaximizationProfit-Maximization

• Calculate the profit at each price point on a demand curve and choose the highest

• In other words, which price produces the highest total contribution

• Verified by observing marginal revenue and cost figures

Dr. Rosenbloom


Demand PricingDemand Pricing Where does demand information Where does demand information

come from?come from?• Analytic modeling• Experiments• Customer surveys• Managerial judgement

Dr. Rosenbloom


Competitive Strategy Positioning ContinuumCompetitive Strategy Positioning Continuumpriceprice uniqueunique

Low cost focus

Differentiation focus

Strategic Pricing Strategic Pricing ConcernsConcerns

Legal Legal ConcernsConcerns

Ethical Ethical ConcernsConcerns

Dr. Rosenbloom


ObjectivesObjectives Goal-setting/Objective-settingGoal-setting/Objective-setting Pricing to achieve a target ROIPricing to achieve a target ROI Pricing to stabilize price and marginPricing to stabilize price and margin Pricing to reach a target market sharePricing to reach a target market share Pricing to meet or prevent competitionPricing to meet or prevent competition Pricing for profit maximizationPricing for profit maximization Pricing for survivalPricing for survival




Dr. Rosenbloom

Skimming Pricing Strategy


New product pricingNew product pricing Skimming Vs. PenetrationSkimming Vs. Penetration

Penetration Pricing Strategy

IntroductionGrowth

Maturity Decline

Strategic Strategic Pricing Pricing

ConcernsConcerns

Legal ConcernsLegal ConcernsEthical Ethical

ConcernsConcerns

Dr. Rosenbloom


High initial price for quick ROIHigh initial price for quick ROI Inelastic demandInelastic demand Price insensitivity by the marketPrice insensitivity by the market

Skimming Pricing

Strategy

IntroductionGrowth

Maturity Decline


ConcernsConcerns


ConcernsConcerns

Penetration Pricing Strategy

Dr. Rosenbloom

Penetration Pricing

Strategy


Low initial price with elastic demand Low initial price with elastic demand Volume for lower production costsVolume for lower production costs Imminent competition Imminent competition

IntroductionGrowth

Maturity Decline


ConcernsConcerns


ConcernsConcerns

Skimming Pricing Strategy

Dr. Rosenbloom


Price-Quality judgementsPrice-Quality judgements Customers uncertain about brand Customers uncertain about brand

quality prior to purchase look to quality prior to purchase look to priceprice

Customers look to price in high Customers look to price in high risk purchasesrisk purchases




Dr. Rosenbloom


Price FixingPrice Fixing Violation of Sherman Anti-Violation of Sherman Anti-

Trust ActTrust Act Conspiring to restrain tradeConspiring to restrain trade


ConcernsConcerns Legal ConcernsLegal ConcernsEthical Ethical

ConcernsConcerns

http://www.ftc.gov/

Dr. Rosenbloom


Price DiscriminationPrice Discrimination Violation of Robinson-Patman ActViolation of Robinson-Patman Act Illegal only when business to businessIllegal only when business to business

• Exception for cost justification• Exception for competitor price matching• Exception for no apparent harm to

competition



ConcernsConcerns

http://www.ftc.gov/

Dr. Rosenbloom


Resale Price MaintenanceResale Price Maintenance When a manufacturer and retailer agree on When a manufacturer and retailer agree on

a minimum price to be charged to a minimum price to be charged to consumers at retailconsumers at retail• Manufacturers can set suggested prices

(MSRP)• Legal to stop selling to retailers who ignore

MSRP



ConcernsConcerns

http://www.ftc.gov/

Dr. Rosenbloom


Predatory PricingPredatory Pricing Aggressive pricing to drive out Aggressive pricing to drive out

newer, smaller rivalsnewer, smaller rivals After removal of rival, prices are After removal of rival, prices are

raised againraised again



ConcernsConcerns

http://www.ftc.gov/

Dr. Rosenbloom


Exaggerated Comparative Price Exaggerated Comparative Price AdvertisingAdvertising Using comparison prices of dubious Using comparison prices of dubious

validityvalidity Product introduced at artificially Product introduced at artificially

high prices for a short time then high prices for a short time then dropped to a new low long-term dropped to a new low long-term priceprice



ConcernsConcerns

http://www.ftc.gov/

Dr. Rosenbloom


Price gouging lawsPrice gouging laws ATM fee practicesATM fee practices Raising prices for necessities Raising prices for necessities

in disaster areasin disaster areas

Strategic Pricing Strategic Pricing ConcernsConcerns Legal ConcernsLegal Concerns

Ethical ConcernsEthical Concerns

Dr. Rosenbloom

Adjustments to Base PricesAdjustments to Base Prices

Reasons base prices change over Reasons base prices change over time:time: Variation in objectives over product Variation in objectives over product

life cyclelife cycle• Introductory low prices, higher

decline prices Competitive price movesCompetitive price moves

• Competitive forces dictate modification of pricing

• Rubbermaid, the U.S. Steel Industry

http://www.rubbermaid.com/

Dr. Rosenbloom

Price Flexing Discounts/AllowancesPrice Flexing Discounts/Allowances

Reasons base prices change over time:Reasons base prices change over time: Price Flexing - Discounts/AllowancesPrice Flexing - Discounts/Allowances

To Consumer To Trade

Trade-in AllowancesTrade-in Allowances

Cash DiscountsCash Discounts

RebatesRebates

Functional Or TradeFunctional Or Trade

SeasonalSeasonal

QuantityQuantity

CashCash

Sales PromotionSales Promotion

Dr. Rosenbloom

Trade-in Allowances

Cash Discounts

Rebates

Used to Used to encourage encourage consumers to consumers to upgrade to newer upgrade to newer or more or more expensive expensive products products

To Consumer


Dr. Rosenbloom

Seasonal or age-Seasonal or age-based discounts based discounts used to encourage used to encourage purchasespurchases

Trade-in Allowances

Cash Discounts

Rebates

To Consumer


Dr. Rosenbloom

After the After the purchase payment purchase payment made to the made to the consumer by the consumer by the producerproducer

Trade-in Allowances

Cash Discounts

Rebates

To Consumer


Dr. Rosenbloom

SeasonalSeasonal

QuantityQuantity

CashCash


Compensate the Compensate the trade for functions trade for functions performed:performed:

Buying & Selling Buying & Selling TransportationTransportation Storage Storage FinancingFinancing Risk-takingRisk-taking Providing InformationProviding Information Standardizing & GradingStandardizing & Grading


To Trade


Dr. Rosenbloom

Permits seasonal Permits seasonal marketers to marketers to maintain steady maintain steady production and to production and to sustain sustain operations in out-operations in out-of-season lullsof-season lulls

To Trade

SeasonalSeasonal

QuantityQuantity

CashCash




Dr. Rosenbloom

Pric

eP

rice

WinterWinterSpring Spring Summer Summer FallFall

To Trade

SeasonalSeasonal

QuantityQuantity

CashCash




Dr. Rosenbloom

Induce larger-Induce larger-quantity purchases quantity purchases and to reward and to reward customers for customers for making fewer making fewer purchases but purchases but purchasing in larger purchasing in larger quantitiesquantities

To Trade

SeasonalSeasonal

QuantityQuantity

CashCash




Dr. Rosenbloom

Encourage prompt Encourage prompt payment from payment from customers. Invoice customers. Invoice includes payment includes payment terms and period of terms and period of time that the cash time that the cash discount is availablediscount is available

To Trade

SeasonalSeasonal

QuantityQuantity

CashCash




Dr. Rosenbloom

Two percent off the Two percent off the total invoice price if total invoice price if paid within 10 days paid within 10 days of the invoice date. of the invoice date. Otherwise the total Otherwise the total invoice price is due invoice price is due in 30 daysin 30 days

2/10, Net 30

To Trade

SeasonalSeasonal

QuantityQuantity

CashCash




Dr. Rosenbloom

Used by producers Used by producers to encourage to encourage greater purchases greater purchases or used to induce or used to induce retailers to retailers to provide shelf or provide shelf or display spacedisplay space

To Trade

SeasonalSeasonal

QuantityQuantity

CashCash




Dr. Rosenbloom

Off-Invoice Off-Invoice AllowancesAllowances

Bill-Back AllowancesBill-Back Allowances

Stocking AllowancesStocking Allowances

To Trade

SeasonalSeasonal

QuantityQuantity

CashCash




Dr. Rosenbloom

Other Forms of Price FlexingOther Forms of Price Flexing

Price shadingPrice shading Salesperson reduces Salesperson reduces

base price because of the base price because of the need to secure a need to secure a large/important clientlarge/important client

Price customizingPrice customizing New technology allows New technology allows

for transaction-by-for transaction-by-transaction transaction customizationcustomization

Dr. Rosenbloom


Price promotionPrice promotion Sales, incentive pricingSales, incentive pricing Retailers began forward-Retailers began forward-

buying or diverting productbuying or diverting product Every Day Low Pricing Every Day Low Pricing

(EDLP) is reducing the use (EDLP) is reducing the use of price promotionof price promotion

CouponingCouponing Free-standing inserts (in Free-standing inserts (in

newspapers)newspapers) Point of purchasePoint of purchase

Dr. Rosenbloom


Pricing for different segmentsPricing for different segments Geographic segmentsGeographic segments

• Different prices in different zones Usage segmentsUsage segments

• Different prices for high volume users Demographic segmentsDemographic segments

• Different prices for students, children, etc. Time segmentsTime segments

• On- and off-season rates

Dr. Rosenbloom

Geographic Pricing PoliciesGeographic Pricing Policies

FOBFOB

PricingPricing

FOBFOB

PricingPricing

Uniform Uniform Delivered Delivered

PricingPricing


PricingPricing

ZoneZone

PricingPricing

ZoneZone

PricingPricing

Basing-PointBasing-Point

PricingPricing


PricingPricing

Dr. Rosenbloom


FOBFOB

PricingPricing

FOBFOB

PricingPricingUniform Uniform

Delivered Delivered PricingPricing


PricingPricing

ZoneZone

PricingPricing

ZoneZone

PricingPricing


PricingPricing


PricingPricing

Using freight absorption pricing (FOB - Free Using freight absorption pricing (FOB - Free On Board) the seller pays or absorbs the On Board) the seller pays or absorbs the transportation chargestransportation charges

Dr. Rosenbloom


FOBFOB

PricingPricing

FOBFOB




PricingPricing

ZoneZone

PricingPricing

ZoneZone

PricingPricing


PricingPricing


PricingPricing

Using zone pricing all consumers in the same Using zone pricing all consumers in the same zone pay the same transportation chargezone pay the same transportation charge

Dr. Rosenbloom


FOBFOB

PricingPricing

FOBFOB




PricingPricing

ZoneZone

PricingPricing

ZoneZone

PricingPricing


PricingPricing


PricingPricing

Using basing-point pricing, all freight costs Using basing-point pricing, all freight costs are priced as if they originated from the same are priced as if they originated from the same basing pointbasing point

Dr. Rosenbloom


FOBFOB

PricingPricing

FOBFOB




PricingPricing

ZoneZone

PricingPricing

ZoneZone

PricingPricing


PricingPricing


PricingPricing

Using uniform delivered pricing all consumers Using uniform delivered pricing all consumers pay the same transportation charges (average pay the same transportation charges (average shipping expense to all customers)shipping expense to all customers)

Dr. Rosenbloom

PrestigePrestigePricingPricing

Pricing PoliciesPricing Policies

Odd-EvenOdd-Even Pricing Pricing

Loss-LeaderLoss-LeaderPricingPricing

Product LineProduct Line Pricing Pricing

Dr. Rosenbloom





Pricing at relatively high levels so as to Pricing at relatively high levels so as to convey an image of high quality or convey an image of high quality or exclusivityexclusivity


Dr. Rosenbloom




Pricing policy which offers products at Pricing policy which offers products at prices below or near cost to attract prices below or near cost to attract consumers from competitors’ storesconsumers from competitors’ stores



Dr. Rosenbloom






Price lining is producing or marketing multiple Price lining is producing or marketing multiple products at different price pointsproducts at different price points

Bundling is marketing two or more products in a Bundling is marketing two or more products in a single package for a special pricesingle package for a special price

Dr. Rosenbloom





Odd pricing refers to a price ending with an Odd pricing refers to a price ending with an odd number just under a round numberodd number just under a round number

Even pricing is used to convey high qualityEven pricing is used to convey high quality


Chapter 14 Pricing Strategies and Determination Harcourt, Inc.

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Transcript of Chapter 14 Pricing Strategies and Determination Harcourt, Inc.