Chapter 20 outline

Chapter 20 outline - Chapter 20 Setting the Right Price...

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Chapter 20- Setting the Right Price Setting the right price on a product is a 4-step process : 1) Establish pricing goals o Profit-oriented, sales-oriented, or status quo 2) Estimate demand, costs, and profits 3) Choose a price strategy to help determine a base price o Price strategy: a basic, long-term pricing framework, that establishes the initial price for a product & the intended direction for price movements over the product life cycle Sets a competitive price in a specific market segment, based on a well0defined positioning strategy o Price skimming: pricing policy whereby a firm charges a high introductory price, often coupled with heavy promotion Situations when price skimming is successful: inelastic demand, unique advantages/superior, legal protection of product, technological breakthrough, blocked entry to competitors As long as demand is greater than supply, skimming is an attainable strategy Skimming strategy encourages competitors to enter the market o Penetration pricing: firm charges a relatively low price for a product initially as a way to reach the mass market Advantages: discourages or blocks competition from market entry, boosts sales and market share Disadvantages: selling large volumes at low prices may lengthen time with financial losses, strategy to gain market share may fail Tends to be effective in a price-sensitive market (ex: WalMart) o Status quo pricing: charging a price identical to or very close to competition’s price Advantages: simplicity, safest route to long-term survival for small firms Disadvantages: strategy may ignore demand and/or cost 4) Fine-tune the base price with pricing tactics Results lead to the right price The legality and ethics of price strategy Unfair trade practice acts: laws that prohibit wholesalers & retailers from selling below cost o Bait pricing is considered deceptive by FTC Price fixing: an agreement between 2 or more firms on the price they will charge for a product Price discrimination: the Robinson-Patman Act of 1936 o 6 elements to prove a violation: There must be price discrimination (charging different prices to different customers for the same product) Transaction must occur in interstate commerce
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Seller must discriminate by price among 2 or more purchasers Products sold must be commodities or tangible goods Products sold must be of like grade and quality There must be significant competitive injury o 3 defenses for the seller charged with price discrimination: Cost—prices represent manufacturing or quantity discount savings Market conditions—price variations justified if designed to meet fluid product or market conditions Competition—reduction in price may be necessary to stay even with competition Predatory pricing: the practice of charging a very low price for a product with the intent of driving competitors out of business or out of a market o Average variable cost rule used to determine if predatory (predatory
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This note was uploaded on 03/14/2011 for the course BMGT 350 taught by Professor Boyd during the Fall '08 term at Maryland.

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Chapter 20 outline - Chapter 20 Setting the Right Price...

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