Chapter 20 ♦ Setting the Right Price 20-1
CHAPTER 20 Setting the Right Price
CHAPTER FEATURES
Chapter Features
Key Points
✓ Marketing & You
Students are given a survey to determine their price sensitivity.
✓ Customer Experience
The Brazilian Free Sample Club emulates the same sort of idea used
✓ Application Exercise
Students solve markup problem centered on the price of bananas.
✓ Case Study
Black Friday sales have become part of American holiday tradtion.
This case examines the pricing strategies of Gap and Old Navy and
the psychology of consumer deal shopping.
USING THIS MANUAL
Chapter twenty includes five learning outcomes that help students become more familiar with setting the right price. The
high enough to be prohibitively expensive for charities and
impoverished towns.
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LEARNING OUTCOMES
1 Describe the procedure for setting the right price
The process of setting the right price on a product involves four major steps: (1) establishing pricing goals; (2) estimating
2 Identify the legal and ethical constraints on pricing decisions
Government regulation helps monitor five major areas of pricing: unfair trade practices, price fixing, resale price
3 Explain how discounts, geographic pricing, and other special pricing tactics can be
used to fine-tune the base price
Several techniques enable marketing managers to adjust prices within a general range in response to changes in
competition, government regulation, consumer demand, and promotional and positioning goals. Techniques for fine–
tuning a price can be divided into three main categories: discounts, allowances, rebates and value pricing; geographic
pricing; and other pricing tactics.
4 Discuss product line pricing
Product line pricing maximizes profits for an entire product line. When setting product line prices, marketing managers
determine what type of relationship exists among the products in the line: complementary, substitute, or neutral.
Managers also consider joint (shared) costs among products in the same line.
5 Describe the role of pricing during periods of inflation and recession
Marketing managers employ cost-oriented and demand-oriented tactics during periods of economic inflation. Cost–
oriented tactics consist of dropping products with a low profit margin, using delayed-quotation pricing and escalator
Chapter 20 ♦ Setting the Right Price 20-3
CHAPTER OUTLINE
1 Describe the procedure for setting the right price
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How to Set a Price on a
Product or Service
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Establishing Pricing Goals
I. How to Set a Price on a Product or Service
Setting the right price on a product is a four-step process:
o Establish pricing goals.
The first step in setting a price is to establish pricing goals, which may be
profit-oriented, sales-oriented, or status quo. Pricing goals are derived from
the firm’s overall objectives.
B. Estimate Demand, Costs, and Profits
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Choosing a Price Strategy
Review Question 1.3
C. Choose a Price Strategy
1. A price strategy defines the initial price and gives direction for price
movements over the product life cycle. It is a long-term pricing
framework which establishes the initial price for a product and the
intended direction for price movements over the product life cycle.
2. Three basic policies for setting a price on a new good or service are
price skimming, penetration pricing, and status quo pricing.
a. Price skimming is a pricing policy whereby a firm charges a
high introductory price, often coupled with heavy promotion. As
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Review Question 1.1
block entry into the market by competitors, because they cannot
Penetration pricing is designed to capture a large market share,
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Status Quo Pricing
Review Questions 1.2
c. Status quo pricing means maintaining existing prices or simply
meeting the competition. Sometimes this policy can be the safest
route to long-term survival if the firm is comparatively small.
Customer Experience
You can have this for only $0.00
2 Identify the legal and ethical constraints on pricing
decisions
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The Legality and Ethics
of Price Strategy
II. The Legality and Ethics of Price Strategy
A. Unfair Trade Practices
In over half the states, unfair trade practice acts prohibit wholesalers and
B. Price Fixing
Price fixing is an agreement between two or more firms on the price they
will charge for a product.
1. Price fixing is in violation of the Federal Trade Commission Act and
the Sherman Act.
2. Price fixing is illegal per se; that is, it is illegal no matter how
reasonable or beneficial the results may be.
a. Resale Price Maintenance
Resale price maintenance is the practice whereby a manufacturer
Chapter 20 ♦ Setting the Right Price 20-5
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Price Discrimination
Review Question 2.1
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Predatory Pricing
D. Price Discrimination
Price discrimination, the practice of charging different prices to different
customers for the same product, is prohibited by the 1936 Robinson-Patman
Act.
Six elements are needed for a violation of the Robinson-Patman Act to
occur:
1. There must be price discrimination.
There are three possible defenses for the seller charged with price
discrimination:
1. Accounting for cost differential
E. 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 or out of a market.
Once competitors have been driven out, the firm raises its prices.
1. This practice is illegal under the Sherman Act and the Federal Trade
Commission Act.
3 Explain how discounts, geographic pricing, and other special
pricing tactics can be used to fine-tune the base price
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Tactics for Fine-Tuning
III. Tactics for Fine-Tuning the Base Price
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Rebates, and Value
Pricing
quantity discount, the most common form of discount.
1) A cumulative quantity discount, a deduction from list price
that applies to the buyer’s total purchases made during a
b. A cash discount is a price reduction offered to a consumer,
industrial user, or marketing intermediary in return for prompt
payment of a bill. It saves the seller carrying costs and billing
expenses, and it reduces the risk of bad debt.
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Value-based Pricing
e. A promotional allowance (trade allowance) is a payment to a
dealer for promoting the manufacturer’s products. It is both a
pricing tool and a promotional device.
f. A rebate is a cash refund given for the purchase of a product
during a specified period. A rebate is a temporary inducement
that can be taken away without altering the basic price structure.
1. Value-based pricing is a pricing strategy that has grown out of the
quality movement. Since the firm is customer driven, it starts with the
customer, considers the competition, and then determines the
appropriate price.
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Geographic Pricing
B. Geographic Pricing
a. FOB origin pricing, also called FOB factory or FOB shipping
point pricing, is a pricing tactic that requires the purchaser to
absorb the freight costs from the shipping point. FOB means the
goods are placed “free on board” a carrier.
d. In freight absorption pricing, the seller pays all or part of the
actual freight charges and does not pass them on to the
purchaser.
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Other Pricing Tactics
Review Question 3.5
C. Other Pricing Tactics
Other pricing tactics are used to stimulate demand for specific products, to
increase store patronage, and to offer a wider variety of merchandise at a
specific price point.
1. A merchant using a single-price tactic offers all goods and services at
2. If a trade-in is involved, the customer must negotiate two prices, one
for the new product and one for the existing product.
3. Professional services pricing, used by lawyers, doctors, counselors,
4. Price lining is the practice of offering a product line with several
5. Leader pricing (or loss-leader pricing) is an attempt to attract
6. Bait pricing, a deceptive and illegal practice, tries to get customers
into a store through false or misleading price advertising and then uses
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Consumer Penalties
7. Odd-even pricing (or psychological pricing) means using
8. Price bundling is marketing two or more goods or services in a single
9. Two-part pricing involves two separate charges to consume a single
10. Pay What You Want pricing allows customers to name their prices
for certain products or services. This strategy relies on customers
having an accurate internal pricing structure that correctly shows what
they would normally pay for equivalent products or services.
D. A consumer penalty is an extra fee paid by the consumer for violating
terms of the purchase agreement. Businesses impose penalties for two
reasons. If a customer does not fulfill his or her purchase as agreed:
1) the company will suffer an irrevocable loss
2) the company will incur additional transactional costs
4 Discuss product line pricing
Review Question 4.1
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Product Line Pricing
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Relationships Among
Products
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Joint Costs
IV. Product Line Pricing
Product line pricing is setting prices for an entire line of products, which is a
broader concern than setting the right price on a single item.
A. Relationships among Products
One of several types of relationships may exist among the various products
in a line:
a. The products may be complementary, meaning that an increase in the
sale of one good causes an increase in demand for the complementary
good.
B. Joint costs are costs shared in the manufacturing and marketing of a product
line. They can complicate the issue of product pricing, because the
assignment of a portion of those costs to each product may be somewhat
subjective.
5 Describe the role of pricing during periods of inflation and
Chapter 20 ♦ Setting the Right Price 20-9
recession
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Inflation
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20-36
Cost-Oriented Tactics
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Demand-Oriented Tactics
V. Pricing During Difficult Times
A. Inflation
When the economy is characterized by high inflation, special cost-oriented
or demand-oriented pricing tactics are often necessary.
1. Cost-Oriented Tactics
a. One popular tactic is the removal of products with a low profit
margin from the product line.
1) This tactic can backfire if the product has been selling at
b. Delayed-quotation pricing is a popular pricing tactic for
industrial installations.
1) The price is not set on the product until the item is either
finished or delivered.
2. Demand-Oriented Tactics
a. Price shading involves the use of discounts by salespeople to
increase demand for one or more products in a line.
e. A buyer’s dependence on the selling firm may be heightened by
selling entire systems that include feasibility studies, installation,
and training.
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Recession
B. Recession
Periods of reduced economic activity call for special marketing tactics.
1. Value Pricing
2. Bundling or Unbundling
a. If features are added to a bundle, consumers may perceive the
offering as having greater value.
KEY TERMS
anchoring
leader pricing (loss-leader pricing)
product line pricing
bait pricing
markdown money
promotional allowance (trade
allowance)
base price
noncumulative quantity discount
basing-point pricing
quantity discount
cash discount
rebate
consumer penalty
penetration pricing
resale price maintenance
cumulative quantity discount
predatory pricing
seasonal discount
delayed-quotation pricing
price bundling
single-price tactic
escalator pricing
price fixing
two-part pricing
flexible pricing (variable pricing)
price lining
unbundling
FOB origin pricing
price shading
unfair trade practice acts
freight absorption pricing
price skimming
uniform delivered pricing
functional discount (trade discount)
price strategy
value-based pricing
joint costs
zone pricing
Suggested Homework:
• The end of each chapter contains numerous questions that can be assigned or used as the basis for longer
investigations into marketing.
REVIEW AND APPLICATIONS
Chapter 20 ♦ Setting the Right Price 20–11
1.1 A manufacturer of office furniture decides to produce antique-style roll top desks reconfigured to
accommodate personal computers. The desks will have built-in surge protectors, a platform for raising or
lowering the monitor, and a number of other features. The quality, solid-oak desks will be priced far below
comparable products. The marketing manager says, “We’ll charge a low price and plan on a high volume to
reduce our risks.” Comment.
This is not the type of product that a business should expect to be a high volume item. With all of its special details,
1.2 Janet Oliver, owner of a mid-priced dress shop notes, “My pricing objectives are simple: I just charge what
my competitors’ charge. I’m happy because I’m making money.” React to Janet’s statement.
This may not be the best strategy because Janet really does not know whether the demand for her line of dresses is
1.3 What is the difference between a price policy and a price tactic? Give an example.
A price strategy defines the initial price and gives direction for price movements over the product life cycle. The
price policy is a strategy set for a specific market segment, based on a well–defined positioning strategy.
2.1 What are the three basic defenses that a seller can use if accused under the Robinson-Patman Act?
The Robinson-Patman Act provides three defenses for the seller charged with price discrimination (in each
market conditions, or 3) Competition—if the price is reduced to stay even with the competition.
3.1 You are contemplating a price change for an established product sold by your firm. Write a memo analyzing
the factors you need to consider in your decision.
Although students’ answers will vary, they should address some of these points: Before instituting a price
3.2 Columnist Dave Barry jokes that federal law requires this message under the sticker price of new cars:
“Warning to stupid people: Do not pay this amount.” Discuss why the sticker price is generally higher
than the actual selling price of a car. Tell how you think car dealers set the actual prices of the cars they
sell.