PRICING

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PRICING
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Reading in Chapters 10 and 11

• Skip
• Costs at Different Levels of Production, p
  313-314
• Analyzing the Price-Demand Relationship and Price
  Elasticity of Demand, p. 317-top of 319
• International Pricing, p. 344-345
• Public policy and Pricing, p. 349-352.

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Definitions

• PRICE (Narrow) The amount of money charged for
  a product or service
• PRICE (Broad) The sum of the values consumers
  exchange, plus the terms and timing associated
  with the exchange, for the benefit of having or
  using the product or service

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Factors To Be Considered

• INTERNAL FACTORS 
• Marketing Objectives
• Marketing Mix Strategy
• Costs
• Org'n for Pricing
•  

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• EXTERNAL FACTORS 
• Market Demand
• Competition
• Other

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Marketing ObjectivesPaths to Wealth
Maximization

• Survival/current cash flow maximization
• Current profit maximization
• Market-share leadership
• Product-quality leadership
• Capture attention/customers
• Position firm
• Affect competition

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Marketing Mix Strategy

• Pricing should be consistent with positioning
• Product, place, promotion price should work
  together
• Target costing when pricing is used for
  positioning

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Costs

• Total Costs Fixed Variable Costs 
• The Experience (Learning) Curve

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Industry Characteristics

• - Pure competition
• - Oligopoly
• - Monopolistic competition
• - Pure monopoly

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Consumer Perceptions

• Value of product/service
• Expectations re price
• Perceptions of alternatives

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Competitors' Prices/offerings

• Current and future
• Should estimate costs, reaction styles

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GENERAL PRICING APPROACHES

• Cost-based pricing
• Buyer-based pricing
• Competitor-based pricing

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(1) Cost-based Pricing

• Cost-Plus Pricing
• Defense Contractors
• --gt Markup (based on price)
• PriceCost/(1-Markup)
• --gt Markup (based on cost)
• PriceCost(1Markup)

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• BREAKEVEN ANALYSIS
• let Price P Quantity Q Variable cost/unit
  VC Fixed Cost FC
• Then  
• ProfitRevenue - Costs
• PQ - VCQ- FC
• (P-VC)Q - FC
• At breakeven, 0(P-V)QB-FC and
• QB FC/(P-V)

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• (b) Target Profit Pricing
• Assume Investment 10,000,000
• Desired ROR 20 ?
• Target Profit 2,000,000
• set Price such that for a given Q profit
  2,000,000
• 2,000,000 (P-V)Q FC
• If V 40, Q 100,000, and FC 3,000,000 then
  P 90

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(2) Buyer-based Pricing

• Perceived value pricing
• An aside Value pricing EDLP, Wal-Mart and Kmart

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(3) Competition-based Pricing

• Going rate pricing
• Sealed bid pricing

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NEW-PRODUCT PRICING STRATEGIES

• INNOVATIVE PRODUCT 
• - Market-Skimming Pricing 
• - Market-Penetration Pricing
• IMITATIVE PRODUCT

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PRODUCT-MIXPRICING STRATEGIES

• PRODUCT LINE PRICING
• - Different features, different prices
• OPTIONAL-PRODUCT PRICING 
• CAPTIVE-PRODUCT PRICING
• BY-PRODUCT PRICING
• PRODUCT-BUNDLE PRICING

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PRICE ADJUSTMENT STRATEGIES

• DISCOUNT PRICING/ALLOWANCES
• - Cash Discounts (e.g., 2/10 net 30)
• - Quantity Discounts
• cumulative
• noncumulative
• - Functional (Trade) Discounts 
• - Seasonal Discounts
• - Allowances

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• SEGMENTED (DISCRIMINATORY) PRICING
• - Segment
• - Product Form
• - Location
• - Time

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• PSCYHOLOGICAL PRICING
• - Reference Prices
• - Digits and Break Points
• PROMOTIONAL PRICING
• Why ? ? ?
• GEOGRAPHICAL PRICING
• --FOB - Origin
• - Uniform Delivered
• - Zone Pricing
• - Basing-Point Pricing
• - Freight Absorption Pricing

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• PRICE CHANGES
• Price cuts
• Price Increases