Product

1
Product Pricing Issues

• May 5, 2004

2
Agenda

• Product Positioning
• Meanings of Price
• Demand Pricing Strategies
• Elasticity
• Bundling

3
What to Say?

• Positioning Main thought to associate with the
  company
• Sun Microsystems The Dot in Dot.Com
• Microsoft Where Do You Want to Go
  Today(Gates) to Empower People
  Through Great Software Anyplace, Any Time, and on
  Any Device (Balmer)
• Dell Be Direct
• Gateway Youve Got A Friend in the Business
  to Connect with Us

4
Price Definitions

• Consumer what must be sacrificed in order to
  possess or use a product.
• (money, time, effort)
• Producer what is received in return for the
  transfer of possession or usage rights to the
  consumer
• (money, products, goodwill)

5
Prices Do Not Always Reflect Direct Costs
6
Organizational Objectives Pricing Strategies

• Status Quo Cost-oriented
• Sales Revenue Maximization Demand-oriented
• Market Share Maximization Competition-oriented
  
• Profit Maximization Demand Cost-oriented

7
Cost-Oriented Pricing
8
Break Even Analysis

• 1. TR TC Pr where TR Total
  Revenue
• TC Total Cost Fixed Variable FC
  VC Q Pr Profit Margin Desired
• 2. P Q (FC VC Q) Pr
• 3. Q (FC Pr) / (P - VC)

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Break Even Analysis (example)

• Let FC 1000
• VC 2 / unit
• Pr 600
• Price - 10 Q (1000 600) / (10 -
  2) 200 units
• Price - 8 Q (1000 600) / ( 8 - 2)
  266 units

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Economics of Pricing
13
Pricing Strategy

• Volume - Maximize unit sales
• (subject to not losing money)
• Market Share Maximize market share
• Maximize Profits
• Maximize Sales Revenue

14
Price Elasticity

• Percent change in quantity sold for a given
  percent change in price.

E (?Q / Q) / (? P / P)
15
Price Elasticity

• Quantity (3-2)/2 50
• Price (117-130)/130 -10
• Elasticity 50 / -10 -5

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Price Bundling

• Bundling when several related items are sold
  together for a packaged price, usually lower than
  each item separately.
• Amazon always offers the album selected with a
  similar one for a combined price.

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Advantages of Bundling (Variable Cost is 3 per
service)
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Current (5.50 for Voice 5 for Hot Line)
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Optimal Prices
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Sell All Services to Everyone(Variable Cost is
3 per service)
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Optimal Prices
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Sell to Everyone(Variable Cost is 3 per service)
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Optimal Prices
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Pure Bundling(Variable Cost is 3 per service)
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Optimal Prices
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Mixed Bundling(Variable Cost is 3 per service)
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Mixed Bundling(5 for Voice, 4.50 for Hot Line
9 for bundle)
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Optimal Prices