Pricing Strategies

1
Pricing Strategies Tactics

• Marketing for Engineers
• ELE 4EMT

Lecture 9 26 March, 2007
2
Changes to next weeks lectures

• No lecture on Monday, April 2
• Lecture as usual on Tuesday
• Wednesdays lecture will be a presentation by
  APESMA

3
Executive Summary Presentations

• All Powerpoint files to be mailed to me by 5pm
  today (March 26).
• Presentations will take place tomorrow 9am in HS1
  249
• Attendance will be checked.

4
Team Meeting Minutes

• Minimum of 6 meeting minutes required for full
  10 mark allocation
• Minutes should be mailed, at latest, prior to the
  next meeting.
• Include teams name/ID in the subject field of
  the e-mail

5
Business News

• David Jones profit
• Coles Group sell-off plans (corrected from
  original handouts)
• Coles, K-Mart, Liquorland
• Target
• Officeworks
• Qantas takeover still unresolved
• ALP broadband policy announcement
• LG TV glitch
• Software fault affecting 16 models
• 10s of thousands of TVs affected

6
Todays Topics

• Establishing The Exact Price
• Pricing Strategies

7
Telstra/ACCC

• Telstra broadband pricing strategy
• ACCC
• Australian Competition and Consumer Commission
• Promotes competition and fair trade in the
  market place to benefit consumers, business and
  the community. Refer http//www.accc.gov.au
• Vets proposed prices, holds enquiries, monitors
  profits.
• Chairman is Graeme Samuel (was Alan Fels)
• ACCC has been investigating anti-competitive
  conduct by Telstra in its broadband pricing.

8
ACCC price-fixing battles

• The Age April 1, 2005
• ONGOING
• The ACCC is investigating 25 serious cases
  showing cartel behaviour. Highest-profile case is
  the allegation of price-fixing in the corrugated
  box division of Amcor. Another case is against
  three companies accused of carving up the market
  for alluvial garnet here and overseas. They are
  Barton Mines Corporation, Barton International
  Incorporated and Barton International Australia.
• MARCH 2005
• The ACCC wins a legal victory against a group of
  Ballarat-based petrol companies when the Federal
  Court hands down penalties of 23.3 million for
  price-fixing.
• DECEMBER 2004
• Five companies and nine individuals fined
  485,000 for price-fixing in NSW scrap metal
  markets.
• AUGUST 2004
• Biscuit, bread and cake maker George Weston Foods
  penalised 1.5 million after admitting a former
  director had attempted a price-fix.
• JUNE 2004
• Metro Brick fined 1 million for price-fixing
  with Midland Brick Company. Boral, of which
  Midland is a subsidiary, voluntarily disclosed
  information to the ACCC.
• APRIL 2004
• ABB Power Transmission and ABB Transmission and
  Distribution Ltd fined 14 million for
  price-fixing and market-sharing contraventions.
  Company executives fined a total of more than 1
  million.
• APRIL 2002
• ACCC raids eight Caltex, Shell and Mobil sites
  looking for evidence of petrol price-fixing but
  after almost 12 months of investigation fails to
  take any action.
• - AAP, with Gabrielle Costa

9
Introduction

• A wide range of pricing strategies are available
  to marketing managers.
• A good price will reflect
• Market realities,
• Actual costs,
• Consumer perceptions, and
• Other considerations

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Establishing The Exact Price

• Markup on Selling Price Mark-up on Cost
• The Cost-Plus Method
• The Average-Cost Method
• Target Return Pricing
• Break-Even Analysis

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Mark-up on Cost Selling Price
Cost x Mark-Up m Selling Price y
Mark-up on Selling Price
Mark-up on Cost
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Example
Mark-up on Cost
A product costs 1.00 to produce is sold for 1.50
means a mark-up on cost of 50 percent.
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Example
Mark-up on Selling Price
A product costs 1.00 to produce is sold for 1.50
means a mark-up on selling price of 33.3 percent.
Note This is more commonly referred to as margin
gross profit margin or net profit margin.
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Mark-up through a Channel of Distribution
Manufacturer Cost 20.00 20 Mark-up
5.00 Selling price 25.00
Wholesaler Cost 25.00 15 Mark-up
4.41 Selling price 29.41
Retailer Cost 29.41 41
Mark-up 20.59 Selling price 50.00
What is the type of mark-up used ?
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The Cost-Plus Method

• A method similar to mark-up in which a
  manufacturer, or a service provider, determines
  what costs were involved in producing an item and
  then add an amount to the cost total to arrive at
  a price.
• This method is used in some government contracts,
  with the supplier of a good or service submitting
  the costs associated with the project along with
  a profit margin to yield a total price for the
  project.

16
The Average-Cost Method

• All the costs associated with the manufacturing
  and marketing of a good or the provision of a
  service are identified and added.
• Adding a margin for profit to the costs and
  dividing the total by the number of units
  produced will give a likely price per unit.
• There is a serious risk that the quantity
  demanded by the market may not match that used in
  the calculation.
• Changes in demand can turn profit into loss.

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Example

• An engineering consulting firm is awarded a
  contract to design, specify, and project manage
  the implementation of a satellite communication
  earth station.
• The service portion of the project (design,
  specify, and manage) may be charged by the firm
  at a fixed price.
• The cost of equipment, installation, and
  commissioning may be charged on the basis of cost
  m, where m is a percentage of the cost.

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Example
All costs (80,000)
Average cost of a single unit
800
Number of units produced (100)
All costs (80,000) Margin for profit (20,000)
100,000
100,000
Average cost of a single unit inc. profit margin
1,000
100
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What's the problem with that?

• If only 50 units were sold at the price of
  1,000, then the firms revenue would be only
  50,000 , while the cost of the production and
  marketing would remain at 80,000.
• A case of a bad sales forecasting!
• How would you mitigate the risk?

20
Target Return Pricing

• The total costs of producing a product, or
  providing a service, are the sum of
• Fixed and
• Variable costs.
• The fixed costs are incurred with the passage of
  time regardless of volume.
• The variable costs will fluctuate with some
  measure of volume.

21
Calculation

• The first step is to calculate a total fixed cost
  figure, which will include items like
• Salaries,
• Superannuation,
• WorkCover,
• Office/factory rent,
• Outgoings, and
• other expenses that must be paid even when no
  units are being produced.
• A target return, usually a percentage of
  investment, is added to total costs.

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Example

• Assume a fixed cost of 400,000 and a target
  return of 100,000, giving a total of 500,000.
• For an estimated demand of 1000 units, the fixed
  cost per unit would be 500.
• But the production and sale of each unit involves
  variable costs as well. Suppose that to be 75
  per unit.
• The price per unit is then 500 75 575.
• As in the average-cost method, miscalculation of
  the demand can lead to a disaster.

23
Break-Even Analysis
Revenue
Area of profit
Loss Profit
Cost
Revenue and cost
Break-even point
Area of loss
Quantity of units produced and sold
Note Error in axis labels corrected from
original handouts
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Price Adjustments

• Discounts
• Cash Discounts
• Anticipation Discounts
• Trade Discounts

• Quantity Discounts
• Seasonal Discounts
• Chain Discounts
• Promotional Allowances

25
Pricing Strategies

• Differential pricing strategies.
• Competitive pricing strategies.
• Product-line pricing strategies.
• Psychological and image pricing strategies.
• Distribution-based pricing strategies.

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Differential Pricing Strategies

• A strategy whereby different prices are charged
  to different buyers for the same product.
• Variable pricing
• Second-market discounting
• Skimming (high price at the beginning)
• Periodic discounting
• Random discounting

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Competitive Price Strategies

• Meeting competition
• Undercutting competition
• Price leadership
• Following the leader
• Penetration pricing
• Predatory pricing (eliminating competition)
• Traditional pricing
• Inflationary pricing

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Product-line Pricing Strategies

• The objective of product-line pricing is to
  maximise profit for the total product line rather
  that to obtain the greatest profits for any
  individual item in the line.
• Total-profit pricing
• Captive pricing
• Leader pricing
• Bait pricing
• Price lining
• Multiple-unit pricing

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Psychological Image Pricing Strategies

• A strategy whereby a moderate price is set for a
  version of a product that will be displayed next
  to a higher priced model of the same brand or
  next to a competitive brand.
• Reference pricing
• Odd and even pricing
• Prestige pricing

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Distribution-Based Pricing Strategies

• F.O.B. (free on board or freight on board)
• Delivered pricing
• Zone pricing
• Uniform delivered pricing
• Basing-point pricing

31
Pricing and the Law

• The Trade Practices Act 1974
• The Australian Competition and Consumer
  Commission
• Pricing and social responsibility

32
References
Zikmund, William G., dAmico, Michael, Marketing,
5th edition West Publishing Company
1996. http//www.accc.gov.au
Thanks for your attention
33
Changes to next weeks lectures

• No lecture on Monday, April 2
• Lecture as usual on Tuesday
• Wednesdays lecture will be a presentation by
  APESMA