11 Pricing Analysis Flashcards
Income Effect
As pricing falls, buyers have more Real Income. They can buy More product with the same amount of money.
Substitution Effect
Consumers buy one good as its price relative to others drops.
Change in Demand CURVE
A change in price changes demand ALONG the curve. A change in a determinant MOVES THE ACTUAL CURVE
Prestige goods
A decline in price might cause a decrease in demand.
Price Elasticity of Demand
definition and formula
Sensitivity of quantity demanded from changes in Price
Percentage change in Price
(P1-P2)/P1+P2
- The absolute value is always used. No negatives
Elasticity Types
Greater Than 1: Elastic. Small change in price = significant change Demand
Equal to 1: UNITARY elasticity: 1 unit change in P = 1 unit change in Demand
Less than 1: Inelastic. Large change in price = small change in Demand
Infinite: PERFECTLY ELASTIC. A horizontal line. A single seller can’t influence market.
Farmer can sell all at market price. none above market price. (happens in pure competition)
Equal to Zero: PERFECTLY INELASTIC. Vertical Line. customers will pay any price. Drug users.
Table of TOTAL effects on REVENUE
depending on elasticity
Price + Decrease No Change Increase
Price - Increase No change Decrease
5 Pricing Objectives
PT, VIS
Profit Maximization
Target MARGIN maximization. A target RATIO of Profit to Sales.
Volume Oriented: Sales Volume or Market Share
Image Oriented: Enhance perception of Merch Mix
Stabilization: Pricing set to maintain stable relationship of Firms price to Competitors
Price Setting Factors
Supply and Demand is determined by: C, C, C Customer Demand Competitor Actions Costs
INTERNAL PRICE SETTING FACTORS
MM, AOC
1. Marketing Objectives:SPMP, Survival, Profit Maximization, Market Share Leadership, Product Quality Leadership
2.MARKETING MIX STRATEGY
- ALL RELEVANT COSTS: Variable,
Fixed, Total. R&D>Cust Svc. Lower costs to Price = more willing to supply. - ORGANIZATIONAL FOCUS of pricing decisions.
- CAPACITY: example: Utilities use Peak-Load. Demand is low = low price, vice-versa
EXTERNAL PRICE SETTING FACTORS
TC, P-D, C
- TYPE OF MARKET: pure competition, monopolistic competition, Oligolpolistic, Monopoly> affects prices
- Customer PERCEPTION of Value and Price: the VALUE the customer thinks he is getting and the price willing to pay. Higher PRICE = HIGHER PERCEIVED VALUE.
- PRICE-DEMAND RELATIONSHIP: a.DEMAND CURVE is usually downward sloping (lower price = more demanded. BUT, PRESTIGE GOODS>
b. in the intermediate, curve my slope upwards.
c. Elastic pricing: Percentage change in price to quantity demanded is greater than 1.0…Price increase will reduce total revenue. - COMPETITORS: P CPA
Products, Costs, Prices, Amounts supplied.
General Pricing Approaches
MARKET BASED (BUYER BASED)
- Starts with Target Price based on Perceived Value and Competitor Actions
- Also Market COMPARABLES
- Typical when many COMPETITORS AND UNDIFFERENTIATED (Commodities)
General Price Approaches
COMPETITION Based
- GOING RATE: largely on Competitor Price
2. SEALED BID: in bidding, PERCEPTION of competitors pricing
General Pricing Approaches
NEW PRODUCT PRICING
- PRICE SKIMMING: High intro price to attract buyer’s not concerned about pricing. Recover R & D
- PENETRATION PRICE: LOW INTRO price to penetrate market.
General Pricing Approaches
PRICING BY INTERMEDIARIES
- MARKUP based on price PAID for product
2. MARK DOWNS: reduction of original price
General Pricing Approaches
PRICE ADJUSTMENTS
GIDD, PPV
GEOGRAPHICAL
INTERNATIONAL
DISCOUNTS AND ALLOWANCES
DISCRIMINATORY
PROMOTIONAL
PSYCHOLOGICAL
VALUE PRICING
General Pricing Approaches:
Pricing Adjustments
Geographical: (freight)
U-ZABA
-UNIFORM FREIGHT COSTS: same price to all customers regardless of location
- ZONE PRICING: Not Actual, but a ZONE customer is in.
- ACTUAL FREIGHT COSTS: FOB Origin
- BASING POINT: Price FROM a SPECIFIC CITY. Regardless of actual shipping point.
- ABSORPTION: seller absorbs all or part.
General Pricing Approaches
Price Adjustments
International
Price adjust to LOCAL conditions
General Pricing Approaches
Price Adjustments
Discounts and Allowances
Q-CATS
Quantity: encourage LARGE VOLUME
Cash: Encourage prompt payment, avoid bad debts, improve cash flows.
Allowances: trade in, Promotional
Trade (functional): discounts offered to members such as SELLING
Seasonal: by season to SMOOTH PRODUCTION
General Pricing Approaches
Price Adjustments
DISCRIMINATORY
Adjusts for differences in CUSTOMERS, LOCATIONS
General Pricing Approaches
Price Adjustments
PROMOTIONAL
TEMPORARY price adjustment. Below LIST OR COST to STIMULATE SALES
General Pricing Approaches
Price Adjustments
PSYCHOLOGICAL
- based on CONSUMER PSYCHOLOGY.
ie raise prices to suggest quality
General Pricing Approaches
Price Adjustments
VALUE PRICING
Redesign for Quality without Price increase.
or SAME QUALITY for LOWER PRICE
General Pricing Approaches
PRODUCT MIX PRICING
PP,COB
PRODUCT LINE :sets price “Steps” in product line by Costs, Perceptions, Competitor Price
PRODUCT BUNDLE: Combinations at lower than INDIVIDUAL
CAPTIVE-PRODUCT: (RAZORS). Main product cheap, razors expensive
OPTIONAL-PRODUCT: Firm must choose which products are ACCESSORIES/which part of the STANDARD PRODUCT
BY-PRODUCT: Sets these prices above storing and delivering.
General Pricing Approaches
ILLEGAL PRICING
PREDATORY PRICING: pricing below cost to destroy competitor. (Pricing below an appropriate cost AND will recover through higher PRICES or GREATER MARKET SHARE.
PRICE DISCRIMINATION AMONG CUSTOMERS: ROBINSON PORTMAN ACT 1936: Illegal if LESSENS COMPETITION. applies to MANUFACTURERS. Applies to Buyers AND Sellers.
COLLUSIVE PRICING: can’t CONSPIRE to RESTRICT OUTPUT. set ARTIFICIALLY HIGH PRICES.
DUMPING: sell BELOW COST in other countries. Triggers Tariffs.
General Pricing Approaches
COST BASED PRICING
Process starts with COST DETERMINATION followed by Price that will RECOVER costs PLUS DESIRED RATE OF RETURN.
Important to know Cost Behavior, Traceability, Drivers
Most use ABSORPTION or TOTAL COST
General Pricing Approaches
COST BASED PRICING FORMULAS
- TOTAL COST + (TOTAL COST X MARKUP %)
- ABSORPTION MFG COST + (ABSORB X MARKUP %)
- VARIABLE MFG COST + (VMC X MARKUP %)
- TOTAL VARIABLE COST + (TVC x Markup %)
General Pricing Approaches
TARGET PRICING
Expected Price: based on CUSTOMER PERCEPTION OF VALUE, Competitor Responses
Target Operating Income PER UNIT: Sales need to cover the VARIABLE, FIXED and NET INCOME company wants DIVIDED BY units FORECAST TO BE SOLD.
Takes ENTIRE LIFE CYCLE into consideration.
INTRO TO WITHDRAWAL.
Value Engineering: reaching Targeted COST LEVELS. Assess ALL: R&D, design, >CUST SVC. MINIMIZE COSTS without sacrificing customer satisfaction. …..
Identify VALUE ADDED: Activities that CAN’T BE ELIMINATED without sacrificing Quality, responsiveness or Quantity of oUTPUT required by Customer or Org.
Also: Distinguish between Cost Incurrence (Actual Use of Resources)and Locked In (Designed In) that will occur in future based on past decision:
General Pricing Approaches
LIFE CYCLE COSTING
Emphasizes need to cover UPSTREAM AND DOWNSTREAM not just PRODUCTION COSTS
RELATED: Whole Life Cost = Life Cycle Cost + After Purchase Costs (support, repair, disposal)
Market Structures
PURE COMPETITION
Large number of BUYERS AND SELLERS
acting Independently.
Only Basis for competition is Price. Each seller produce an IMMATERIAL OUTPUT. Can’t influence MARKET PRICE.
Homogeneous or Standard product (commodities)
Marginal Revenue EQUALS Price
As long as the next unit adds more MR than MC, firm increase TOTAL PROFIT
For max Total Profit: Must find the Quantity that Price = MR = MC
For a purely competitive firm
Units x Avg Price = Total Rev Marginal
1 x 960 = 960 960
2 x 960 = 1,920 960
3 x 960 = 2,880 960
See 11 page 13 for graph of Marginal Cost and Marginal Profit
Market Structures
MONOPOLY
One Firm, No Close Substitutes
Marginal Revenue is less than price
To increase sales»Must Lower Price
Marginal revenue continuously decreases as output raised.
Monopolist “Price Searches” where MR = MC
to get Max Level of Total Profit
Units Avg Rev (Price) = Tot Rev Marg Rev
1 x 960 = 960 960
2 x 910 = 1820 860
Monopolistic Competition
Large number of Firms, DIFFERENTIATED PRODUCTS.
of Firms, Less than Pure Competition, but can’t Collude (can’t act together to restrict output)
To Max Profit, MR = MC
Products may be differentiated other than Price (Quality, Brand, Style). Advertising crucial
Oligopoly
Few Large firms in Industry.
Mutually aware, Mutually INTERDEPENDENT
Price, advertising dependent on ACTIONS of other firms.
Each firm sets price and productions after considering mutual INTERDEPENDENCE.
- Prices are STICKY because of Interdependence.
If one lowers prices, no increase in sales because others lower. Profits will lower.
Value engineering
Systematic evaluation of the trade-offs between product functionality and product cost while still satisfying customer needs is the definition of value engineering
