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Transcript
Pricing!!
Pricing in line with a Firm’s
Objectives
1
Price
Amount a buyer pays to a seller in
exchange for products and services
the economic sacrifice
Non-monetary price
Barters, donations, and time
(Easier / Harder) to change than other
elements in the marketing mix?
2
Pricing Objectives
Market survival
end of season sales
charge for services
(Long / Short) term objective
Sales / Market Share growth
Market Share is ______________
penetration pricing
productivity effects
3
More Pricing Objectives
Profitability--optimal price a trade off
between margins and number of sales to
maximize profitability
price skimming
ROI requirements:
Income before taxes
Total operating assets associated with the product (e.g., plant, equipment, inventory )
4
Final Objectives
Competitive Effect
price wars usually occur when ___________
Quality and Image
prestige/premium pricing
5
Discussion: How do managers make
pricing decisions?
What did you find out???
6
The Five C’s in Setting
Prices
Customer
Costs
Competition
Government Controls
Channels of Distribution
7
CONSUMER FACTORS --DEMAND
Each price that the company charges will
lead to different levels of demand
Traditional demand curve?
P1
P2
Q1
Q2
IS the Demand Curve Always
Downward Sloping?
9
Elasticity of Demand
Definition: How sensitive
consumers are to changes in price
Elasticity =
Q
P
Is elasticity always negative?
Elasticity Cont’d
INELASTIC DEMAND
ELASTIC DEMAND
P
P
Q
Q
What would you do if you knew demand was
elastic/inelastic?
11
Determining Price Sensitivity
Price Sensitivity Measures from consumers
Oral-B’s Cross Action toothbrush has three types of
bristles that are set at different angles. It has a dense
tip that cleans behind back teeth and an ergonomic
rubberized handle.
Circle what is too cheap
Square what is too expensive
0.25 0.75 1.25 1.75 2.25 2.75 3.25 3.75 4.25 4.75 5.25 5.75 6.25 6.75 7.25 7.75 8.25
Price Sensitivity Continued
100%
80%
60%
40%
20%
0%
0.25 0.75 1.25 1.75 2.25 2.75 3.25 3.75 4.25 4.75 5.25 5.75 6.25 6.75 7.25 7.75 8.25
Too cheap
Too expensive
13
Influences on Elasticity
Substitute products
Income effect
Other Products (cross-elasticity)
14
Customer Oriented
Strategies
Demand-Backward Pricing
Perceived Value Pricing
Price Skimming
Price Penetration
Trial Pricing
15
Cost Factors
 Types of Costs:
Fixed
Variable
 TOTAL COST
COST AND PROFIT
BREAK-EVEN:
TR = TC
P*Q = FC + (VC*Q)
Q=
FC
P - VC
Break Even Analysis
(Been there, done that!)
Fixed costs
Sales price - Variable Cost Per Unit
Fixed
Variable
Saws
Varnish
Managers
Wood
Warehouse Lease
WHY DO THIS?
18
COST ORIENTED STRATEGIES
Target Return:
P = AVC + TFC + r(INV)
Q
Q
AVC = average variable cost
TFC = total fixed cost
Q = projected quantity sold
r = targeted ROI
INV = initial investment
PROBLEMS?
19
Other Cost Strategies
Mark-Up on Cost (manufacturer)
P = UTC + (UTC * MU%)
Mark-Up on Selling Price (retailer)
P =
cost
(1.00- MU%)
Price-Floor Pricing
20
COMPETITION FACTORS
PRODUCT DIFFERENTIATION
MARKET STRUCTURE
Oligopoly – status quo
Monopolistic – non-price competition
COMPETITIVE PRICING POLICIES
Competition-Oriented
Strategies
PRICE-LEADER
PRICE-CHALLENGER
PRICE-FOLLOWER
NICHE-MARKETER
Government Controls
Pricing law objectives:
ensure competition among companies within
markets
protect consumer rights
23
Important Pricing Acts
Sherman Act 1890
No price fixing
Federal Trade Commission Act 1914
limits unfair and anti-competitive activities
Robison-Patman Act 1936
Limits price discrimination
Wheeler-Lea Act 1938
No deceptive pricing
Consumer Goods Pricing Act 1975
Limits wholesaler & manufacturer ability to set retail prices
24
Discussion: What is Price
Discrimination?
Definition:Selling the same product to
different consumers at different prices
Is it legal?
Yes:
No:
25
Other Legal Issues
 Price gouging
 Price comparisons with a “fake” price
 Bait and Switch
 Predatory Pricing
 Price Fixing
 Horizontal
 Vertical
26
INTERESTING ISSUES IN
PRICING
PSYCHOLOGICAL PRICING
COMPARISON PRICING
DUMPING
BUNDLING
27
Consumer’s and Pricing--A
Test
Item
Estimated
Price
Most you
would pay
Actual
Price
High
Medium or
low?
28
3. Psychological
Internal Reference Price
What you expect to pay
How is this formed?
Past prices
Competitions prices
Reservation Price
Highest price willing to pay
Perceived Price
Consumer’s reaction to a price– high/low; fair/unfair
29
Comparison Pricing
COMPARE T0:
PROBLEMS:
Dumping
Pharmaceutical Firm Selling Brand Name Product
Sales
100,000 units @ &10/unit
Fixed Costs $500,000 for a capacity of 200,000 units
Variable Costs
$1
Assume you are entering the Generic Market and there
is no cannibalization between the branded and
generic market
What is the minimum profitable price you can charge?
Movies
Movie studio sells to 2 cinema chains: Supreme
Cinema
Fractured Flicks
We have two block-busters we are about to
release:
Macbeth
Naked Gun XII
To be continued…..
Cinema Chains’ Reservation
Prices
Supreme Cinemas
Fractured Flicks
Macbeth
$2,600
$1,000
Naked Gun XII
$1,200
$1,800
Each cinema chain will only buy one copy of each film. How
should your price the films in order to maximize revenue
while at the same time not price discriminating.
33
PRICE DISCOUNTING
TRADE FUNCTIONAL DISCOUNT
QUANTITY DISCOUNTS
NONCUMULATIVE
CUMULATIVE
34
TEMPORAL DISCOUNTING
10 Consumers willing to pay $50
10 Consumers willing to pay $30
Cost $20/dress to make
How should you price the dress?
35
Things to consider when
changing your price
Basic
Price mix
Price
Promotion mix
Components
Example
Objective
Long-term effect
36
Price change concepts
Price Thresholds
JND
Traps for price decreases
low-quality--buyers question quality
fragile market share trap--consumers switch
to any lower priced good
shallow pockets trap--competitor can
maintain price cut longer than you
37