Transcript Part One

McGraw-Hill/Irwin
Copyright © 2009 by the McGraw-Hill Companies, Inc. All rights reserved.
Chapter 14
Pricing and
Negotiating for Value
PRICING ISSUES: WHY PRICING IS DIFFICULT
Objective & Explicit
1. DEMAND FACTORS
(How much do
customers want)
2. COST FACTORS
(Actual outlays)
Subjective and
Interpretive
1. STRATEGY ISSUES
(Pricing objectives)
2. COMPETITIVE
FACTORS
(Rivals’ prices)
3. TRADE FACTORS
(Channel power)
4. LEGAL FACTORS
(Restrictions and
discrimination)
14-3
A MODEL FOR MANAGING PRICE
1
Demand Factors
• Elasticity
of demand
• Cross elasticities
2
Cost Factors
• Customer value
• Costs now
perceptions
5
Trade Factors
• Power in the channel
• Traditions and roles
• Margins
• Anticipated costs
• Economic objectives
4
Strategy Issues
• Target
3
Cost Factors
• Structure
of competition
• Barriers to entry
• Intent of rivals
market
selection
• Product positioning
• Price objectives
• Marketing program
6
Legal Factors
• Vertical
restrictions
• Price discrimination
Evaluation and
Formation of
Prices & policy
Exhibit 14-2
14-4
SUPPLY AND DEMAND
Price
Supply
Demand
Quantity
Exhibit 14-3
14-5
ANALYZING MARKET STRUCTURES
Types of
situations
Important
dimensions
Uniqueness of each
firm’s product
Number of
competitors
Size of competitors
(compared to size
of market
Elasticity of
demand facing
firm
Elasticity of
industry demand
Control of price by
firm
Pure
Competition
Oligopoly
Monopolistic
Competition
Monopoly
None
None
Some
Unique
Many
Few
Few to many
None
Small
Large
Large to small None
Completely
Elastic
Kinked demand
curve (elastic and
inelastic
Either
Either
Either
Inelastic
Either
Either
None
Some (with care)
Some
Complete
Exhibit 14-5
14-6
BREAK-EVEN ANALYSIS
BREAK-EVEN OCCURS WHEN: TOTAL REVENUE=TOTAL COST
BREAK-EVEN IS DONE TO FIND THE LEVEL OF SALES TO
COVER ALL FIXED AND VARIABLE COSTS
Given: Price x Q = FC + VC = FC x (UVC x Q)
Q is quantity; FC, fixed costs; VC, variable costs;
UVC, unit variable costs; Price, average revenue
Solve for Q (quantity)
(Price × Q) – (UVC × Q) = FC
Q(Price – UVC) = FC
Q = FC/(Price-UVC) = FC / unit margin
Solve for Q (quantity)
(Price × Q) – (UVC × Q) = FC
Q(Price – UVC) = FC
Q = FC/(Price-UVC) = FC / unit margin
Exhibit 14-9
14-7
KEY DECISIONS IN MANAGING PRICE
•
•
•
DETERMINE PRICING STRATEGY– Develop specific
approach to achieve price objectives
DETERMINE CHANNEL INTERMEDIARY PRICES,
COSTS AND MARGINS
DETERMINE SINGLE PRODUCT AND PRODUCT LINE
PRICING
•
•
•
Develop pricing structures for substitute and
complementary products
DETERMINE WHETHER TO PARTICIPATE IN BIDDING
AND NEGOTIATION FOR SALES
ESTABLISH A PRICING SYSTEM
•
Based on the 4 C’s : Costs, Customers, Competitors, and
Channels
14-8
MARGINAL ANALYSIS
SCENARIO: What sales increase is needed to cover a
$1.2 million increase in expenditures?
WHERE: COGS = 75% of Net Sales
NR = New Revenue
NR = $1.2 million + COGS
NR = $1.2 million + .75 NR
.25 NR = $1.2 million
NR = $1.2 million / .25
NR = $4.8 million
14-9
CALCULATING MARGIN CHAINS
A PRICE INCREASE/DECREASE BY ONE CHANNEL MEMBER WILL
IMPACT THE PRICE CHARGED BY SUBSEQUENT CHANNEL MEMBERS
ASSUME: Given a new product selling for $10,
what is the maximum factory price allowable?
WHOLESALER
Net Sales
100%
COGS
85%
Gross Profit
15%
Apply $10 dealer price
Net Sales
$7.00
COGS
5.95
Gross Profit
$1.05
DEALER
Net Sales
100%
COGS
70%
Gross Profit
30%
Net Sales
COGS
Gross Profit
$10.00
7.00
$ 3.00
Exhibit 14-11
14-10
TYPES OF PRICING
1. ADMINISTERED PRICES Prices established by seller as impersonal and
take-it-or-leave it offers
2. COMPETITIVE BIDDING –
OPEN BIDDING – Any organization can
compete for business
CLOSED BIDDING - Solicits bids from
exclusive list of potential suppliers
3. NEGOTIATED PRICES
Seeks prices based on mutually agreeable terms
14-11
ROBINSON-PATMAN ACT
VIOLATIONS OCCUR:
1. When different prices are charged to
competitors;
2. The differences are not attributable to cost
differences;
3. The product is essentially the same for each
competitor;
4. The effects are damaging to competition
14-12
NEGOTIATION PRIMER
● AVOIDANCE: When a company doesn’t need to deal
with the partner or to make a deal
*● ACCOMMODATION: Sacrifice necessary to hold or
sustain a relationship
● COMPROMISE: Hybrid of competition and
accommodation
*● COMPETITIVE NEGOTIATION: There is a
winner and a loser
*● COLLABORATION: Joint problem solving for a
creative win-win solution
*NEGOTIATION STRATEGY OPTIONS
14-13
LEVERAGE FOR A GLOBAL PRICING CONTRACT
These products or services are a significant portion of
customer’s purchases.
Local markets are reasonably homogeneous.
Customer’s top management is omitted.
Customer seeks value enhancement more than cost cutting.
Supplier has good working relationships not just at HQ, but
with the company’s country managers.
Customer and supplier have some implementation experience
with global strategies played out at local levels.
Exhibit 14-16
14-14