Transcript Part One

Chapter Fourteen
Pricing and
Negotiating for Value
Learning Objectives
• What is Price
• A model for price
• Supply and demand
• The Nature of Competitive Markets
• Four market models
• Issues in Price Management
• Key decisions in managing price
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What is Price
Price is the amount of money paid by a buyer to a seller for a
particular product or service.
On the seller side – price captures the focus of accountants,
market managers, operation managers, sales staff, and
pricing specialist.
2. On the buyer (customer) side, price is the aim of buyers
seeking value. Customers’ perception of value is reflected
in the price they are willing to pay
Customer perceived value is the difference between total
customer value and total customer cost of a market offering
relative to those of competing offers.
1.
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A model for price
1 Demand Factors
Elasticity of demand
• Cross elasticities
• Customer value
2
Cost Factors
• Costs
now
• Anticipated costs
• Economic objectives
3
Competitive Factors
• Structure
of competition
• Barriers to entry
• Intent of rivals
perceptions
4 Strategy Issues
• Target market
selection
• Product positioning
• Price objectives
• Marketing program
5 Trade Factors
• Power in the channel
• Traditions and roles
• Margins
6 Legal Factors
• Vertical restrictions
• Price discrimination
Evaluation and
Formation of
Prices & policy
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Pricing Issues: Why Pricing is Difficult
Objective & Explicit
Subjective and
Interpretive
1. DEMAND FACTORS
1. STRATEGY ISSUES
(How much do
customers want)
2. COST FACTORS
(Actual outlays)
(Pricing objectives)
2. COMPETITIVE
FACTORS
(Rivals’ prices)
3. TRADE FACTORS
(Channel power)
4. LEGAL FACTORS
(Restrictions and
discrimination)
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Supply and Demand
The scissors of intersecting supply and demand functions
1. Demand Function – a downward-sloping line that
represents the tendency that as price declines, the demand
for purchase increases.
•
2.
3.
Differentiate between elastic (flat – price sensitive) & inelastic
demand (steep – less sensitive)
Supply Function – slope upward; represents suppliers’
motivation to increase supply as prices increase.
The equilibrium price and quantity = the intersection of
the supply and demand curves = the price at which sellers
are willing to fill the market’s demand
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Supply and Demand
Price
Supply
Demand
Quantity
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The Nature of Competitive Markets
Four Market Structures:
(1) Pure competition
(2) Oligopoly
(3) Monopolistic competition
(4) Monopoly
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The Nature of Competitive Markets
Pure competition
–
–
–
–
–
Large number of small firms
Homogenous products
Freedom of entry/exit
Least likely to be encountered in the real world
Most attractive to the buyer
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The Nature of Competitive Markets
Oligopoly
–
–
–
A few (often large) sellers of similar products
Many business markets are oligopolies
The most distinctive characteristic: kinked demand curve
(very elastic above the kink, very inelastic below the kink, and then
each firm can quickly notice and respond to competitive actions,
prices tend to stick at or near the kink)
–
Least likely to compete on the basis of price because
oligopolies are especially susceptible to price wars
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The Nature of Competitive Markets
Monopolistic competition
–
–
–
–
A large number of differentiated sellers – such as corporate
training companies, custom marketing research firms, and
industrial distributors
The actions of one firm have a smaller effect on others
Each seller brings some unique competency to the market
and offers distinctively valued services and products
Profit maximization model is illustrated by this market
structure when MR=MC
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The Nature of Competitive Markets
Monopoly
–
–
–
A single seller; most attractive model to a seller
In these days of global competition, any true monopoly
(single seller) is highly unlikely.
Only government is likely to be a true monopoly (driver’s
license, permits, etc.) or the grantor of monopolies (phone,
cable).
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Market Structures
Types of
situations
Important
dimensions
Uniqueness of each
firm’s product
Pure
Competition
None
Oligopoly
Monopolistic
Competition
Monopoly
None
Some
Unique
Number of competitors Many
Few
Few to many
None
Size of competitors
(compared to size of
market
Small
Large
Large to small
None
Elasticity of demand
facing firm
Completely
Elastic
Kinked demand
curve (elastic
Either
and inelastic
Either
Elasticity of industry
demand
Either
Inelastic
Either
Control of price by firm None
Either
Some (with care) Some
Complete
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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
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Determine pricing strategy
• Price objectives might be:
–
–
–
–
–
To increase profitability by 12% over the next year
To thwart the efforts by competitors to gain a foothold in the market
To get competitors to accept us a price leader
To restore order in a chaotic market
To increase market share to 17%
• A pricing strategy capitalizes on the unique strengths of the
enterprise and the opportunities in the market
– To gain market share by concentrating on small users served by our
full-line distributors
– To build customer trust by reducing prices on products having highly
visible cost reductions
– To win customers from competitors by bundling items at a low total
price
– To reduce inventory of displaced and remanufactured products without
damaging brand image or trade relations
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Determine channel intermediary
prices, costs and margins
• Reseller margins
– Too high: users forgo the benefits of the product, and factory sales
suffer.
– Too low: intermediary selling effort, service, stocking, and so on may
deteriorate, causing end user frustration and eventually a switch to
products of another manufacturer
• Push or Pull – Reliance on resellers to differentiate the brand or not
– Pull: direct communication with end users to differentiate the product
through the media; will squeeze reseller margins and users will benefit
from low price
– Push: differentiation performed by channel; support and rightly
compensate the differentiation efforts of the channel partners
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Determine single product & product line pricing
• Develop pricing structures for substitute and complementary
products
• A product line – a group of products that are related in
purchase or use
• Substitute products may replace others of the same or
another producer; the pricing tends to be driven largely by cost
factors
• Complementary products (used in combination); price the
most attractive, or driver product low and seek high margins
on parts, consumables, or services
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Determine whether to participate in
bidding and negotiation for sales
• Administered prices – set by a seller and offered on a take-it
or leave-it basis
• Competitive biding – asks the suppliers to offer their best
deals and selects the best of the best as a designated point in
time
– buyers take a proactive role in pricing
– Sales to government often involve bid pricing
• Negotiation – involves two-way communication and problem
solving to come to mutually agreeable terms
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Establish a pricing system
• Price is a critical element of marketing strategy
• Enough information on costs, customers, competitors, channel
policy and the law
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