Transcript Pricing

Pricing
Business Marketing
Dr. Dawne Martin
November 29, 2011
Learning Objectives
• Understand the model for pricing, and how
strategy, costs, environment and positioning
will affect pricing decisions
• To understand how market-based, costbased and value-based prices are
determined
• To understand how to map customer value
for determining value-based prices
• To develop price management policies
Question
• The XYZ Manufacturing Corporation has
experienced a rather large decline in sales
for its component parts. Mary Vantage,
vice-president of marketing, believes a 10%
price cut may get things going again.
• What factors should Mary consider before
reducing the price of the components.?
Managing Pricing
•
•
•
•
To support a target-positioning strategy
To achieve target financial goals
To fit the realities of the marketplace
To pursue both cost and demand based
pricing principles and processes.
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
14-5
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
14-6
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
14-7
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
14-8
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
Prices & Policies
• Strategy -- specific approach to achieve
objectives
– Attribute bundles and effect on buyer center
• Product-specific attributes
• Company-related attributes
• Salesperson-related attributes
– Capitalize on unique strengths & market
opportunities
• Channel Pricing
– Intermediary prices, costs and margins
– Channel margin management --Promotion,
restrictions, push Vs pull
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
14-12
Pricing Policies
• Product Line Pricing
– Substitute product – based on relative benefits
and price sensitivity of each target market
– Complementary products – Price driver product
low in order the penetrate market – negotiate
on-going price contracts
– Segmentation Pricing – Based on relative
customer value
– Product Life Cycle Issues – pricing new vs. old
products
Other Issues
• Discounts
– Cumulative vs. Non-cumulative
•
•
•
•
Return or Breakage Allowance Leasing
Co-op payments
Trade show support
Legal Issues
– Robinson-Patman Act
– Clayton and Sherman Antitrust Acts
– Functional discounts – based on purchaser’s role in the
supplier’s distribution system reflecting services
performed for the supplier.
What Do You Need to Know
• Customer Price Sensitivity
– Customer product perceptions & value
– Value Mapping
•
•
•
•
•
•
•
Criteria customers use to make purchase decision
Weight of features in terms of importance
List of competitors in market (customer perceptions)
Rating of competitor products on features
List actual prices for each competitor
Calculate value position for each
Plot each on value map
George E. Cressman, Jr. “Snatching Defeat from the Jaws of Victory”, Marketing
Management, Summer 1997.
What Do You Need to Know
• Firms Cost Structure
– More fixed/less variable costs = lower prices
– More variable/less fixed = raise price
• Competitor Strategies & Costs
– Strategic Intent
• Which customer groups are “must win”
• Support for positioning and targeting
• How is price used
– Capabilities & barriers
What Do You Need to Know
– Likely Outcome -- compare strategic intent
with capabilities & barriers
– Impact on your firm
• Issues in Strategies and Costs
– High-fixed cost industries
• Focus on capacity utilization
• Price cuts will generate retaliation
– Price insensitive markets
• Price is an estimator of value -- when customer
finds it difficult to forecast quality
Adjustments to Base Price
• Many pricing decisions involve an
adjustment to the price of an existing
product or service.
• A change in price should be judged in terms
of its effects on short or long-term profits
rather than sales volume (an outdated
decision production rule).
How Pricing Tactics Create a Price Range
Linoleum Price to Retailer
$6.00
$0.10
$5.78
$0.12
22.7% off
invoice
Dollars per square yard
$0.30
$0.37
$0.35
$4.47
$0.20
Dealer
list
price
Order Competitive Invoice
size
discount
price
discount
Payment
terms
discount
$0.09
Annual Off-invoice
Co-op Freight
volume promotions advertising
bonus
Pocket
price
Price Range
Source: Robert L. Rosielli, “Managing Price, Gaining Profit,” Harvard Business Review, September/October 1992,
86.
Price Tactics that Create a Price
Schedule/Range
•
•
•
•
Price discriminate against slow payers.
Price discriminate for volume purchases
Price discriminate by tying purchases
Price discriminate to different usage/benefit
segments
• Price discriminate against a usage time
• Price discriminate against distant user
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
14-21
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
14-22
Medicus Major
• Sells small medical instruments & supplies
• Uses national distributor -- Galax
– 50% of sales to large hospitals
– 50% to dealers who sell to small hospitals and clinics
• Discount structure
–
–
–
–
Small hospitals & clinics -- pay list price
Large hospitals -- 12% discount off list
Wholesalers -- 40% discount
Dealers -- 20% discount
Questions
• If Medicus’s price is $4 what is the COGS for
Glaxa
• What increase in sales must Galax produce to
cover new debt service costs of $185, 000 per year
for its truck fleet expansion?
• To enhance coverage of the Southern states,
Medicus is considering adding a wholesaler, Dixie
Supply, who has made acquisitions to establish a
national presence
– What are the possible consequences on
• Prices
• Channel margins
- Channel functions