stmkt auc-class.12-spring.2013

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Pricing Strategies

A.U.C - Amira EL-Deeb

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Setting the price

There is a six-step procedure:

1. Selecting the pricing objective

2. Determining demand.

3. Estimating costs.

4. Analyzing competitors’ costs, prices, and offers.

5. Selecting a pricing method.

6. Selecting the final price.

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Step 1: Selecting the Pricing Objective

1. Survival

2. Maximum Market Skimming…(market-skimming pricing),

Conditions favor Market skimming pricing

3. Maximum Market Share … (market-penetration pricing),

Conditions favor setting a low price

4. Product-Quality Leadership

Setting the price

Principles of Marketing A.U.C - Amira EL-Deeb

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Step 2: Determining Demand

Price Elasticity of Demand

If demand hardly changes with a small change in price, we say

the demand is inelastic.

If demand changes considerably, demand is elastic

Setting the price

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Step 3: Estimating Costs

Fixed costs (also known as overhead) are costs that do

not vary with production or sales revenue.

Variable costs vary directly with the level of production.

Total costs consist of the sum of the fixed and variable

costs for any given level of production.

Average cost is the total cost per unit at that level of

production

Setting the price


Step 4: Analyzing Competitors' Prices& Offers

Setting the price

Types of markets •Pure competition

•Monopolistic competition

•Oligopolistic competition

•Monopoly

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Characteristic

Perfect

Competition

Monopolistic

Competition

Oligopoly

Monopoly

Number of firms

competing Large number Large number Small number Single firm

Nature of the

product Undifferentiated Differentiated

Undifferentiated

or differentiated Unique

Entry No barriers Few barriers Many barriers Blocked

Information

availability Complete Relatively good Asymmetric Asymmetric

Firm’s control

over price None Some Some Substantial

Step 4: Analyzing Competitors' Prices& Offers

Step 5: Selecting a Pricing Method

The famous 4 price-setting methods are:

1. Markup pricing.

2. Target-return pricing.

3. Perceived-value pricing.

4. Auction-type pricing.

5. Price discrimination

Setting the price

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Calculating the price of a

product by determining

the average cost of

producing the product

and then setting the price

a given percentage above

that cost.

Optimal markup:

m = -1 ÷ (1 + ep),

where,

m = markup and

ep = price elasticity of

demand


Optimal Markups

Elasticity Calculation Markup

-2.0 m = -[1/(1 - 2)] = +1.00 1.00 or 100%

-5.0 m = -[1/(1 – 5)] = +.25 0.25 or 25%

-11.0 m = -[1/(1 - 11)] = +0.10 0.10 or 10%

∞ m = -[1/(1 - ∞)] = 0 0.00 (no markup)

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B2B Markup pricing

Setting the price


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Target-return pricing

(or Break even pricing )

Break-even charts show total cost and total revenues

at different levels of unit volume.

The intersection of the total revenue and total cost

curves is the break-even point.

Companies wishing to make a profit must exceed the

break-even unit volume

ignore price elasticity and competitors’ prices

Setting the price

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Target-return pricing (or Break even pricing )

Setting the price

x units Break-even

output

margin of

safety

The margin of safety

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We can find the operating break-even point in

units by simply solving for Q:

QFC

p v

FC

CM$ unit

*

/

Where CM$/unit is the contribution margin per unit sold (i.e., CM$/unit = p - v)

The contribution margin per unit is the amount that each unit sold contributes to paying off the fixed costs


Suppose that a company has fixed costs of $100,000

and variable costs of $5 per unit. What is the break-

even point if the selling price is $10 per unit?

Q units* ,,

100 000

10 520 000

Or

BE$ , $200, 20 000 10 000

Step 5: Selecting a Pricing

Method

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Assuming that a product has a selling price

of £6. Variable costs are £1 per unit and

fixed costs are £50,000 per year

Calculate the number of units that a firm

must sell in order to break-even

= £50,000 = 1000 units

£5



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Unit & Price determination

Setting the price

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Perceived-value pricing

Setting the price

Perceived value is made up of:

•Buyer’s image of the product performance

•Channel deliverables

•The warranty quality and customer support.

•Softer attributes such as: supplier’s reputation and

Trustworthiness.


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Price discrimination is the practice of charging different

prices to various groups of customers that are not based

on differences in the costs of production.

In first-degree price discrimination, the seller charges buyers the

maximum amount they are willing to pay for each unit of the product.

(ex. Bargaining)

In second-degree price discrimination, the seller charges less to

buyers who buy a larger volume.

In third-degree price discrimination, the seller charges different

amounts to different classes of buyers (ex. clubs)

Price discrimination

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Price Discrimination - Versioning

Offering different

versions of a product

to different groups of

customers at various

prices, with the

versions designed to

meet the needs of the

specific groups.

Book publishers have

long used versioning

when they publish a

hardcover edition of a

book and then wait a

number of months before

the cheaper paperback

edition is released.

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Price Discrimination - Bundling

Bundling involves selling

multiple products as a

bundle where the price of

the bundle is less than

the sum of the prices of

the individual products or

where the bundle reduces

the dispersion in

willingness to pay.

Microsoft Office

bundles its products

together, but also

sells them separately.

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Price Discrimination: Promotional Pricing

Using coupons and sales

to lower the price of the

product for those

customers willing to incur

the costs of using these

devices as opposed to

lowering the price of the

product for all customers.

Those individuals who clip

coupons or watch newspaper

advertisements for sales are

more price sensitive than

consumers who do not engage

in these activities, and they are

also willing to pay the

additional costs of the time and

inconvenience of clipping the

coupons and monitoring the

sale periods.

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Price Discrimination: Two - Part Pricing

Charging consumers a

fixed fee for the right to

purchase a product and

then a variable fee that is a

function of the number of

units purchased.

This is a pricing strategy

used by buyers clubs,

athletic facilities, and travel

resorts where customers

pay a membership or

admission fee and then a

per-unit charge for the

various products, services,

or activities as members.

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Requirements for Successful Price

Discrimination

Firms must possess some degree of monopoly

or market power that enables them to charge a

price in excess of the costs of production.

Firms must be able to separate customers into

different groups that have varying price

elasticities of demand.

Firms must be able to prevent resale among the

different groups of customers.

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Price cut and price increase

Initiating Price Cuts

Companies may initiate a price cut in a drive to

dominate the market through lower costs.

Initiating Price Cuts is Desirable When a Firm:

Has excess capacity

Faces falling market share due to price competition

Desires to be a market share leader

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Initiating Price Increases

1. A major circumstance provoking price

increases is cost inflation.

2. Another factor leading to price increase is

over-demand.

Price cut and price increase


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Responding to Competitors’ Price Changes

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Selected financial ratios

Profit margin

= Net Income / Sales

Gross profit margin or Gross Profit Rate

= (Net sales - Cost of goods sold) / Net sales

Return on investment (ROI ratio or Du Pont

ratio)

= Net income / Total Assets

Current ratio

= Current assets / Current liabilities

Sample Small Business Balance Sheet[9]

Assets Liabilities and Owners' Equity

Cash $ 16,600 Liabilities

Accounts

Receivable 1,200 Notes Payable $30,000

Land 52,000 Accounts Payable 7,000

Building 36,000 Total liabilities $37,000

Tools and

equipment 12,000 Owners' equity

Capital Stock $

80,000

Retained

Earnings 800

Total owners' equity $80,800

Total $117,800 Total $117,800

http://en.wikipedia.org/wiki/Balance_sheet



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