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Stmkt auc-class.12-spring.2013

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  • 1. 2/17/2013 Pricing Strategies 1Setting 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. A.U.C - Amira EL-Deeb 2 1
  • 2. 2/17/2013Setting the price 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 A.U.C - Amira EL-Deeb 3Setting the priceStep 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 Principles of Marketing A.U.C - Amira EL-Deeb 4 2
  • 3. 2/17/2013Setting the price 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 A.U.C - Amira EL-Deeb 5Setting the price Step 4: Analyzing Competitors Prices& Offers Types of markets •Pure competition •Monopolistic competition •Oligopolistic competition •Monopoly A.U.C - Amira EL-Deeb 3
  • 4. 2/17/2013 Step 4: Analyzing Competitors Prices& Offers Perfect Monopolistic Characteristic Competition Competition Oligopoly Monopoly Number of firms Large number Large number Small number Single firm competing Nature of the Undifferentiated Undifferentiated Differentiated Unique product or differentiated Entry No barriers Few barriers Many barriers Blocked Information Complete Relatively good Asymmetric Asymmetric availability Firm’s control None Some Some Substantial over price 7Setting the price 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 4
  • 5. 2/17/2013Step 5: Selecting a Pricing Method Calculating the price of a  Optimal markup: product by determining the average cost of m = -1 ÷ (1 + ep), producing the product where, and then setting the price m = markup and a given percentage above that cost. ep = price elasticity of demandOptimal 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) 10 5
  • 6. 2/17/2013Setting the price Step 5: Selecting a Pricing Method  B2B Markup pricing Principles of Marketing A.U.C - Amira EL-Deeb 11Setting the price Step 5: Selecting a Pricing Method  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 A.U.C - Amira EL-Deeb 12 6
  • 7. 2/17/2013Setting the price Step 5: Selecting a Pricing Method  Target-return pricing (or Break even pricing ) Principles of Marketing A.U.C - Amira EL-Deeb 13 The margin of safety margin of safety Break-even x units output 7
  • 8. 2/17/2013 Step 5: Selecting a Pricing Method  We can find the operating break-even point in units by simply solving for Q: FC FC Q*   p  v 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 Step 5: Selecting a Pricing Method 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 $10 per unit? 100,000 Q*   20,000 units 10  5 Or BE$  20,000  10  $200,000 8
  • 9. 2/17/2013 Step 5: Selecting a Pricing Method  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 £5Setting the price Step 5: Selecting a Pricing Method Unit & Price determination A.U.C - Amira EL-Deeb 18 9
  • 10. 2/17/2013Setting the price Step 5: Selecting a Pricing Method  Perceived-value pricing 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. A.U.C - Amira EL-Deeb 19 Price discrimination  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) A.U.C - Amira EL-Deeb 20 10
  • 11. 2/17/2013Price Discrimination - Versioning Offering different  Book publishers have versions of a product long used versioning when they publish a to different groups of hardcover edition of a customers at various book and then wait a prices, with the number of months before versions designed to the cheaper paperback meet the needs of the edition is released. specific groups. 21Price Discrimination - Bundling Bundling involves selling  Microsoft Office multiple products as a bundles its products bundle where the price of together, but also the bundle is less than the sum of the prices of sells them separately. the individual products or where the bundle reduces the dispersion in willingness to pay. 22 11
  • 12. 2/17/2013 Price Discrimination: Promotional Pricing  Using coupons and sales  Those individuals who clip to lower the price of the coupons or watch newspaper advertisements for sales are product for those more price sensitive than customers willing to incur consumers who do not engage the costs of using these in these activities, and they are devices as opposed to also willing to pay the lowering the price of the additional costs of the time and inconvenience of clipping the product for all customers. coupons and monitoring the sale periods. 23Price Discrimination: Two - Part Pricing  Charging consumers a  This is a pricing strategy fixed fee for the right to used by buyers clubs, purchase a product and athletic facilities, and travel then a variable fee that is a resorts where customers function of the number of pay a membership or units purchased. admission fee and then a per-unit charge for the various products, services, or activities as members. 24 12
  • 13. 2/17/2013Requirements for Successful PriceDiscrimination 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. 25 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 A.U.C - Amira EL-Deeb 26 13
  • 14. 2/17/2013Price cut and price increase Initiating Price Increases 1. A major circumstance provoking price increases is cost inflation. 2. Another factor leading to price increase is over-demand. A.U.C - Amira EL-Deeb 27Responding to Competitors’ Price ChangesPrinciples of Marketing A.U.C - Amira EL-Deeb 28 14
  • 15. 2/17/2013 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 liabilitiesSample Small Business Balance Sheet[9]Assets Liabilities and Owners EquityCash $ 16,600 LiabilitiesAccounts 1,200 Notes Payable $30,000ReceivableLand 52,000 Accounts Payable 7,000Building 36,000 Total liabilities $37,000Tools and 12,000 Owners equityequipment $ Capital Stock 80,000 Retained 800 Earnings Total owners equity $80,800Total $117,800 Total $117,800 15