McGraw-Hill/Irwin   Copyright © 2009 by the McGraw-Hill Companies, Inc. All rights reserved.
Chapter 14    Pricing andNegotiating for Value
Assignment•   You are setting up a new coffee shop:    •   Your target customers are students, young adults such as 9X, 8X...
PRICING ISSUES: WHY PRICING IS DIFFICULT                               Subjective and  Objective & Explicit               ...
A MODEL FOR MANAGING PRICE                              1     Demand Factors                                  • Elasticity...
SUPPLY AND DEMANDPrice                              Supply                             Demand                             ...
ANALYZING MARKET STRUCTURES          Types of         situationsImportant           Pure                                Mo...
BREAK-EVEN ANALYSISBREAK-EVEN OCCURS WHEN: TOTAL REVENUE=TOTAL COST  BREAK-EVEN IS DONE TO FIND THE LEVEL OF SALES TO     ...
KEY DECISIONS IN MANAGING PRICE•   DETERMINE PRICING STRATEGY– Develop specific    approach to achieve price objectives•  ...
MARGINAL ANALYSISSCENARIO: What sales increase is needed to cover a          $1.2 million increase in expenditures?       ...
CALCULATING MARGIN CHAINS  A PRICE INCREASE/DECREASE BY ONE CHANNEL MEMBER WILLIMPACT THE PRICE CHARGED BY SUBSEQUENT CHAN...
TYPES OF PRICING1. ADMINISTERED PRICES -     Prices established by seller as impersonal and     take-it-or-leave it offers...
ROBINSON-PATMAN ACTVIOLATIONS OCCUR:1. When different prices are charged to   competitors;2. The differences are not attri...
NEGOTIATION PRIMER  ● AVOIDANCE: When a company doesn’t need to deal     with the partner or to make a deal*● ACCOMMODATIO...
LEVERAGE FOR A GLOBAL PRICING CONTRACT These products or services are a significant portion of   customer’s purchases. Loc...
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Chap014 pricing and negotiating for value

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Chap014 pricing and negotiating for value

  1. 1. McGraw-Hill/Irwin Copyright © 2009 by the McGraw-Hill Companies, Inc. All rights reserved.
  2. 2. Chapter 14 Pricing andNegotiating for Value
  3. 3. Assignment• You are setting up a new coffee shop: • Your target customers are students, young adults such as 9X, 8X. • Your rent: 2,000 USD/ month • Initial investment (construction, interior design, furniture…): 100.000 USD • Work in Group: - Design your products/ services and pricing plan for your products and services - Discuss all the factors that you consider when designing your product and pricing plan. - How many pricing options do your group have? - How pricing plan is linked with your overall marketing strategy and plan?
  4. 4. PRICING ISSUES: WHY PRICING IS DIFFICULT Subjective and Objective & Explicit Interpretive1. DEMAND FACTORS 1. STRATEGY ISSUES (How much do (Pricing objectives) customers want) 2. COMPETITIVE2. COST FACTORS FACTORS (Actual outlays) (Rivals’ prices) 3. TRADE FACTORS (Channel power) 4. LEGAL FACTORS (Restrictions and discrimination) 14-4
  5. 5. A MODEL FOR MANAGING PRICE 1 Demand Factors • Elasticity of demand • Cross elasticities 2 Cost Factors • Customer value 5 Trade Factors• Costs now perceptions • Power in the channel• Anticipated costs • Traditions and roles• Economic objectives • Margins 4 Strategy Issues • Target market selection 3 • Product positioning 6 Legal Factors Cost Factors • Price objectives • Vertical• Structure restrictions of competition • Marketing program• Barriers to entry • Price discrimination• Intent of rivals Evaluation and Formation of Prices & policy Exhibit 14-2 14-5
  6. 6. SUPPLY AND DEMANDPrice Supply Demand Quantity Exhibit 14-3 14-6
  7. 7. ANALYZING MARKET STRUCTURES Types of situationsImportant Pure Monopolisticdimensions Competition Oligopoly Competition MonopolyUniqueness of each None None Some Uniquefirm’s productNumber of Many Few Few to many NonecompetitorsSize of competitors(compared to size Small Large Large to small Noneof marketElasticity of Kinked demanddemand facing Completely curve (elastic and Either Eitherfirm Elastic inelasticElasticity ofindustry demand Either Inelastic Either EitherControl of price by None Some (with care) Some Completefirm Exhibit 14-5 14-7
  8. 8. BREAK-EVEN ANALYSISBREAK-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
  9. 9. 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 14-9 Channels
  10. 10. MARGINAL ANALYSISSCENARIO: 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 14-10
  11. 11. CALCULATING MARGIN CHAINS A PRICE INCREASE/DECREASE BY ONE CHANNEL MEMBER WILLIMPACT THE PRICE CHARGED BY SUBSEQUENT CHANNEL MEMBERS ASSUME: Given a new product selling for $10, what is the maximum factory price allowable? WHOLESALER DEALER Net Sales 100% Net Sales 100% COGS 85% COGS 70% Gross Profit 15% Gross Profit 30% Apply $10 dealer price Net Sales $7.00 Net Sales $10.00 COGS 5.95 COGS 7.00 Gross Profit $1.05 Gross Profit $ 3.00 Exhibit 14-11 14-11
  12. 12. TYPES OF PRICING1. ADMINISTERED PRICES - Prices established by seller as impersonal and take-it-or-leave it offers2. COMPETITIVE BIDDING – OPEN BIDDING – Any organization can compete for business CLOSED BIDDING - Solicits bids from exclusive list of potential suppliers3. NEGOTIATED PRICES Seeks prices based on mutually agreeable terms 14-12
  13. 13. ROBINSON-PATMAN ACTVIOLATIONS 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 14-13
  14. 14. 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 14-14
  15. 15. 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 14-15

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