The document discusses pricing strategies and economic concepts related to pricing. It covers factors that influence pricing decisions, such as costs, demand, and competition. It also discusses different market structures including perfect competition, monopoly, oligopoly and monopolistic competition. For each market structure, it examines how firms make pricing decisions and maximize profits. The document also covers topics such as price discrimination, cartels, multi-product pricing, and the impact of the internet on pricing and market structures.
Detailed presentation on how price is determined, factors effecting price.
The price determination under following markets,
1). Perfect Competition
2). Monopoly
3). Duopoly
4). Oligopoly
have been described in detail.
Price Determination Under Short & Long Period, Cournot Model & Stackelberg Model are also discussed.
Students should be able to:
Understand the assumptions of perfect competition and be able to explain the behaviour of firms in this market structure.
Understand the significance of firms as price-takers in perfectly competitive markets. An understanding of the meaning of shut-down point is required. The impact of entry into and exit from the industry should be considered.
Detailed presentation on how price is determined, factors effecting price.
The price determination under following markets,
1). Perfect Competition
2). Monopoly
3). Duopoly
4). Oligopoly
have been described in detail.
Price Determination Under Short & Long Period, Cournot Model & Stackelberg Model are also discussed.
Students should be able to:
Understand the assumptions of perfect competition and be able to explain the behaviour of firms in this market structure.
Understand the significance of firms as price-takers in perfectly competitive markets. An understanding of the meaning of shut-down point is required. The impact of entry into and exit from the industry should be considered.
Senior Project and Engineering Leader Jim Smith.pdfJim Smith
I am a Project and Engineering Leader with extensive experience as a Business Operations Leader, Technical Project Manager, Engineering Manager and Operations Experience for Domestic and International companies such as Electrolux, Carrier, and Deutz. I have developed new products using Stage Gate development/MS Project/JIRA, for the pro-duction of Medical Equipment, Large Commercial Refrigeration Systems, Appliances, HVAC, and Diesel engines.
My experience includes:
Managed customized engineered refrigeration system projects with high voltage power panels from quote to ship, coordinating actions between electrical engineering, mechanical design and application engineering, purchasing, production, test, quality assurance and field installation. Managed projects $25k to $1M per project; 4-8 per month. (Hussmann refrigeration)
Successfully developed the $15-20M yearly corporate capital strategy for manufacturing, with the Executive Team and key stakeholders. Created project scope and specifications, business case, ROI, managed project plans with key personnel for nine consumer product manufacturing and distribution sites; to support the company’s strategic sales plan.
Over 15 years of experience managing and developing cost improvement projects with key Stakeholders, site Manufacturing Engineers, Mechanical Engineers, Maintenance, and facility support personnel to optimize pro-duction operations, safety, EHS, and new product development. (BioLab, Deutz, Caire)
Experience working as a Technical Manager developing new products with chemical engineers and packaging engineers to enhance and reduce the cost of retail products. I have led the activities of multiple engineering groups with diverse backgrounds.
Great experience managing the product development of products which utilize complex electrical controls, high voltage power panels, product testing, and commissioning.
Created project scope, business case, ROI for multiple capital projects to support electrotechnical assembly and CPG goods. Identified project cost, risk, success criteria, and performed equipment qualifications. (Carrier, Electrolux, Biolab, Price, Hussmann)
Created detailed projects plans using MS Project, Gant charts in excel, and updated new product development in Jira for stakeholders and project team members including critical path.
Great knowledge of ISO9001, NFPA, OSHA regulations.
User level knowledge of MRP/SAP, MS Project, Powerpoint, Visio, Mastercontrol, JIRA, Power BI and Tableau.
I appreciate your consideration, and look forward to discussing this role with you, and how I can lead your company’s growth and profitability. I can be contacted via LinkedIn via phone or E Mail.
Jim Smith
678-993-7195
jimsmith30024@gmail.com
The case study discusses the potential of drone delivery and the challenges that need to be addressed before it becomes widespread.
Key takeaways:
Drone delivery is in its early stages: Amazon's trial in the UK demonstrates the potential for faster deliveries, but it's still limited by regulations and technology.
Regulations are a major hurdle: Safety concerns around drone collisions with airplanes and people have led to restrictions on flight height and location.
Other challenges exist: Who will use drone delivery the most? Is it cost-effective compared to traditional delivery trucks?
Discussion questions:
Managerial challenges: Integrating drones requires planning for new infrastructure, training staff, and navigating regulations. There are also marketing and recruitment considerations specific to this technology.
External forces vary by country: Regulations, consumer acceptance, and infrastructure all differ between countries.
Demographics matter: Younger generations might be more receptive to drone delivery, while older populations might have concerns.
Stakeholders for Amazon: Customers, regulators, aviation authorities, and competitors are all stakeholders. Regulators likely hold the greatest influence as they determine the feasibility of drone delivery.
The Team Member and Guest Experience - Lead and Take Care of your restaurant team. They are the people closest to and delivering Hospitality to your paying Guests!
Make the call, and we can assist you.
408-784-7371
Foodservice Consulting + Design
Oprah Winfrey: A Leader in Media, Philanthropy, and Empowerment | CIO Women M...CIOWomenMagazine
This person is none other than Oprah Winfrey, a highly influential figure whose impact extends beyond television. This article will delve into the remarkable life and lasting legacy of Oprah. Her story serves as a reminder of the importance of perseverance, compassion, and firm determination.
Artificial intelligence (AI) offers new opportunities to radically reinvent the way we do business. This study explores how CEOs and top decision makers around the world are responding to the transformative potential of AI.
1. Luiz Afonso dos Santos Senna - PhD
Pricing Strategies and Tactics
Luiz Afonso dos Santos
Senna, PhD
lsenna@producao.ufrgs.br
2. Luiz Afonso dos Santos Senna - PhD
Fatores na fixação de Preço
3. Luiz Afonso dos Santos Senna - PhD
Fatores Externos afetando as decisões de preços
Mercado e demanda
Custos definem o limite inferior e a demanda
define o limite de preço.
As relações preço-demanda são fuindamentais
par aos teomadres de decisão em transportes
Fatores Externos incluem a natureza do mercado
e da demanda, competição e outros elementos
ambientais
4. Luiz Afonso dos Santos Senna - PhD
Preço em diferentes tipos de mercados
Mercados de Competição Pura
Bens/serviços uniformes
Não existe um único vendedor ou comprador com
efeito significativo sobre o preço de mercado
Marketing mix possui pouco impacto
5. Luiz Afonso dos Santos Senna - PhD
Preço em diferentes tipos de mercados
Competição Monopolística
Compradores e vendedores trocam sobre uma gama
de preços
Ênfase em diferenças por meio de diferenciação
através de marketing mix
Competição Oligopolística
Poucos vendedores altamente sensíveis aos preços
de cada um e de estratégias de marketing
6. Luiz Afonso dos Santos Senna - PhD
Considerações primárias na fixação de preços
Objetivos de Pricing
7. Luiz Afonso dos Santos Senna - PhD
Cost-based versus value-based pricing
Source: The Strategy and Tactics of Pricing, by Thomas T. Nagle and Reed K. Holden (2011)
Preço baseado em custos X baseado em valor
9. Luiz Afonso dos Santos Senna - PhD
How does our pricing strategy fit into this
framework? What economic principles apply?
Porter’s Five Forces Model (old)
Supplier Power
Substitutes and Complements
Internal Rivalry Buyer Power
New Entrants
10. Luiz Afonso dos Santos Senna - PhD
Market Structure – Internal rivalry
Market structure and pricing decisions are closely
related. But how to define the market?
The degree to which the firm gets to choose price is
determined in large part by market structure
There are two extreme cases: perfect competition
and monopoly
11. Luiz Afonso dos Santos Senna - PhD
Assessing and responding to a competitor’s price cut (depending
on the market structure)
12. Luiz Afonso dos Santos Senna - PhD
Perfect Competition
Conditions necessary:
Large numbers of buyers and sellers
Homogeneous product
Free entry and exit
Perfect information
13. Luiz Afonso dos Santos Senna - PhD
Perfect Competition
Demand curve for any given firm is
horizontal. Price is set by market at Pe
Firm can sell as much or as little as desired
at market price, but nothing if they raise P.
P
e
S
D
D
P
e
14. Luiz Afonso dos Santos Senna - PhD
Monopoly
Conditions necessary
Single seller of product
No close substitutes
Significant barriers to entry
There are few examples of perfect
competition and pure monopoly.
Most firms have a differentiated product, and
there are substitutes.
15. Luiz Afonso dos Santos Senna - PhD
Pricing in Perfect Competition
Do not choose price.
Choose output quantity. TC includes opportunity
cost of capital invested.
What will be our profit (loss) from our output
decision?
Should we produce now? (SR)
Should we stay in the industry? (LR)
16. Luiz Afonso dos Santos Senna - PhD
Costs at different levels of production
Cost per unit at different levels of production
17. Luiz Afonso dos Santos Senna - PhD
Pricing in a Monopoly
Profit maximization will be achieved by setting
price so that MC=MR.
It is not reached by setting price as “high as
possible.”
Like any firm, the monopolist is constrained
by their demand curve.
One cannot choose both P and Q.
18. Luiz Afonso dos Santos Senna - PhD
The Shut-Down Rule
At what point should the firm cease
production of a certain item?
When might it pay to produce at a loss?
In SR, many costs are fixed. Just because a
firm is making losses, it does not necessarily
mean it should shut down (short run), or even
go out of business (long-run).
19. Luiz Afonso dos Santos Senna - PhD
The Shut-Down Rule cont.
Profit = TR – TC; TR=P*Q, TC = VC + FC
(TR - VC) - FC = [(P - AVC)Q] – FC
Separate out fixed costs, focus on variable elements
As long as P>AVC, there is a positive contribution to
fixed costs.
If firm shuts down (Q = 0), then Profit = - FC
If shut down: Firm has a loss of fixed costs.
20. Luiz Afonso dos Santos Senna - PhD
The Shut-Down Rule cont.
In SR, firm may minimize losses by continuing to
produce.
If losses are expected permanently, get out.
Case of multiple products:
C = FC + VC1 + VC2
21. Luiz Afonso dos Santos Senna - PhD
The Shut-Down Rule
1. P = (TR1 - TVC1) + (TR2 - TVC2) - FC
2. P = (P1*Q1 - AVC1*Q1) + (P2*Q2 - AVC2*Q2) - FC
3. P = [(P1 - AVC1)*Q1]+ [(P2 - AVC2)*Q2] - FC
Results:
1. SR - each product should be produced if Pi>AVCi
2. In LR, the firm should continue operating only if
expected P>=0 (Profits are non-negative)
22. Luiz Afonso dos Santos Senna - PhD
Price Discrimination
Selling the same good to different people at
different prices
Conditions necessary:
Identifiable customer groups with differing price
elasticities
Maintain separation of groups--prevent resale.
23. Luiz Afonso dos Santos Senna - PhD
Types of Price Discrimination
First degree
Identify and charge each customer
what they are willing to pay
Limit: D = MR, no consumer
surplus.
Second degree
Quantity discounts. Volume
purchases are given lower prices.
Need to measure goods and
services bought by consumers.
24. Luiz Afonso dos Santos Senna - PhD
Types of Price Discrimination
Third degree
Segment markets in some way. Charge
all in the segment the same prices.
Treat each segment as a separate
market– then do MR=MC in each
Are coupons as a price discrimination
mechanism?
25. Luiz Afonso dos Santos Senna - PhD
Oligopoly Strategies
Common theme - Rivalrous behavior
Pricing - limit pricing - set prices low as signal
to possible entrants or other competitors your
willingness and ability to defend your market
share.
Must have credibility.
Trading SR profit for more profits later
26. Luiz Afonso dos Santos Senna - PhD
Oligopoly Strategies
Use the legal / regulatory systems
File patent application
Challenge business charter application
File regulatory challenge
Pre-emptive entry - Wal-Mart
27. Luiz Afonso dos Santos Senna - PhD
Oligopoly Strategies
Capacity and production
Announce capacity expansion
Revise/modify products - more
difficult to copy
Advertising
Raise cost of entry for others
28. Luiz Afonso dos Santos Senna - PhD
Oligopoly and Monopolistic Competition
Oligopoly
Few sellers - usually large ones
Recognized interdependence in
pricing and output decisions
Need to consider response of rivals in
pricing decisions
Typically significant barriers to entry
29. Luiz Afonso dos Santos Senna - PhD
Oligopoly and Monopolistic Competition
Monopolistic Competition
Large number of interdependent
sellers
Differentiated product
Good substitutes
Easy entry and exit
30. Luiz Afonso dos Santos Senna - PhD
Oligopoly and Monopolistic Competition
Most industries are one or the other
Oligopoly: many heavy manufacturing
Autos, steel, chemicals, pharmaceuticals
Monopolistic Competition
Service companies, retail stores, large
corporations (McDonald’s, Wendy’s)
The important point is that demand is downward
sloping
31. Luiz Afonso dos Santos Senna - PhD
Cartels
Illegal in most countries – but encouraged in
others
Conditions helpful:
Small number of firms
Homogeneous product
Entry barriers
Similarity of members
32. Luiz Afonso dos Santos Senna - PhD
Cartels
Problems with cartels:
Cheating on agreement
Price cutting behaviour
Tend to fall apart
Note: When might firms in an industry ask for
(demand) regulation?
33. Luiz Afonso dos Santos Senna - PhD
Pricing Strategies
Profit maximizing rule:
Set production at level where MR = MC
Non - Maximizing pricing rules
there are a variety of these
34. Luiz Afonso dos Santos Senna - PhD
Pricing for Multi-Product Firm
Two products, x and y. TRfirm = TRx + TRy
If there are any spillovers from x to y, then you
may get complications.
MR =
TR
Q
TR
Q
TR
Q
x
x
x
x
y
x
d
d
d
d
d
d
=
MR =
TR
Q
TR
Q
TR
Q
y
y
y
y
x
y
d
d
d
d
d
d
=
35. Luiz Afonso dos Santos Senna - PhD
Multi-Product Firm cont.
The two terms on the right side of the
equation represent interactions. They can be
either positive or negative.
If x and y are complementary goods, the
effect is positive.
If x and y are substitutes, the effect is
negative. One unit’s gain is the other’s loss.
36. Luiz Afonso dos Santos Senna - PhD
Two part pricing
Charge P = MC
charge a fixed fee to extract some of the
“consumer surplus”
Examples:
country clubs
health clubs
electricity providers
37. Luiz Afonso dos Santos Senna - PhD
Declining block pricing
Charging different prices according to how
much is purchased
Attempt to extract consumer surplus and
transfer value to company
38. Luiz Afonso dos Santos Senna - PhD
Auction pricing models
Standard auction model
multiple bidders compete with each other
start at some low price, then successive bids
raise price until someone “wins”
Dutch auction model
start at a high price, lower it until someone bids
ex: dutch flower auctions
How to extract consumer surplus?
39. Luiz Afonso dos Santos Senna - PhD
How does the development of online business
affect this analytic tool? How does the Internet
change the economic principles that apply?
Porter’s Five Forces Model
Supplier Power
Substitutes and Complements
Internal Rivalry Buyer Power
New Entrants
40. Luiz Afonso dos Santos Senna - PhD
Market structure and the Internet
Traditional industry structure paradigm?
Structure, time and place?
Firm size, customer access and service?
Pricing, and reputation online
Who is competing with whom?
42. Luiz Afonso dos Santos Senna - PhD
Internet and demand issues
Role of customer service and customer loyalty
online: e-loyalty?
Consumer demand issues - which goods to
buy online, which in person?
How to price online?
Does this signal the end of the Brand?
43. Luiz Afonso dos Santos Senna - PhD
Pricing and the Internet
Traditional pricing paradigm?
Access to demand data…...
Measurement of demand elasticities?
Ability to conduct pricing “experiments”
Ability to spot market changes - and
move quickly (perhaps)
Access to bigger customer base
Will prices be lower online?
44. Luiz Afonso dos Santos Senna - PhD
Firm structure and the Internet
Are traditional firm structure concepts now
irrelevant?
Economies of scale? Scope?
How does this affect firm incentives to
vertically integrate (or de-integrate)?
Central role of transaction costs…...
45. Luiz Afonso dos Santos Senna - PhD
The Determinants of Demand
Demand The relationship between the
quantity of a good desired by people in a
market and the factors that affect that the
quantity desired is referred to as the
demand for the product. We can express
the demand for a product in the form
We have some precise definitions related
to how income and prices of other goods
affect the demand for a good/service
46. Luiz Afonso dos Santos Senna - PhD
Factors that we expect to affect the demand for the good include:
Population (n)
Price of the good (pi)
Price of other goods (pj)
Income (y)
Expectations of future prices
Tastes (T)
47. Luiz Afonso dos Santos Senna - PhD
Substitutes and Complements
Two goods, x and y, are said to be substitutes if an
increase in the price of x (y) increases the demand for
good y (x) and a decrease in the price of x (y)
decreases the demand for y (x) – (Butter and
margarine)
Two goods, x and y, are said to be complements if
an increase in the price of x (y) decreases the demand
for good y (x) and a decrease in the price of x (y)
decreases the demand for y (x) (Sugar and coffee)
48. Luiz Afonso dos Santos Senna - PhD
Income and Demand
A good is said to be normal if an increase
(decrease) in income increases (decreases) the
demand for the good. A good is said to be
inferior if an increase (decrease) in income
decreases (increases) the demand for a good
49. Luiz Afonso dos Santos Senna - PhD
The Demand Curve
The relationship between the quantity demanded of a good and the
price of that good is referred to as the demand curve.
51. Luiz Afonso dos Santos Senna - PhD
The demand curve gives the relationship
between price and the quantity consumers
will desire to purchase at that price
Note the demand curve is drawn given that
no other factors affecting the demand for
the product, such as income, population, or
tastes, change
Demand for the product is based on
specific, unchanging values for the other
factors that affect demand
52. Luiz Afonso dos Santos Senna - PhD
As the price of a good decreases (increases),
more (less) of it will be purchased
That is, the demand curve is downward sloping
There are two factors that explain this
relationship:
As the price of a good increases, consumers will substitute into
other goods (substitution effect);
.As the price of a good increases, consumers will have less real
income to purchase all goods (income effect).
The Law of Demand
53. Luiz Afonso dos Santos Senna - PhD
Changes in Demand versus Changes in Quantity
Demanded
A movement along a demand curve is referred to as a change in
quantity demanded.
The quantity demanded changes because of a price change.
A shift in the demand curve is referred to as a change in demand.
Demand changes (the demand curve shifts) because of a change in
one of the factors affecting demand other than price (income, price
of other goods, tastes, population) changes.
54. Luiz Afonso dos Santos Senna - PhD
Demand for steaks
D1 represents the demand for steaks (lbs/day) given the price of
chicken is $3.50; the number of customers is 1,500 a day; and the
average annual household income is $40 thousand.
Then we might expect the following:
A decrease in demand for steak if the price of chicken, a substitute for steak, fell
from $3.50 to $2.00.
This is shown by a shift in of the demand curve from D1 to D2
An increase in demand for steak if the annual income increases from $40 to $60
thousand, since steak is a normal good.
This is shown by a shift out of the demand curve from D1 to D3
57. Luiz Afonso dos Santos Senna - PhD
Algebraic Representation
The preceding figure that follows is given by
QD = 100 - 10P
Linear relationship we can graph by choosing two
points.
Easiest points:
Q = 0 0 = 100 - 10P or P = 10, Q = 0
P = 0 implying Q = 100 - 10(0) = 100 and therefore
P = 0, Q = 100
Slope, dQ/dP = -10
58. Luiz Afonso dos Santos Senna - PhD
The Determinants of Supply
Number of Firms
Price of Product
Cost of inputs
Wages
Capital
Materials
Price of other goods
Expectations of Future Prices
Technology
59. Luiz Afonso dos Santos Senna - PhD
The Supply Curve
The relationship between the quantity supplied of a good
and the price of that good is referred to as the supply curve
The supply curve gives the relationship between price
and the quantity produces will wish to sell at that price
Note the supply curve is drawn given that no other factors
affecting the supply for the product
Supply of the product is based on specific, unchanging
values for the other factors that affect supply
61. Luiz Afonso dos Santos Senna - PhD
The Law of Supply
As the price of a good increases (decreases), more (less) of it will be
produced and offered for sale.
The supply curve is upward sloping.
This is explained by the assumption that marginal (incremental) cost
increases as output increases.
62. Luiz Afonso dos Santos Senna - PhD
Changes in Supply versus Changes in Quantity
Supplied
A movement along a supply curve is referred to as a
change in quantity supplied.
The quantity supplied changes because of a price
change.
A shift in the supply curve is referred to as a change
in supply.
Supply changes (the supply curve shifts) because of a
change in one of the factors affecting supply other
than price changes.
63. Luiz Afonso dos Santos Senna - PhD
Comparisons
What happens to Price & Quantity when:
Incomes increase
Wages fall
Prices of other goods change
Making predictions of the impact on the market of these types of
changes is referred to as Comparative Statics
64. Luiz Afonso dos Santos Senna - PhD
Comparisons
These changes are all changes in demand or changes in
supply
Shifts in demand or supply curve
4 possibilities:
Increase in demand (shift out demand curve)
Decrease in demand (shift in demand curve)
Increase in supply (shift out supply curve)
Decrease in supply (shift in supply curve)
65. Luiz Afonso dos Santos Senna - PhD
The Impact of Market Condition Changes on Equilibrium Price and
Quantity
Market
Change
Impact on
Equilibrium
Price
Impact on
Equilibrium
Quantity
Examples
Increase in
Demand
+ + Increase in Income (normal
good); increase in price of
substitute; decrease in price
of complements; increase in
population
Decrease
in Demand
- - Opposite of increase in
demand
Increase in
Supply
- + Technological innovation;
increase in suppliers;
decreases in costs
Decrease
in Supply
+ - Increase in costs or wages;
increase in price of
alternative product produced
by firms
66. Luiz Afonso dos Santos Senna - PhD
Pricing Strategy
How does a company decide what price to
charge for its products and services?
What is “the price” anyway? doesn’t price
vary across situations and over time?
Some firms have to decide what to charge
different customers and in different
situations
They must decide whether discounts are
to be offered, to whom, when, and for what
reason
67. Luiz Afonso dos Santos Senna - PhD
Why is Pricing Important?
In a company with average economics*,
1% increase in volume = 3.3% increase in
profit
1% increase in price = 11.1% increase in
profit
Improvements in price typically have 3-4
times the effect on profit as proportionate
increases in volume.
*Based on average of 2,463 companies
68. Luiz Afonso dos Santos Senna - PhD
Price vs. Nonprice Competition
In price competition, a seller regularly offers
products priced as low as possible and
accompanied by a minimum of services
In non price competition, a seller has
stable prices and stresses other aspects of
marketing
With value pricing, firms strive for more
benefits at lower costs to consumer
With relationship pricing, customers have
incentives to be loyal-- get price incentive if
you do more business with one firm
69. Luiz Afonso dos Santos Senna - PhD
Nonprice Competition
Some firms feel price is the main competitive
tool, that customers always want low prices
Other firms are looking for ways to add
value, thereby being able to avoid low prices
Sometimes prices have to be changed in
response to competitive actions
Many firms would prefer to engage in non
price competition by building brand equity
and relationships with customers
70. Luiz Afonso dos Santos Senna - PhD
SELECT PRICING OBJECTIVE
SELECT METHOD OF DETERMINING THE BASE PRICE:
Cost-plus
pricing
Price based on
both demand
and costs
Price set in
relation to
market alone
DESIGN APPROPRIATE STRATEGIES:
Price vs. nonprice
competition
Skimming vs.
penetration
Discounts and allowances
Freight payments
One price vs.
flexible price
Psychological pricing
Leader pricing
Everyday low vs.
high-low pricing
Resale price
maintenance
The Process: An Illustration
72. Luiz Afonso dos Santos Senna - PhD
Steps for Determining Prices
Study Costs
Can you make a
profit?
Can you reduce
costs without
affecting quality or
image?
73. Luiz Afonso dos Santos Senna - PhD
Steps for Determining Prices
Estimate Demand
What do customers
expect to pay?
Prices usually are directly
related to demand.
74. Luiz Afonso dos Santos Senna - PhD
Steps for Determining Prices
Study Competition
75. Luiz Afonso dos Santos Senna - PhD
Steps for Determining Prices
Decide on a
Pricing Strategy
Price higher than the
competition because
your product is
superior
Price lower, then raise
it once your product is
accepted
76. Luiz Afonso dos Santos Senna - PhD
Steps for Determining Prices
Set Price
Monitor and evaluate its effectiveness
as conditions in the market change
77. Luiz Afonso dos Santos Senna - PhD
Pricing Technology
Smart Pricing – decisions are based on an
enormous amount of data that Web-based
pricing technology crunches into timely, usable
information.
Communicating Prices to Customers – electronic
gadgets that provide real-time pricing information
such as electronic shelves, digital price labels
78. Luiz Afonso dos Santos Senna - PhD
Pricing Technology
RFID Technology – wireless technology that
involves tiny chips imbedded in products.
The chip has an antenna, a battery, and a
memory chip filled with a description of the
item
Toll technology
79. Luiz Afonso dos Santos Senna - PhD
Geographic Considerations
FOB (free on board) plant or FOB origin:
Price quotation that does not include shipping
charges. Buyer pays all freight charges to
transport the product from the manufacturer
Freight absorption: system for handling
transportation costs under which the buyer may
deduct shipping expenses from the costs of
goods
Geographic Considerations
80. Luiz Afonso dos Santos Senna - PhD
Uniform-delivered price: system for handling
transportation costs under which all buyers are
quoted with the same price, including transportation
expenses
Zone pricing: system for handling transportation
costs under which the market is divided into
geographic regions and a different price is set in
each region
Basing-point system: system for handling
transportation costs in which the buyer’s costs
included the factory price plus freight charges from
the basing-point city nearest the buyer. Seeks to
equalize competition between distant marketers
87. Luiz Afonso dos Santos Senna - PhD
Penetration Pricing
Price set to ‘penetrate the market’
‘Low’ price to secure high volumes
Typical in mass market products – chocolate bars,
food stuffs, household goods, etc.
Suitable for products with long anticipated life cycles
May be useful if launching into a new market
89. Luiz Afonso dos Santos Senna - PhD
Market Skimming
High price, Low volumes
Skim the profit from the market
Suitable for products that have
short life cycles or which will
face competition at some point
in the future (e.g. after a patent
runs out)
Examples include: Playstation,
jewellery, digital technology,
new DVDs, etc.
90. Luiz Afonso dos Santos Senna - PhD
Market Skimming
Many are predicting a firesale in
laptops as supply exceeds demand
Plasma screens: Currently at
high prices but for how long?
Title: Thin-shaped television. Copyright: Getty Images,
available from Education Image Gallery
92. Luiz Afonso dos Santos Senna - PhD
Value Pricing
Price set in accordance with
customer perceptions about
the value of the product /
service
Examples include status
products/exclusive products
Companies may be able to set prices
according to perceived value.
Title: BMW At The Frankfurt Auto Show. Copyright:
Getty Images, available from Education Image Gallery
94. Luiz Afonso dos Santos Senna - PhD
Loss Leader
Goods/services deliberately sold below cost to
encourage sales elsewhere
Typical in supermarkets, e.g. at Christmas, selling
bottles of gin at £3 in the hope that people will be
attracted to the store and buy other things
Purchases of other items more than covers ‘loss’ on
item sold
e.g. ‘Free’ mobile phone when taking on contract
package
96. Luiz Afonso dos Santos Senna - PhD
Psychological Pricing
Used to play on consumer perceptions
Classic example - $9.99 instead of $10.00!
Odd-even: $5.95, $.79, $699 OR $12, $50
Multiple Unit-3 for !1.00 better than $.34 each
97. Luiz Afonso dos Santos Senna - PhD
Psychological Pricing
Odd-Even Pricing
Odd numbers convey a bargain
image -- $.79, $9.99, $699
Even numbers convey a quality
image -- $10, $50, $100
98. Luiz Afonso dos Santos Senna - PhD
Psychological Pricing
Prestige Pricing – sets a higher than
average price to suggest status
99. Luiz Afonso dos Santos Senna - PhD
Psychological Pricing
Multiple-Unit Pricing – 3 for $.99
Suggests a bargain and helps
increase sales volume.
Better than selling the same items
at $.33 each.
100. Luiz Afonso dos Santos Senna - PhD
Psychological Pricing
Everyday Low Prices (EDLP)
– set on a consistent basis
102. Luiz Afonso dos Santos Senna - PhD
Going Rate (Price Leadership)
In case of price leader, rivals have difficulty in competing on
price – too high and they lose market share, too low and the
price leader would match price and force smaller rival out of
market
May follow pricing leads of rivals especially where those rivals
have a clear dominance of market shar
Where competition is limited, ‘going rate’ pricing may be
applicable – banks, petrol, supermarkets, electrical goods – find
very similar prices in all outlets
104. Luiz Afonso dos Santos Senna - PhD
Tender Pricing
Many contracts awarded on
a tender basis
Firm (or firms) submit their
price for carrying out the
work
Purchaser then chooses
which represents best value
Most government contracts
A European consortium led by Airbus
recently won a contract to supply
refuelling services to the RAF – priced
at £13 billion!
106. Luiz Afonso dos Santos Senna - PhD
Price Discrimination
Charging a different price for
the same good/service in
different markets
Requires each market to be
impenetrable
Requires different price
elasticity of demand in each
market
Air/rail
First class
Business class
Economy class
Prices for rail travel differ for the same
journey at different times of the day
107. Luiz Afonso dos Santos Senna - PhD
Discounts and Allowances
Cash Discounts – offered to
buyers to encourage them to pay
their bills quickly.
2/10, net 30
Quantity Discounts – offered for
placing large orders
Trade Discounts – the way
manufacturers quote prices to
wholesalers and retailers.
108. Luiz Afonso dos Santos Senna - PhD
Promotional Pricing -- Used with sales
promotion
Loss Leader Pricing – offering very
popular items for sale at below-cost
prices
Special-Event
Back-to-school specials
Dollar days
Anniversary sales
Rebates and Coupons
109. Luiz Afonso dos Santos Senna - PhD
Discounts and Allowances
Seasonal Discount – offered
outside the customary buying
season
110. Luiz Afonso dos Santos Senna - PhD
Discounts and Allowances
Allowances – go directly to the
buyer. Customers are offered a
price reduction if they sell back an
old model of the product they are
purchasing
112. Luiz Afonso dos Santos Senna - PhD
Destroyer/Predatory Pricing
Deliberate price cutting or
offer of ‘free gifts/products’ to
force rivals (normally smaller
and weaker) out of business
or prevent new entrants
Anti-competitive and illegal if
it can be proved
Typical of oligopoly with
collusion
Microsoft – have been accused of predatory
pricing strategies in offering ‘free’ software as
part of their operating system – Internet
Explorer and Windows Media Player - forcing
competitors like Netscape and Real Player out
of the market
113. Luiz Afonso dos Santos Senna - PhD
114
The Legality and Ethics of
Price Strategy
Issues
That Limit
Pricing
Decisions
Unfair Trade Practices
Price Fixing
Price Discrimination
Predatory Pricing
114. Luiz Afonso dos Santos Senna - PhD
Unfair Trade Practice Acts
Laws that prohibit
wholesalers and retailers from
selling below cost
115. Luiz Afonso dos Santos Senna - PhD
Price Fixing
An agreement between two or
more firms on the
price they will charge
for a product (usually in oligopolistic
markets)
116. Luiz Afonso dos Santos Senna - PhD
Price Discrimination
The Robinson-Patman Act of 1936 (USA):
Prohibits any firm from selling to two or
more different buyers at different prices if
the result would lessen competition
118. Luiz Afonso dos Santos Senna - PhD
Predatory Pricing
The practice of charging a
very low price for a product
with the intent of driving
competitors out of business or
out of a market.
119. Luiz Afonso dos Santos Senna - PhD
120
Discussion: Impact of Ethics on
Pricing
How should you price if your product is a life-
saving drug?
What are the ethical considerations?
Customers have no choice
Need to pay for the research
When cheaper options doesn’t work
Competition decides
120. Luiz Afonso dos Santos Senna - PhD
Some other pricing strategies
These all involve the use of some numerical
understanding….
122. Luiz Afonso dos Santos Senna - PhD
Absorption/Full Cost Pricing
Full Cost Pricing – attempting to set price to
cover both fixed and variable costs
Absorption Cost Pricing – Price set to
‘absorb’ some of the fixed costs of production
124. Luiz Afonso dos Santos Senna - PhD
Marginal Cost Pricing
Marginal cost – the cost of producing ONE extra or ONE fewer
item of production
MC pricing – allows flexibility
Particularly relevant in transport where fixed costs may be
relatively high
Allows variable pricing structure – e.g. on a flight from London to
New York – providing the cost of the extra passenger is
covered, the price could be varied a good deal to attract
customers and fill the aircraft
125. Luiz Afonso dos Santos Senna - PhD
Marginal Cost Pricing
Example:
Aircraft flying from Bristol to Edinburgh – Total Cost (including
normal profit) = £15,000 of which £13,000 is fixed cost*
Number of seats = 160, average price = £93.75
MC of each passenger = 2000/160 = £12.50
If flight not full, better to offer passengers chance of flying at
£12.50 and fill the seat than not fill it at all!
*All figures are estimates only
127. Luiz Afonso dos Santos Senna - PhD
Contribution Pricing
Contribution = Selling Price – Variable (direct costs)
Prices set to ensure coverage of variable costs and a
‘contribution’ to the fixed costs
Similar in principle to marginal cost pricing
Break-even analysis might be useful in such
circumstances
129. Luiz Afonso dos Santos Senna - PhD
Target Pricing
Setting price to ‘target’ a specified profit level
Estimates of the cost and potential revenue at
different prices, and thus the break-even
have to be made, to determine the mark-up
Mark-up = Profit/Cost x 100
This strategy is used by many clothes
retailers where they can add upto 60% mark-
up on the basic cost of the clothes. So even
with a 50% sales offer they still make a profit!
133. Luiz Afonso dos Santos Senna - PhD
Influence of Elasticity
Price Inelastic:
% change in Q < % change in P
e.g. a 5% increase in price would be met by a
fall in sales of something less than 5%
Revenue would rise
A 7% reduction in price would lead to a rise in
sales of something less than 7%
134. Luiz Afonso dos Santos Senna - PhD
Influence of Elasticity
Any pricing decision must be mindful of the impact of
price elasticity
The degree of price elasticity impacts on the level of
sales and hence revenue
Elasticity focuses on proportionate (percentage)
changes
PED = % Change in Quantity demanded
% Change in Price
135. Luiz Afonso dos Santos Senna - PhD
Influence of Elasticity
Price Elastic:
% change in quantity demanded > % change in price
e.g. A 4% rise in price would lead to sales falling by
something more than 4%
Revenue would fall
A 9% fall in price would lead to a rise in sales of
something more than 9%
Revenue would rise
136. Luiz Afonso dos Santos Senna - PhD
137
Select a Pricing Method
Mark-up Pricing - “Cost Plus”
Target Return Pricing
Perceived Value Pricing
137. Luiz Afonso dos Santos Senna - PhD
Device Pricing vs. Whole Product Pricing
Value of any product to its market is strongly
influenced by prices of competitive products
Competitive “devices” are analyzed, but
“products” are priced
Product “features” have different values:
Customer service
Warranties
Distribution channels (e.g., convenience)
The “sum” of the features makes up the
“product”
138. Luiz Afonso dos Santos Senna - PhD
Determining Perceived Value
What value is placed on the end result?
The cost of alternative solutions to the
customer.
A function of:
Prices of comparable (though not identical)
products
The “value” (+/-) of the product’s differences vs.
the competitive offering
The value of the “Whole Product”
139. Luiz Afonso dos Santos Senna - PhD
Economic Value Analysis
Identify the cost of the competitive product
or process (i.e., the reference value)
Identify all the factors that differentiate the
product.
Determine the value to the customer of
these differentiating factors (i.e., the
differentiation value)
Sum the reference value and the
differentiation value to determine the total
economic value.
140. Luiz Afonso dos Santos Senna - PhD
Product
Performance
Economic Value
Customer’s
Perceived
Value
Marketing Effort*
Pricing Decision
*A key task of marketing is to translate
the economic value into high
customer perceived value
Economic Value vs. Perceived Value
142. Luiz Afonso dos Santos Senna - PhD
Select the Final Price
Desired/Required Distributor Margins
Psychological pricing
Influence of other marketing mix elements
Company pricing policies
Impact of price on others
143. Luiz Afonso dos Santos Senna - PhD
Conjoint Analysis
Stated Preference Methods
Trade-off Analysis
and
Behavioural models
144. Luiz Afonso dos Santos Senna - PhD
Behavioural Models
-Logit Model-
e= basis of the logarithm neperiano
i- alternative being considered
J= set of alternatives where i is one of them
Ui= utility function of altarnative i
Uj= utility function of alternative j
145. Luiz Afonso dos Santos Senna - PhD
Ui = utility function
α= parameters to be estimated
Xi= attributes
146. Luiz Afonso dos Santos Senna - PhD
Data Collection
Revealed Preference
Data gained from experience
Good to know about previous experience and
existing products/services
Stated preference
Data gainded from hipothetical questions in
selected scenarios
Good to gain information about new
services/products