The document discusses pricing strategies and considerations for a new coffee shop. It covers factors to consider like demand, costs, competition, trade relationships, and legal issues. It provides models and frameworks for setting prices, including analyzing break-even points, margins, and negotiating strategies. The key takeaways are to determine pricing objectives based on costs and customers, analyze competitive factors and channel power, and consider legal restrictions to develop an optimal pricing plan linked to marketing strategy.

1. McGraw-Hill/Irwin Copyright © 2009 by the McGraw-Hill Companies, Inc. All rights reserved.

2. Chapter 14
Pricing and
Negotiating for Value

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. PRICING ISSUES: WHY PRICING IS DIFFICULT
Subjective and
Objective & Explicit
Interpretive
1. DEMAND FACTORS 1. STRATEGY ISSUES
(How much do (Pricing objectives)
customers want) 2. COMPETITIVE
2. COST FACTORS FACTORS
(Actual outlays) (Rivals’ prices)
3. TRADE FACTORS
(Channel power)
4. LEGAL FACTORS
(Restrictions and
discrimination)
14-4

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. SUPPLY AND DEMAND
Price
Supply
Demand
Quantity
Exhibit 14-3
14-6

7. ANALYZING MARKET STRUCTURES
Types of
situations
Important Pure Monopolistic
dimensions Competition Oligopoly Competition Monopoly
Uniqueness of each None None Some Unique
firm’s product
Number of Many Few Few to many None
competitors
Size of competitors
(compared to size Small Large Large to small None
of market
Elasticity of Kinked demand
demand facing Completely curve (elastic and Either Either
firm Elastic inelastic
Elasticity of
industry demand Either Inelastic Either Either
Control of price by None Some (with care) Some Complete
firm
Exhibit 14-5
14-7

8. 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

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. 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
14-10

11. 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 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. TYPES OF PRICING
1. ADMINISTERED PRICES -
Prices established by seller as impersonal and
take-it-or-leave it offers
2. COMPETITIVE BIDDING –
OPEN BIDDING – Any organization can
compete for business
CLOSED BIDDING - Solicits bids from
exclusive list of potential suppliers
3. NEGOTIATED PRICES
Seeks prices based on mutually agreeable terms
14-12

13. 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
14-13

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. 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