The Path to Product Excellence: Avoiding Common Pitfalls and Enhancing Commun...
Mrevfo sujet n°a14 groupe 14_2011-11-04
1. Le 04/10/11
GENIS N.
LEVY M.
BRILLET DE CANDE T.
SEROL A.
LAHLOU A.
DAUVIN N.
Groupe 14 – Management des Achats
1
2. « In the classic economic supply and demand
model, prices are largely driven by competition »
Purchasing and Supply Chain Management,MONCZKA, Chapter X
To what extent MONCZKA recommendations
would be applicable?
Does this recommendation cope with any market
situation?
What are the limitations of this approach?
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3. Introduction
1- Different criterias to set up prices
a) Determining factors
b) Influencing factors
2- Comparison with some market situations
a) Market situation validating MONCZKA
approach
b) Market situations challenging MONCZKA
approach
Conclusion
Bibliography
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4. a) Determining factors
Type of fixing price to apply: cost based or market driven
Cost based
Price is whether:
Deduced:
• Total cost of the product + Margin wanted = price
Induced:
• Target price – fixed margin = Allowable cost of the
product.
• ROI the company wants in order to compensate
investments
BUT
Determining factors are not exhaustive. They don’t take
into account external factors.
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5. a) Determining factors
Competition
- Big
- Monopoly
Supply & Market
Client
Demand driven
Suppliers
- N° suppliers
- Integration
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6. b) Influencing factors
Economic
Upstream market conditions
Suppliers Price
Market
structure
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7. b) Influencing factors
Downstream market
Characteristics of the offer
Product life-cycle
Client loyalty
Nature of the strategy : long-term or short-term ?
Understanding the targeted client
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8. a) Example validating MONCZKA technique
The Car industry
Cost based Market driven
Price Volume Renault Differentiation Bugatti, Rolls
Peugeot Royce
Japanese cars
Target pricing Dacia Logan Market Audi, Hybrid
Tata Nano skimming cars: Prius
Rate of return Formula 1 => Promotional Prime à la casse
luxury cars => pricing Anniversary
normal cars End of a serie
(Mercedez, Lottery
Renault, Audi)
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9. b) Example challenging MONCZKA theory
Geographical discount
Price of related products
Psychological price
Yield Management
Auction type pricing
Complementary goods
Seasonal discount
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10. Determining factors are valid and relevant
BUT they are not exhaustive
Fixing prices is a difficult art
MONCZKA can help fixing prices of most
situations nevertheless his approach could be
more complete
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11. Robert M. Monczka (2009), « Purchasing & supply
chain management », 4th edition, chapitre X,
p.251 – 269
Arjan J. van Weele (2010), « Purchasing & supply
chain management », 5th edition, chapitre XV,
p.346 – 354
Targuzo.com, Stratégie de fixation des prix,
http://www.targuzo.com/decision-
marketing/strategie-fixation-prix.html
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Editor's Notes
Problemactic of the presentation : "What are the main determinants of price fixing in the market according to Monckza, and are they sufficient to understand all market situations?"Monczkais a famousprofessorat the Michigan University. Analysing his book allowed us to be aware of all the constraints to take into account in determining the best price to fix for a product on a specific market.First of all, wewanted to understand MONCZKA ‘s approach for fixing prices and to identify the differentfactorsthathetakesintoaccount to set up a purchasingprice.Then, wetried to know if MONCZKA recommandation couldadapt to anymarket situation and whatwere the limitations of itsapproach.
Type of fixing price to apply: cost based or market drivenCost based:Price: Deduced or induced (fixed or variable margin)Deduced:Total cost of the product + Margin wanted = priceExample:Cost markup pricing model: price = costs + percentage mark-upMargin pricing model: price=cost/(1-profit margin)Break-even targetInduced: Target price – fixed margin = Allowable cost of the product (Target pricing model). Example Japanese industries (car industry in the 80’s)Example: Rate of Return pricing model: price= cost+(investment rate of return)/number of units madeROI the company wants in order to compensate investments (margins)Example: Target pricing model: allowable total cost of item= selling price – profitBUTDetermining factors are not exhaustive. They don’t take into account external factors.
Depending on supply/demandExample: Price volume model: lowering the unit price makes more units sold Depending on suppliers:Suppliers competition: Better price for volume offers when big competition on the supplier marketRevenue pricing model : offers the same product at a temporarily lower price in order to wait for the crisis to stop and keep big volume production advantages (can cause harm to a business)Integration with the supplier: cost reductions thanks to synergies benefits to both.Depending on the client: Value => advantages for the clients thanks to the features (the price he is willing to pay for such improvements to his point of view)Incentives, promotional discounts, etc Example:Promotional pricing model : offers a short-term discountCash discounts :suppliers offer incentives when customer pay promptlyDepending on competition:Objective: Align with competition depending on the others’ product and strategy.2 types:If big competition: low prices in order to gain market shares Example: Market share model: a supplier is willing to accept lower profit margin, or even a loss to attract customers (for efficient producer)Competition pricing model : you cannot buy the same item cheaperMonopoly : high prices to take advantage of the position on the market. Example:Market skimming model: price is set to earn a high profit on each transaction, with buyers persuaded to pay more than is necessaryDepends on: Similarity of the offers and entry barriers for new entrantsDifferentiation
The competition structure : monopoly, competitive marketIt is clear that the market environment is influenced by the number of competitors in an industry, the relative similarityof their products, and any existing barriers to entry for new competitors. We can give the example of monopoly situation, whereonly one supplier can provide a given product or service. This happen in the pharmaceutical industry, where the company first to market with a new patented drug has exclusive rights to sell the product for seven years. During this period, the company is the price maker until generics, which copy the drug’s formulation, enter the market, thereby driving down the cost of the drug.Economic conditionsThe Macro economic situation induce variations of the prices :Producer price index is an indicator of the world inflation. Indeed, when commodity prices rise, this automatically leads to higher prices in the market.Interest rates also plays a role as they can influence the company rate of return and also an important thing, which is the price of capital.Currency rates : is an importantelement to be considered in the context of international purchasing.Some aspects of the relationship with the supplier market play a determining role in the price fixing:Type of cooperation with the suppliernumber of suppliersvolume demanded to the supplierintegration and dependence of both companiescollaborative cost-reduction efforts benefiting for both of them
In order to validateMonczka’stheory, we are going to see a typicalexamplewith the car industry.As we know, there are 2 types of models, the costbasedmodels and the marketdrivenmodels.In the costbasedmodels,the price volume modelisunavoidable. In this model, the more cars are produced, the lower are going to be the coststhanks to the learningcurve, and the cheaperisgoing to be the cars. Hence, the demandwillbegreaterthanks to the greaterappeal of the offer. Thus, more cars are needed, etc. So it’s a virtual cycle widespread in the automotiveindustrywhich has been done by nearly all high volume auto makerssuch as Renault, Peugeot or all the japanese cars.Then, the targetpricing model is a reallycommon practice. Costs have been reducedat the maximum by reusingwidespread car components or by making the mostrustic and simple car possible.It has been used for the Dacia Logan whichaimed to besoldunder 5000€ in Romania at the beginning or for the Tata Nano whichaimed to besoldunder 2000$.Anothercostbased model is the rate of return model. Development of new technologies take place in the automotive sport competition in order to have a good image and to test car components in hard conditions. Then the car maker invoicesthistechnology to customers by usingitfromitshigh-end line product first to itslowcost cars in the end. To sum up, itallowed the car maker to innovatehighly in all itsproduct line withoutmakingittooexpensive for theirbottom-of-the-line cars.In the marketdrivenmodels:Differentiationisusuallyused in order to fix a highprice. The mostrepresentative cars fromthis model wouldbe Bugatti (1 million euros car or more) and Rolls Royce (500 000€). Exclusivity, uniqueness and prestige issoldratherthan a proportionalinnovativeproduct. These cars are usuallyhandcrafted for zero default.The marketskimming model isanother model that has been used by Audi cars or the hybrid cars such as the Toyota Prius to a certain extent. But this model is more significantlyused in the hightechindustry. The PS3 for example (600€ at the beginning, 250€ now for a betterproduct) or the Apple’sproductwhichpriceswere prohibitive from the beginning as theydon’tsufferfrommuchcompetition and the demandstillexist.Finally, the Promotionalpricingisprettycommon. Wecanseeits usage with the French « prime à la casse », whichpermitted to sell more cars before the end of the year. The Anniversary of a serie or its end of production, as well as a lottery or a TV show are otheropportunities to applythisappealingpricing model in order to generate compulsive buyingbehavioursfromcustomerswhothinkthatthistemporaryofferis an unavoidablebargain.
Geographical discount => This discount isgiven to customerswho are locatedclosed to the supplier’sfactory or distribution centre, making the transportation costmuchlowerthanaverage: part of the costbenefitispassed on to the buyer.Inthisway, a local supplier cankeep more distant suppliersaway.Price of relatedproducts=> When a product supplements, your company is paying a price of luxury after the client captured. A manufacturer of razors will pay a reduced price and recoup its margin on sales of adapting to blades.Psychological price=> This approach is used when the marketing manager wants to respond to the consumer rather than an emotional behavior rational. An article sold at 99 cents instead of 1 euro seems much cheaper, for example.Yield management=> used in flexible pricing services characterized by high fixed costs and the presence of a certain inertia of the proposed building (transportation, hotels, ...). Yield management is to maximize the revenue generated by adjusting the variable rate and load factor with a policy of tiered pricing. In this context, the lowest prices are available for reservations made far in advance or on the contrary at the last minute.Auction type pricing=> Common name for several types of sales where the price is neither set nor arrived at by negotiation, but is discovered through the process of competitive and open bidding.Complementary goods=> In an economy with multiple goods, some must be eaten together to meet a need. If X and Y are in this case they are called complementary use of X implies that of Y and vice versa. Therefore, any variation in the consumption of X will result in a similar variation in the consumption of Y in given proportions.(ex: case of light bulbs associated with the purchase of a bedside lamp.)Seasonal discount=> Discount applied to improve manufacturing capacity utilization in periods when sales are low. If the buyer orders out of season, it will get a lower price. (ex: travel tickets)
