Marketing 400 level case study
azanah
chapter-8.pptxChapter 8:
Pricing Strategy and Management
Will cover
Pricing importance
Pricing considerations
Pricing strategies
Pricing importance
Customers
Competition
Organization
Profit
=
Total Revenue
Total Costs
–
Unit Variable Costs
Unit Price
Fixed Costs
+
Quantity Sold
×
–
Profit
(
)
[
]
=
(
)
Quantity Sold
×
Pricing importance
Attention!
Pricing considerations: Conceptual orientation
Corporate objectives
Regulatory constraints
Competitive factors
Initial pricing discretion
Price ceiling = demand/value to buyers
Final pricing discretion
Price floor = direct variable costs
(and others)
Pricing considerations: Organization objectives
Consistency
Beyond profit maximization
Other objectives (brand image, ROI, price stability, etc.)
Pricing considerations: Other factors
PLC
Channel members
Product line issues
Pricing considerations: Price as value indicator
Value-benefits relationship
Price-value perception
Comparative value
Price considerations: Price elasticity
Elasticity: relationship between change in price and change in demand
E > 1: Elastic price
E < 1: Inelastic price
=
Price Elasticity of Demand
E
Percentage Change in Price
Percentage Change in Quantity Demanded
=
Demand
Price
Elastic (demand drops fast with increasing prices)
Inelastic
(price does not impact demand)
Price considerations: Price elasticity (cont.)
10
Price considerations: Product-line pricing
Cross elasticity
Price differentials
=
Percentage Change in Unit Volume to Break Even on a Price Change
Original Contribution Margin
+
–
Percentage Price Change
Percentage Price Change
(
)
(
)
(
)
Calculating price change impact
Price considerations: Price impact on profit
Example
CM = 20%
Price change = 5% decrease
Formula: -(% price change)
(CM%) + (%price change)
Calculation: -(-5)
(20) + (-5)
Price impact on profit example
= 33
Product Beta (β)
Cost, Volume, and Profit Data
Product Alpha (α)
Effect of price changes example
Formula: -(% price change)
(CM%) + (%price change)
14
Source: Kent B. Monroe, Pricing: Making Profitable Decisions, 3rd ed. (Burr Ridge, IL; McGraw Hill/Irwin, 2003).
Product Beta (β)
Cost, Volume, and Profit Data
Break-Even Sales Change
Product Alpha (α)
+
–
+
–
+
–
+
–
Effect of price changes example
15
Source: Kent B. Monroe, Pricing: Making Profitable Decisions, 3rd ed. (Burr Ridge, IL; McGraw Hill/Irwin, 2003).
Pricing strategies: Full cost types
Markup (P = C/(1 – MU%))
Breakeven (BEu = FC/(P – VC))
Rate of return
=
=
Profit
Investment
Total Revenues
Total Cost
ROI
–
Investment
=
Price
Unit Cost
–
Investment
Quantity
×
×
(
)
(
)
Quantity
ROI example
Example: Formula:
P = $.775
C = $.175
Q = 20,000
I = $80,000
Calculation:
(.775 X 20,000) – (.175 X 20,000)
80,000
15,500 – 3,000 125,000
80,000 80,000
Price
Unit Cost
–
Investment
Quantity
×
×
(
)
(
)
Quantity
=
=
= 15.6%
Pricing strategies: Full cost types (cont.)
Markup
Breakeven pricing
Rate of return
Price at desired rate of return
Price
=
(
)
+
ROI
×
Investment
Unit Cost
×
Quantity
Quantity
Price at desired return example
Example: Formula:
ROI = 15%
C = $.175
Q = 20,000
I = $80,000
Calculation:
(.15 X 80,000 + .175 X 20,000)
20,000
12,000 + 3500 15,000
20,000 20,000
(
)
+
ROI
×
Investment
Unit Cost
×
Quantity
Quantity
=
=
= $.775
Pricing strategies: Variable cost types
Contribution or demand pricing
Variable costs as relevant
Demand stimulation and shifting
Pricing strategies: New offerings
Skimming
Penetration
Intermediate
Pricing strategies: Competitive interaction
“Actions and reactions”
Rarely considered
Options
1: Longer term outlook
2: Competitor focus
Price wars
Unit Sales Volume
1,000
1,000
Unit Selling Price
$10
$10
Unit Variable Cost
$7
$2
Unit Contibution Margin
$3
(30%)
$8
(80%)
Fixed Costs
$1,000
$6,000
Net Profit
$2,000
$2,000
Break-Even Volume
333.3
units
750.0
units
For a 5% price reduction
20.0%
6.7%
For a 10% price reduction
50.0%
14.3%
For a 5% price increase
14.3%
5.9%
For a 10% price increase
25.0%
11.1%
GrossMargin
| Product Alpha | Product Betaa | |||
| Unit Sales Volume | 1,000 | 1,000 | ||
| Unit Selling Price | $10 | $10 | ||
| Unit Variable Cost | $7 | $2 | ||
| Unit Contibution Margin | $3 | (30%) | $8 | (80%) |
| Fized Costs | $1,000 | $6,000 | ||
| Net Profit | $2,000 | $2,000 | ||
| Break-Even Volume | 333.3 | units | 750.0 | units |
| For a 5% price reduction | 20.0% | 6.7% | ||
| For a 10% price reduction | 50.0% | 14.3% | ||
| For a 5% price increase | 14.3% | 5.9% | ||
| For a 10% price increase | 25.0% | 11.1% |
