Lecture 7 Pricing Management

Lecture 7 Pricing - Pricing Manage e m nt(Nove be 5 10 12 and 17 mr Diffe nt form of price re s(a Fixe(constant ove theshort te and for all custom

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Pricing Management (November 5, 10, 12, and 17)
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Different forms of price: (a) Fixed (constant, over the short term and for all customers) (b) Flexible prices changing (a) from customer to customer (b) rapidly over time (c) Offered by Sellers – Accepted by Buyers (d) Offered by Buyers – Accepted by Sellers (Reverse pricing – the Priceline model, Auctions)
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From a marketer’s perspective, prices should be able to exploit differences in consumers’ reservation price (maximum willingness to pay) Customer A B C Reservation price $20 $15 $10 With fixed pricing $10 Revenue = $30 (A, B, and C buy) $15 Revenue = $30 (A and B buy) $20 Revenue = $20 (A buys) With flexible pricing, Revenue = $45
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HOW MUCH FOR A COKE? One of the great moments in the history of price foolishness involved Coca-Cola. On October 28, 1999, the New York Times reported that Coke was testing a vending machine that could sense the outside temperature and "automatically raise prices for its drinks in hot weather." The story came from Coke's then-chairman, Douglas Ivester. He was describing the technology to a Brazilian magazine, bragging that it could increase price during a sports championship in summer heat "when it is fair that it should be more expensive." Coke confirmed the testing; Pepsi said that it would never "exploit" customers in hot weather.
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Considerations (in setting a price) (a) Costs set the floor (e.g., cost plus or markup pricing) (b) Competitors set the ceiling (e.g., competitive parity pricing) (c) Perceived value (benefits) determines the final price (e.g., perceived value pricing)
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The pricing method that you adopt depends upon your objective (a) Survival (new entrant): Cost plus (markups), below costs, breakeven (b) Competitive parity: Value pricing (c) Maximize profits: Profit maximizing price (d) Gain market share: Penetration pricing (e) Recover investments: Skimming pricing (f) Mess with the customers’ head: Psychological pricing
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Markup Pricing (On Cost, On sales): China Nike Wholesaler Retailer Customer ($15) ($20) ($30) ($50) Nike buys at $15 per pair from the manufacturers in China and sells to the wholesaler for $20 per pair
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China Nike Wholesaler Retailer Customer ($30) ($50) Retailer Customer Retailer puts a markup of $20 ($50 - $30) This $20 markup can be described as (a) 67% markup on costs ($-markup divided by the cost price, $30), or (b) A 40% markup on sales ($-markup divided by the selling price, $50)
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Retailer Customer Retailer’s cost = $30 Retailer’s markup = 40% on sales Cost = 60% of sales (= $30) Markup = 40% of sales Total = 100% (Cost + Markup = Selling Price) Selling price = $30/0.6, or $50
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Total Revenue = Total Costs Key terms: (a) Contribution: (Price – Average Variable Costs) (b) Breakeven Volume: How much (quantity) would you need to sell (usually in a year) to break even? (c) Breakeven Price:
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This note was uploaded on 02/21/2010 for the course MKTG 311 taught by Professor Chatterji during the Fall '08 term at Binghamton University.

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Lecture 7 Pricing - Pricing Manage e m nt(Nove be 5 10 12 and 17 mr Diffe nt form of price re s(a Fixe(constant ove theshort te and for all custom

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