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Lecture 7 Pricing Management

Lecture 7 Pricing Management - Pricing Manage e m nt(Nove...

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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) Flexibleprices changing (a) from customer to customer (b) rapidly over time (c) Offered by Sellers – Accepted by Buyers (d) Offered by Buyers – Accepted by Sellers (Reversepricing – the Pricelinemodel, Auctions)
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From a marketer’s perspective, prices should be ableto 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 flexiblepricing, 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 theceiling (e.g., competitiveparity pricing) (c) Perceived value(benefits) determines thefinal price(e.g., perceived value pricing)
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Thepricing method that you adopt depends upon your objective (a) Survival (new entrant): Cost plus (markups), below costs, breakeven (b) Competitiveparity: Valuepricing (c) Maximizeprofits: Profit maximizing price (d) Gain market share: Penetration pricing (e) Recover investments: Skimming pricing (f) Mess with thecustomers’ 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 $20 markup can bedescribed as (a) 67% markup on costs ($-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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Breakeven Pricing: 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: Given a target quantity for a year, what should be the price that enables you to break even?
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Somebasic relationships: Total Revenue = Price (P) X Quantity sold (Q) Total Costs = Fixed Costs (FC) + Total VariableCosts Total VariableCosts = Quantity sold (Q) X AverageVariable Cost (AVC)
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