Lecture 8 Pricing Management April 12, 14, & 28

Lecture 8 Pricing Management April 12, 14, & 28 -...

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Pricing Management (April 12, 14, & 28)
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Priceformats: (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 machinethat could sense the outside temperature and "automatically raise prices for its drinks in hot weather." Thestory came from Coke 's then-chairman, Douglas Ivester. He was describing the technology to a Brazilian magazine, bragging that it could increasepriceduring 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., markup pricing, breakeven pricing) (b) Competitors set theceiling (c) Perceived value(benefits) determines thefinal price(e.g., perceived value pricing)
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Perceived value Product Price Cost of Goods Sold $0 Consumer’s incentiveto buy (Perceivevalue– Price) Seller’s incentiveto sell (Price– COGS)
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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 themanufacturers 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, $50)
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100 X ($) Price Buying ($) Markup 100 X ($) Price Buying ($) Price Buying - ($) Price Selling (%) Costs on Markup 100 X ($) Price Selling ($) Markup 100 X ($) Price Selling ($) Price Buying - ($) Price Selling (%) Sales on Markup = = = =
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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?
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