Pricing of Consumer Products

Pricing of Consumer Products - Pricing of Consumer Products...

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Unformatted text preview: Pricing of Consumer Products ˆ ˆ ai = σ i + δ ∗ i Pricing of Existing Products as Currently Done Marketing constructs a Sales/Price relationship Information on Competition Proposed Manufacturing levels in the chosen horizon Marketing Market Information Current prices, overall demands, current sales Manufacturing Feasibility, production Schedule and projected Product Costs ˆ ˆ ai = σ i + δ ∗ i New Products In this case Pricing is more difficult because: In a) Consumer profiles need to be chosen b) The actual product may need to be changed in composition or structure to improve profits c) The choice of markets also changes profit distribution d) The existing manufacturing process and the associated Supply Chain may need adaptation, or be built from scratch. e) Advertising means and intensity play a bigger role and need to be decided. All are so intertwined that decisions on each item affect directly all the rest. AN INTEGRATED MODEL IS A MUST ˆ ˆ ai = σ i + δ ∗ i Pricing Model We resort to the following formula from Micro-economics p1d1=p2 d2 where where p1= new product price d1= new product demand p2 = competition’s product price competition d2= competition product demand When no competition exists, then we use p1 d1 =constant =constant We use the above formula for conceptual reasons. In reality we use a slightly more complex one. ˆ ˆ ai = σ i + δ ∗ i Pricing Model p1d1=p2 d2 Explanation When the prices are equal p1= p2 When d1 = d2 Market is split equally This is true only when a) Products are of equal quality (consumer is indifferent when a) prices are equal) b) Consumer has equal knowledge about existence of both products ˆ ˆ ai = σ i + δ ∗ i Pricing Model We therefore introduce two parameters α and β β p1d1=p2 d2 α β: is a positive coefficient that is a measure of how much more appealing to the consumer the new product will be, given equal prices. α: is a positive coefficient that is a measure of how much the consumer knows about the existence of the new product. Not the formula we use in class Not ˆ ˆ ai = σ i + δ ∗ i Pricing Model Assume that β=0.5, that is, the consumer will like the new product twice that as much as the competition. Also assume that α=1, that is, the consumer knows both products perfectly well. Then, when the prices are equal p1= p2 d1 = 2d2 Market share is 2/3 We calculate β as a function of the ratio of “happiness” both products give the customer ˆ ˆ ai = σ i + δ ∗ i Pricing Model In fact β can change throughout time. Too. We propose β = H2/H1 That is, the ratio of “preferences”. We use Hi=Σ wiyi wi= weights yi= Normalized scores (0-1) of consumer attributes (color, taste, smoothness, size, functionality, etc) (color, Connect yi to physical properties or product structure Connect ˆ ˆ ai = σ i + δ ∗ i Pricing Model Assume that β=1, that is, the consumer prefers the new product as much that as the competition. Also assume that α=0.5 , that is, half of consumers know about the that product Then, when the prices are equal p1= p2 Then, d1 = 0.5 d2 Market share is 1/3 ˆ ˆ ai = σ i + δ ∗ i Pricing Model In fact α is a function of time 1 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 Which can be altered by advertisement 0 1 2 3 4 5 1 Saturation Oversaturation 0.9 0.8 Sales 0.7 Threshold 0.6 0.5 Increased advertising 0.4 0.3 (which has a cost ) 0.2 0.1 0 0 1 2 3 4 5 Advertising Rate / Year ˆ ˆ ai = σ i + δ ∗ i Integrated Pricing Model Find (SIMULTANEOUSLY) product composition/Structure Market and consumer profile Price Corresponding Manufacturing Corresponding Supply Chain SUCH THAT Net Present value is maximum Subject to: Subject Maximum Capital Investment Logistic and resource constraints ˆ ˆ ai = σ i + δ ∗ i Example Consider an over-the-counter skin moisturizing lotion for ichthyosis patients Ichthyosis Vulgaris This requires the usual ingredients of a moisturizing lotion (occlusives, Emollients, Humectants) (occlusives, active ingredients to promote desquamation (exfoliants) (exfoliants) Additional ingredients (emulsifying agents, preservatives, thickeners, PH (emulsifying adjustors and antioxidants) ˆ ˆ ai = σ i + δ ∗ i Example Perfect product : Lotion that give MAXIMUM HAPPINESSS Pre-Shower Lotion Formulation Ingredient Percent (%) Function Water 60 Solvent Ammonium Lactate 10 Desquamation Retinyl Palmitate 8 Antioxidant Jojoba Oil 8 Emollient PEG-4 8 Emollient/Liposome Formation Cetyl Alcohol 2.9 Emulsifier Octyldodecanol 2.9 Thickener Phenoxyethanol 0.196 Preservative Maleic Acid 0.004 pH Adjuster ˆ ˆ ai = σ i + δ ∗ i Example Shower Gel Formulation Ingredient Percent % Function Water 52 Solvent Polysorbate-20 20 Surfactant Cocoamidopropyl Betaine 5 Surfactant Lactic Acid 4 Exfollient/NMF Urea 4 NMF Sodium PCA 3 NMF Urocanic Acid 3 NMF Citric Acid 3 NMF Oleic Acid 3 Emollient/Thickener Cetyl Alcohol 2.796 Emulsifier Phenolxyethanol 0.2 Preservative Maleic Acid 0.004 pH Adjustor ˆ ˆ ai = σ i + δ ∗ i Example After-Shower Lotion Formulation Ingredient Percent % Function Water 60 Solvent Dimethicone 10 Humectant Lanolin 8 Humectant PEG-4 6.996 Emollient/Liposome Formation Cetyl Alcohol 5 Emulsifier Ceramide 3 SC Lipid/Humectant Isostearic Acid 2.8 Thickener Palm Oil 2 Emollient γ-Linoleic Acid 1 SC Lipid Cholesterol 1 SC Lipid Phenoxyethanol 0.2 Preservative Maleic Acid 0.004 pH Adjustor ˆ ˆ ai = σ i + δ ∗ i Example How is preference constructed? Consumer rating vs Physical property 10 1 Consumer Rating of Effectiveness Consumer Preference Fraction Consumer Satisfaction vs rating 0.8 0.6 0.4 0.2 8 6 4 2 0 0 0 2 4 6 8 Consumer Rating of Effectiveness 10 0 0.2 0.4 0.6 Diffusion (C/Cideal) 0.8 1 ˆ ˆ ai = σ i + δ ∗ i Example Unfortunately, a loosing money proposition at average market prices Cost (million $) Raw Material Cost/yr 51.62 Total Product Cost/yr 58 Annual Product Revenue/yr 16.2 NPW -125.54 Substitute ingredients are needed Example Happiness model illustrated for Pre-Shower Lotion: Happiness Relative proportions of Water, Ammonium Lactate, Jojoba Oil where changed to give a relative happiness value of β=0.78, and with it, the product sold as the three lotions has competitive prices. NPW (million $) Substitutes NPW vs Package Price (FIXED DEMAND) 400 300 200 100 0 -100 70 -200 -300 -400 -500 -600 75 80 85 90 95 Price per Package ($) 100 105 Next step: Conduct a full optimization using the happiness model and the pricing formulas to also allow demand vary ...
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This note was uploaded on 08/31/2011 for the course CHE 4273 taught by Professor Staff during the Spring '10 term at Oklahoma State.

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