Marketing Management Lecture Week 11 PRICE DISC CHANNELS

Marketing Management Lecture Week 11 PRICE DISC CHANNELS -...

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Professor Arjun Chakravarti Spring 2010 MARKETING MANAGEMENT WEEKS 11-12 : Foundations of Product Pricing
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Understanding of Pricing (To this point) I. Understanding the needs of the consumer (Using EVC and Conjoint) - What are consumer sources of willingness to pay? - Irrespective of competitive factors II. Measurement and Evaluation - EVC: estimate max WTP relative to other options - Conjoint: Elasticities of relevant attributes - Qualitative Interviews
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Once needs are understood: III. Company demand and viability analysis 1. Understand needs of consumer segments 2. Quantify into WTP… …does the firm have the ability / desire to provide it? 3. Necessary: Can firm afford to make it? (Cost-plus view) 4. Necessary and sufficient: Do profit outcomes meet the needs of the firm over a specific time horizon? What does this imply about the logic of “Cost-plus” pricing?
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Price every step as a negotiation Think about all pricing problems as a negotiation Basic Rules of Negotiation: STARTING ASSUMPTION: 1. You sell directly to end user 2. Every intermediate step needed to deliver the product could be done by you or you could outsource it.
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Existing Vertical vs. Horizontal Competition Retailer Manufacturer Distributor Vertical Chain End User Buyer Retail Manufacture Distribute End User Buyer Horizontal Chain Horizontal Chain - Two competing firms (Kraft, Nestle) Vertical Chain - Firms offering different services to get product to market - Profit level available to the entire chain is distributed based on the market power of players in the chain. - e.g., Where is Walmart on the vertical chain? - Profit analysis determines “make” vs. “buy” (Besanko, Ch 5) OUTSOURCED INSOURCED
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Price every step as a negotiation Simple Model: - Sell direct to another party - In-source everything all production Example: A Cup of Roast Coffee - You are a manufacturer selling direct to drinkers of coffee STEP 1. Establish Willingness to Pay by the End User ($3) - What price can you charge as a monopolist ? ANSWER: $3. - If you charge more, people won’t buy coffee. - If you charge less, you are leaving money on the table
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From Monopoly to Competition Total Economic Value FIRM COST TO PRODUCE 1. Large number of producers and consumers 2. All firms are small relative to the industry 3. No producers or consumers have market power (Why?) - Homogeneous product across firms (no differentiation) - All consumers have perfect information (no asymmetry) - Consumers can distinguish “lemons” from plums Note: Homogeneity includes “search costs” Now assume that the firm is competing to provide coffee in a perfectly competitive market. $3 $1
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Market Dynamics S D P Q Price convergence in perfect competition Someone might be willing to pay this much…but consumers are strategic While a supplier would like to take that price, other homogenous suppliers will bid down until they reach zero profits.
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Marketing Management Lecture Week 11 PRICE DISC CHANNELS -...

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