Define and understand the relative merits of price vs nonprice competition 3

Define and understand the relative merits of price vs

This preview shows page 93 - 102 out of 129 pages.

2.Define and understand the relative merits of price vs. nonprice competition 3.Describe the four basic pricing approaches: cost-, demand-, competition-, and value-based pricing. 4. Know how to compute price using cost-based and demand-based pricing models 5. Know how to compute price using value-based pricing and the multiattribute model 6.Define the critical strategic pricing ratio and its significance 7. Know what is meant by price unbundling and how it is used PRICING DECISIONS ARE IMPORTANT IN U.S. BECAUSE OF RELIANCE ON “ADMINISTERED PRICING” THE PURPOSE OF PRICE IS NOT TO RECOVER COST BUT TO CAPTURE THE VALUE OF THE PRODUCT IN THE CONSUMER'S MIND. VALUE = PERCEIVED BENEFITS / PRICE REFERENCE PRICE --INTERNAL --EXTERNAL PRICE VS. NONPRICE COMPETITION PRICE/QUALITY RELATIONSHIP: PRICE AS A COMMUNICATION TOOL 92
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PRICING APPROACHES *0 COST-BASED *1 PROFIT-BASED *2 DEMAND-BASED *3 COMPETITION-BASED *4 VALUE-BASED COST-BASED PRICING *5 BREAKEVEN ANALYSIS *6 MARKUP KEY CONCEPTS *7 FIXED COST (FC) *8 VARIABLE COST (VC) *9 TOTAL COST (TC) 93
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BREAKEVEN ANALYSIS BREAKEVEN PRICE = (TOT.FC / # UNITS) + UNIT VC BREAK-EVEN ANALYSIS CHART EXAMPLE WHAT PRICE SHOULD SLEEP INN CHARGE FOR ONE NIGHT? (HOTEL CAPACITY IS 250 ROOMS) TWO KNOWNS TOT. FC = $4000 UNIT VC = $8 PER ROOM TWO UNKNOWNS PRICE (P) # UNITS TRY 250 ROOMS BE PRICE = (TOT.FC / #UNITS) + UNIT VC 94 DOLLARS (REVENU E OR COST) TOTAL REVENUE BREAK- EVEN POINT TOTAL COST FIXED COST 0 UNITS PRODUCED AND SOLD 0
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BE PRICE = $4000 / 250 ROOMS + $8 PER ROOM BE PRICE = $16 PER ROOM + $8 PER ROOM = $24 PER ROOM 95
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TRY 200 ROOMS (80% OCCUPANCY) BE PRICE = $4000 / 200 ROOMS + $8 PER ROOM BE PRICE = $20 PER ROOM + $8 PER ROOM = $28 PER ROOM MARKUP PRICING* COST OF GOODS P = (100 - % MARKUP)/100 *MARKUP IS MOST OFTEN EXPRESSED AS A % OF SELLING PRICE, NOT COST OF GOODS EXAMPLE: GIVENS COST = $1000 MARKUP = 50% $1000 P = (100 - 50)/100 = $1000/.5 = $2000 PROFIT-BASED PRICING --TARGET PROFIT PRICING --TARGET RETURN-ON-INVESTMENT (ROI) PRICING TARGET PROFIT PRICING P = TOT. FIXED C (TFC) + TOT. VAR. C (TVC) + TOT. PROFIT ( ) TOT. # UNITS 96
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EXAMPLE: GIVENS TFC = $100K UVC = $100 II= $30K # UNITS = 200 TVC = UVC x #UNITS TVC = $100 x 200 UNITS = $20,000 P = (TFC + TVC +  # UNITS = $100K + $20K + $30K / 200 UNITS = $150,000 / 200 UNITS P = $750/UNIT TARGET ROI PRICING ROI = RETURN ON INVESTMENT TFC + TVC + (INVESTMENT X ROI) P = STD. # UNITS (NOTE: INVESTMENT X ROI = TARGET PROFIT) 97
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EXAMPLE: GIVENS TFC = $175K TVC = $825K INVEST. = $2,000,000 ROI = 20% STD. # UNITS = 700 P = ($175K + $825K + ($2M * .20))/700 UNITS P = ($175K + $825K + $400K)/700 UNITS P = $2000 GENERAL PROBLEMS WITH PURE COST- AND PROFIT-BASED PRICING --Internal focus --Ignores demand, competitive factors --Assumes all that is produced is sold at full price --Fails to account for economies of scale 98
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DEMAND-BASED PRICING *10SKIMMING/PENETRATION *11PRESTIGE PRICING *12BUNDLE PRICING *13DEMAND-MINUS *14CHAIN MARKUP DEMAND-MINUS PRICING 100 - % MARKUP WP = RP X 100 WP = WHOLESALE PRICE RP = RETAIL PRICE EXAMPLE RP = $600 MARKUP = 50% WP = ? -------------------- NOTE: WP IS RETAILER'S COST OF GOODS (100 - 50) WP = $600 X 100 = $600 X .5 = $300 99
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CHAIN MARKUP PRICING SAME AS DEMAND-MINUS BUT INCLUDES A LONGER CHANNEL EXAMPLE CHAIN INCLUDES A MANUFACTURER, A DISTRIBUTOR, & A RETAILER Q: WHAT PRICE SHOULD THE MANUFACTURER CHARGE THE DISTRIBUTOR?
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