Cost plus pricing… Adding standard markup to the cost of the product Unit cost Markup = ________ Price 1 - desired return • EG. if unit cost is $16 and desired return is 20% then selling price is $20 $16 = $20 (1 - .20)
Break-even Analysis Contribution = price - variable cost Total Fixed Costs BEP = ________________ Contribution/unit
Break-even analysis flexibility… • do BEP based on desired market share – is that market share attainable? • Include profit objectives in fixed costs • include marketing costs to see impact on BEP
General Pricing Strategies • Competition Based Pricing – benchmark against competition – strategically: maintains existing market shares • Market Skimming Pricing – maximize price to “skim” profits from segments willing to pay high price – image and quality must support high price – used by high tech firms to recover R&D costs quickly – take advantage of “fad” demands – take advantage of price insensitive innovators • Market Penetration Pricing – low initial pricing to achieve high market share quickly – potential for economies of scale – favourable conditions: • market is price sensitive • economies of scale must exist • low price an effective entry barrier
Pricing Services • unique challenges in allocation of variable costs • pricing strategy = demand smoothing – encourage customers to come during slow hours – Maximizing revenue during high-demand (without alienating consumers)
Promotional Pricing • pricing for short-term sales boost – loss leader to drive traffic – special event pricing (PR) – cash rebates or low-interest financing – problem: easily copied by competitors • can undermine brand equity – “I bought it because it was on sale.” • obscures reference points – What is the “regular” price?
Strategic Price Management • About value vs. price – Add value versus reduce the price • Pricing = process of capturing value – Manage everything that has value to consumers – About customer’s “willingness to pay” which can be influenced • Anderson & Simester found a 20% decrease in demand for an apparel retailer when customers perceived a price increase as unfair • Centralized pricing responsibility • Set policies not reaction
II. Customers use of Price
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