Chap014 pricing and negotiating for value
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Transcript of Chap014 pricing and negotiating for value
McGraw-Hill/Irwin Copyright © 2009 by the McGraw-Hill Companies, Inc. All rights reserved.
Chapter 14
Pricing and
Negotiating for Value
AssignmentAssignment
• You are setting up a new coffee shop:• Your target customers are students, young adults such as 9X, 8X.
• Your rent: 2,000 USD/ month
• Initial investment (construction, interior design, furniture…): 100.000 USD
• Work in Group:
- Design your products/ services and pricing plan for your products and services
- Discuss all the factors that you consider when designing your product and pricing plan.
- How many pricing options do your group have?
- How pricing plan is linked with your overall marketing strategy and plan?
PRICING ISSUES: WHY PRICING IS DIFFICULT
Objective & Explicit
1. STRATEGY ISSUES(Pricing objectives)
2. COMPETITIVEFACTORS(Rivals’ prices)
3. TRADE FACTORS(Channel power)
4. LEGAL FACTORS(Restrictions anddiscrimination)
1. DEMAND FACTORS(How much docustomers want)
2. COST FACTORS(Actual outlays)
Subjective andInterpretive
14-4
A MODEL FOR MANAGING PRICE
Evaluation and Formation of
Prices & policy
Demand Factors• Elasticity of demand
• Cross elasticities
• Customer value
perceptions
1
Cost Factors
• Costs now
• Anticipated costs
• Economic objectives
2
Cost Factors• Structure of competition• Barriers to entry• Intent of rivals
3
Strategy Issues• Target market selection• Product positioning• Price objectives• Marketing program
4
Trade Factors• Power in the channel• Traditions and roles• Margins
5
Legal Factors• Vertical restrictions• Price discrimination
6
Exhibit 14-2
14-5
SUPPLY AND DEMAND
Quantity
Demand
SupplyPrice
Exhibit 14-3
14-6
Exhibit 14-5
Types ofsituations
Importantdimensions
Pure Competition Oligopoly
MonopolisticCompetition Monopoly
Uniqueness of each firm’s product None None Some Unique
Number of competitors Many Few Few to many None
Size of competitors (compared to size of market
Small Large Large to small None
Elasticity of demand facing firm
Completely Elastic
Kinked demand curve (elastic and inelastic
Either Either
Elasticity of industry demand Either Inelastic Either Either
Control of price by firm None Some (with care) Some Complete
ANALYZING MARKET STRUCTURES
14-7
Exhibit 14-9
BREAK-EVEN ANALYSIS
BREAK-EVEN IS DONE TO FIND THE LEVEL OF SALES TO COVER ALL FIXED AND VARIABLE COSTS
Q is quantity; FC, fixed costs; VC, variable costs;UVC, unit variable costs; Price, average revenue
BREAK-EVEN OCCURS WHEN: TOTAL REVENUE=TOTAL COSTBREAK-EVEN OCCURS WHEN: TOTAL REVENUE=TOTAL COST
Given: Price x Q = FC + VC = FC x (UVC x Q)Given: Price x Q = FC + VC = FC x (UVC x Q)
Solve for Q (quantity) (Price × Q) – (UVC × Q) = FC Q(Price – UVC) = FC Q = FC/(Price-UVC) = FC / unit margin
Solve for Q (quantity) (Price × Q) – (UVC × Q) = FC Q(Price – UVC) = FC Q = FC/(Price-UVC) = FC / unit margin
Solve for Q (quantity) (Price × Q) – (UVC × Q) = FC Q(Price – UVC) = FC Q = FC/(Price-UVC) = FC / unit margin
Solve for Q (quantity) (Price × Q) – (UVC × Q) = FC Q(Price – UVC) = FC Q = FC/(Price-UVC) = FC / unit margin
14-8
KEY DECISIONS IN MANAGING PRICE
• DETERMINE PRICING STRATEGY– Develop specific approach to achieve price objectives
• DETERMINE CHANNEL INTERMEDIARY PRICES, COSTS AND MARGINS
• DETERMINE SINGLE PRODUCT AND PRODUCT LINE PRICING
• Develop pricing structures for substitute and complementary products
• DETERMINE WHETHER TO PARTICIPATE IN BIDDING AND NEGOTIATION FOR SALES
• ESTABLISH A PRICING SYSTEM
• Based on the 4 C’s : Costs, Customers, Competitors, and Channels 14-9
SCENARIO: What sales increase is needed to cover a $1.2 million increase in expenditures?
MARGINAL ANALYSIS
NR = $1.2 million + COGS
NR = $1.2 million + .75 NR
.25 NR = $1.2 million
NR = $1.2 million / .25
NR = $4.8 million
WHERE: COGS = 75% of Net Sales NR = New Revenue
14-10
Exhibit 14-11
A PRICE INCREASE/DECREASE BY ONE CHANNEL MEMBER WILLIMPACT THE PRICE CHARGED BY SUBSEQUENT CHANNEL MEMBERS
CALCULATING MARGIN CHAINS
ASSUME: Given a new product selling for $10,what is the maximum factory price allowable?
WHOLESALER DEALERNet Sales 100% Net Sales 100%
COGS 85% COGS 70%
Gross Profit 15% Gross Profit 30%
Apply $10 dealer priceNet Sales $7.00 Net Sales $10.00
COGS 5.95 COGS 7.00
Gross Profit $1.05 Gross Profit $ 3.0014-11
TYPES OF PRICINGTYPES OF PRICING
1. ADMINISTERED PRICES - Prices established by seller as impersonal and take-it-or-leave it offers
2. COMPETITIVE BIDDING –OPEN BIDDING – Any organization can compete for business CLOSED BIDDING - Solicits bids from exclusive list of potential suppliers
3. NEGOTIATED PRICESSeeks prices based on mutually agreeable terms
14-12
ROBINSON-PATMAN ACTROBINSON-PATMAN ACT
VIOLATIONS OCCUR:
1. When different prices are charged to competitors;
2. The differences are not attributable to cost differences;
3. The product is essentially the same for each competitor;
4. The effects are damaging to competition
14-13
NEGOTIATION PRIMERNEGOTIATION PRIMER
● AVOIDANCE: When a company doesn’t need to deal with the partner or to make a deal
*● ACCOMMODATION: Sacrifice necessary to hold or sustain a relationship
● COMPROMISE: Hybrid of competition and accommodation
*● COMPETITIVE NEGOTIATION: There is a winner and a loser
*● COLLABORATION: Joint problem solving for a creative win-win solution
*NEGOTIATION STRATEGY OPTIONS
14-14
LEVERAGE FOR A GLOBAL PRICING CONTRACT
These products or services are a significant portion of customer’s purchases.
Local markets are reasonably homogeneous.
Customer’s top management is omitted.
Customer seeks value enhancement more than cost cutting.
Supplier has good working relationships not just at HQ, but with the company’s country managers.
Customer and supplier have some implementation experience with global strategies played out at local levels.
Exhibit 14-1614-15