Product Management and New Products Business Marketing Dawne Martin, Ph.D. October 16, 2012.
Pricing Business Marketing Dr. Dawne Martin November 29, 2011.
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Transcript of Pricing Business Marketing Dr. Dawne Martin November 29, 2011.
Pricing Business Marketing
Dr. Dawne Martin
November 29, 2011
Learning Objectives
• Understand the model for pricing, and how strategy, costs, environment and positioning will affect pricing decisions
• To understand how market-based, cost-based and value-based prices are determined
• To understand how to map customer value for determining value-based prices
• To develop price management policies
Question
• The XYZ Manufacturing Corporation has experienced a rather large decline in sales for its component parts. Mary Vantage, vice-president of marketing, believes a 10% price cut may get things going again.
• What factors should Mary consider before reducing the price of the components.?
Managing Pricing
• To support a target-positioning strategy
• To achieve target financial goals
• To fit the realities of the marketplace
• To pursue both cost and demand based pricing principles and processes.
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
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 14-6
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
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
14-9
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 $ 3.0014-10
Prices & Policies• Strategy -- specific approach to achieve
objectives– Attribute bundles and effect on buyer center
• Product-specific attributes• Company-related attributes• Salesperson-related attributes
– Capitalize on unique strengths & market opportunities
• Channel Pricing– Intermediary prices, costs and margins– Channel margin management --Promotion,
restrictions, push Vs pull
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 14-12
Pricing Policies
• Product Line Pricing– Substitute product – based on relative benefits
and price sensitivity of each target market– Complementary products – Price driver product
low in order the penetrate market – negotiate on-going price contracts
– Segmentation Pricing – Based on relative customer value
– Product Life Cycle Issues – pricing new vs. old products
Other Issues• Discounts
– Cumulative vs. Non-cumulative
• Return or Breakage Allowance Leasing• Co-op payments• Trade show support• Legal Issues
– Robinson-Patman Act– Clayton and Sherman Antitrust Acts– Functional discounts – based on purchaser’s role in the
supplier’s distribution system reflecting services performed for the supplier.
What Do You Need to Know
• Customer Price Sensitivity– Customer product perceptions & value– Value Mapping
• Criteria customers use to make purchase decision
• Weight of features in terms of importance
• List of competitors in market (customer perceptions)
• Rating of competitor products on features
• List actual prices for each competitor
• Calculate value position for each
• Plot each on value map
George E. Cressman, Jr. “Snatching Defeat from the Jaws of Victory”, Marketing Management, Summer 1997.
What Do You Need to Know
• Firms Cost Structure– More fixed/less variable costs = lower prices– More variable/less fixed = raise price
• Competitor Strategies & Costs– Strategic Intent
• Which customer groups are “must win”
• Support for positioning and targeting
• How is price used
– Capabilities & barriers
What Do You Need to Know– Likely Outcome -- compare strategic intent with
capabilities & barriers
– Impact on your firm
• Issues in Strategies and Costs– High-fixed cost industries
• Focus on capacity utilization
• Price cuts will generate retaliation
– Price insensitive markets• Price is an estimator of value -- when customer finds it
difficult to forecast quality
Adjustments to Base Price
• Many pricing decisions involve an adjustment to the price of an existing product or service.
• A change in price should be judged in terms of its effects on short or long-term profits rather than sales volume (an outdated decision production rule).
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Linoleum Price to Retailer
How Pricing Tactics Create a Price Range
Price Range
Dealer list
price
Order size
discount
Competitive discount
Invoice price
Payment terms
discount
Annual volume bonus
Off-invoice promotions
Co-op advertising
Freight Pocket price
Source: Robert L. Rosielli, “Managing Price, Gaining Profit,” Harvard Business Review, September/October 1992, 86.
$0.10$0.12
$5.78
$0.30
$0.37$0.35
$0.20$0.09
$4.47
22.7% off invoice
$6.00
Price Tactics that Create a Price Schedule/Range
• Price discriminate against slow payers.
• Price discriminate for volume purchases
• Price discriminate by tying purchases
• Price discriminate to different usage/benefit segments
• Price discriminate against a usage time
• Price discriminate against distant user
ROBINSON-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 competition14-21
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 14-1614-22
Medicus Major• Sells small medical instruments & supplies• Uses national distributor -- Galax
– 50% of sales to large hospitals– 50% to dealers who sell to small hospitals and clinics
• Discount structure– Small hospitals & clinics -- pay list price– Large hospitals -- 12% discount off list– Wholesalers -- 40% discount– Dealers -- 20% discount
Questions
• If Medicus’s price is $4 what is the COGS for Glaxa• What increase in sales must Galax produce to cover
new debt service costs of $185, 000 per year for its truck fleet expansion?
• To enhance coverage of the Southern states, Medicus is considering adding a wholesaler, Dixie Supply, who has made acquisitions to establish a national presence– What are the possible consequences on
• Prices - Channel functions• Channel margins