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1
Pricing Function
PRODUCT MANAGEMENT &PRICING POLICY
Chapter 14:Pricing over the Product Life Cycle
Chapter 15:
Product-Line PricingChapter 16:
Developing a Price Structure
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Chapter 14:Pricing Over the Product Life Cycle
PURPOSE OF THIS CHAPTER :
Review the conceptual Product Life cycle model
Present method for developing pricing strategiesduring different stages of the product life cycle
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Product life cycle
yDevelopment Stage
yIntroduction
yGrowth
yMaturity
ySaturation
yShakeout
yDecline
Sales
trend
Development
Intro
Growth Saturation
Maturity Decline
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Figure 14.1Investment Life Cycle
Cash incomeand
expenditure
CashInvestment
Sales Revenue
Payback point
Direct product
cash cost
Net product cashinflow
Cash recovery of investment
Manufacturing
Marketing
Cumulatif cashinvestment
DEVELOPMENT GROWTH
MATURITY
SATURATION
INTRODUCTION DECLINE
Productdevelopment
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Price elasticity over the product lifecycle
Two broad strategies for pricing new product :
Skimming
Penetration
If the initial price set high because some buyers are not pricesensitive (those who have a relatively high reservation or
maximum price), and if experience factors combine with productquality improvements and increasing competitive pressure fromentering firms to lead to a declining price trend, then we wouldexpect to see increases in price elasticity
Setting relatively high prices
Setting relatively low prices
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Price elasticity over the product lifecycle
Two broad strategies for pricing new product :
Skimming
Penetration
if the initial price is set low to penetrate the market quickly becausebuyers are sensitive to price and there is the possibility of earlycompetitive entries, then the price trend is likely to be increasing over
time.
If the product does provide benefits and value to buyers, then even asthe prices edge upward, we are not likely to see evidence of increasedprice sensitivity, at least until maturity.
Setting relatively high prices
Setting relatively low prices
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Price elasticity over the product lifecycle
y Difficult to make unequivocal statements about how priceelasticity may change over the stages of the product life cycle
y Depends on how the products is initially priced;
y Whether the products price follows a decreasing orincreasing trend over time ;
y The degree to which sellers make quality improvements overtime;
y Degree that buyers perceive real benefits and therefore valuein-use in the product.
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Price elasticity over the product lifecycle
y Managers must not assume that price elasticity isconstant over product, markets, or time.
y If price elasticity is likely to decline for a new product
category, then price reductions aimed at increasing overalldemand will have their strongest effect early in the productlife.
y
If price elasticity increases over the lifecycle, then pricereductions to increase demand will have less effect early butan increasing effect as the product mature
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Table 14.1 Basic pricing decisions
yWhat to charge for the different products and services produced bythe firm
yWhat to charge different types of customers
yWhether to charge different types of distributors the same price
yWhether to give discounts for cash and how quickly payment shouldbe required to earn them
yWhether to suggest resale price or only set the price charged onesown customers
yWhether to price all items in the products line as if they were separateor to price them as team
yHow many different price offerings of each item to have
yWhether to base prices on the geographical location of buyers
yFor establish products, whether to change prices
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Factor to Consider WhenPricing New Products
yDemand consideration provide a ceiling or maximumprice
y The determination of maximum price depends onthe customers perception of value in the selleroffering.
yCost, provide a floor or minimum possible price
y for a new product, the relevant costs are the futureexpected direct costs over the products life cycle
y
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Relevant Cost
Sales Revenue
Direct product cash
cost (relevant cost)
Net product cashinflow
DEVELOPMENT GROWTH
MATURITY
SATURATION
INTRODUCTION DECLINE
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Factor to Consider WhenPricing New Products
yA product that is new to the world passes through distinctivecompetitive stages in its life cycle.
y As new competitors enter the field and innovationsnarrow the gap of distinctiveness between the product and itssubstitutes, pricing discretion narrows.
yWhat the product is worth to the buyer, not what it cost to theseller, is the controlling consideration.
y it is important to analyzing the relationship between thebuyers perceived benefits and the total acquisition cost.
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Estimating demand for a New Product
Will the product fill a need or want and, therefore, will sell ifthe price is right?
At what range of prices will the product be acceptable topotential buyers?
What is the expected sales volumes at feasible price pointsin the acceptable price range?
What is the extent of potential competitive response?
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Buyers Analysis
ySelecting Probable Prices
yBuyers Alternatives-An analysis of demand can be made:
1.Determine the major uses for the product, and then the productsperformance characteristics for these uses
2.Specify the products that are the buyers best alternatives 3. For each use, determine how well the products performance
characteristics meet the requirements of customers compared toalternative products
4. Forecast prices of alternative products
5. Estimate the superiority premium
6. Determine a parity price for the product relative to the buyers bestalternative
(Parity is a price that encompasses the premium a customer would be willing to payfor comparative superiority)
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New-product Pricing
yPricing the Superiority Differential- Determinethe price premium that the new products superiority
will most profitably warrant
Depends on uncertainties for buyer, future costs,and the dynamic demand schedule
yEstimating Costs- A value-oriented approach topricing begins with determining what the target
market would be willing to pay, and then design aproduct using this target cost
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Whose Cost?
yBuyers costs- can be determined by applying value analysistechniques and performance of alternative products to findthe superiority premium
yCompetitors costs- can be determined for products in the market by estimating:Their staying powerThe floor of retaliation pricing
can be determined for unborn competitive products by:Forecasting the relationship between unit direct costs and
cumulative experience
ySellers costs- 1. A new product must be pre-priced in the R&D stage and then
periodically as it progresses toward market
2. Establish a price floor
3. Estimate total costs with and without the new product
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yEstimating the Price-Volume-ProfitRelationship- allows the manager to trace theimplications of different introductory pricing strategies
New-product Pricing
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y 1. Demand is likely to be inelastic during introduction
y 2. Market can be separated into distinct pricesegments
y 3. Skimming is safer when elasticity is unknown (it iseasier to reduce price)
y 4. Cash is needed to fund expansion (caution:sufficient volume must be obtained)
y 5.A capacity constraint exists
y 6. There is realistic perceived value in product
y 7.A high introductory price provides room for futureprice decreases
y 8.A hi h introductor rice ma be used to si nal
When To Use A Skimming Price Strategy
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When To Use A Penetration Price Strategy
y 1. Demand is likely to be elastic during introductiony 2. Product quality and benefits can be easily determined
after trial and usey 3. Possible economies of scale through accumulated
volumey 4. Product faces strong potential competition soon after
introductiony 5. There is no segment of buyers willing to pay a higher
pricey 6. There is high available capacity in production and
distributiony 7.A low introductory price may be used to signal large
experience effects on costs
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Skimming vs. Penetration
y The speed with which a new product losesits uniqueness and sinks to the level of justanother competitive product depends on:
1. Its total sales potential2. The investment required for rivals to manufacture
and distribute the product
3. The strength of the patent and know-how
protection4. The alertness and power of competitors
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(Summary)Guidelines For Pricing New Products
y 1. Clearly define corporate goals
y 2. Begin pricing during development stage
y 3. Use process of successive approximations
(Rough estimates of relevant concepts are preferable to precise knowledge ofhistorical irrelevancies.)
y
4. Cost information about the seller, buyers and sellers rivals can provide usefulguidance
y 5. The only relevant costs are the incremental costs of going ahead; Costs of R&D andmarket testing are irrelevant
y 6. Consider the changing economic and competitive environment of the productthroughout its life cycle.
y 7. Price the product through the eyes of customers. Price it just low enough to make it
irresistible relative to buyers alternatives.y 8. Buyers cost savings (or revenues gained) as a rate of return on their investment is
key to predicting price sensitivity for business customers.
y 9. Choosing between skimming and penetration should be based on a careful analysisof the market.
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Pricing During Growth
yObjective is to select a price that will helpgenerate a sales volume that enables the firmto realize its target contribution 3 essential points for pricing during growth:
1. Range of feasible prices has narrowed
2. Unit variable costs have decreased due toexperience factor
3. Fixed expenses have increased due to increased
capitalization and period marketing costs
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Pricing During Growth
yResponding to Lower-Priced CompetitiveOfferings- The firm should introduce a lower-priced
version of the product before competitors enter
yProlonging the Growth Stage- The firm canrevitalize the product with new and improved
versions
yPricing Next Generation Products
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y
y Pricing objective is to choose the price
alternative leading to maximum contributionFollow competitions reduced prices
Try to reduce costs by using cheaper materials, eliminating severallabor operations, or reducing period marketing costs
PricingDuring Maturity
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Pricing ADeclining Product
y
y Pricing objective is to maximize
contributions per sales dollar generated Most firms eliminate all period marketing costs and remain in the
market as long as price exceeds direct variable costs
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Dynamic Pricing Models
yDiffusion effectrefers to the increased likelihood ofpurchase as market penetration increases
ySaturation effectrefers to the reduction in theunfulfilled demand as market penetration increases
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Focused Price Reductions
Base product vs. option pricesBase product vs. option pricesv Many customers will make their purchase decision using the base
price alone, and then become less price sensitive to additionaloptions or accessories that can be purchased separately
Channel specific pricingChannel specific pricingv Offer lower prices on high-quality products by identifying
distribution channels that serve price sensitive customers andoffering the lower prices through these channels only
Pricing according to customers perceivedPricing according to customers perceived
valuesvaluesv Offering similar services to customers at different prices shifts
demand and enhances volume from price sensitive segments
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Focused Price Reductions
Price bundlingPrice bundlingv Offering two or more products or services at a price that usually is
lower than the sum of the individual prices
Product redesignProduct redesignv Unbundling the base product from the options by changing it in
some way(fewer features, lower grade material, different brandname) and then selling it as a separate, lower-priced product
v The objective is to appeal to price sensitive customers who wouldnormally not buy the original product at its regular price
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Product-line PricingProduct-line Pricing
Chapter 15Chapter 15
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Types of Pricing DecisionsTypes of Pricing Decisions
Determining the lowest priced product and its
price (lowlow--end productend product)
Determining the highest price product and itsprice (highhigh--end productend product)
Setting the price differentials for allintermediate products
Determining the lowest priced product and its
price (lowlow--end productend product)
Determining the highest price product and itsprice (highhigh--end productend product)
Setting the price differentials for allintermediate products
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Conceptual FrameworkConceptual Framework
Demand interrelationships
Complementarity
Substitute relationships Cost interrelationships
Common resources
Common support structure
Nature of marketing strategy
Segmentation issues
Demand interrelationships
Complementarity
Substitute relationships Cost interrelationships
Common resources
Common support structure
Nature of marketing strategy
Segmentation issues
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Determining Price
Differentials
Determining Price
Differentials1. Rank products in ascending order of expected prices, i.e., from low tohigh price.
2. Determine the lowlow--end price,end price, PPminmin..
3. Determine the highhigh--end price,end price, PPmaxmax..
4. The price of thejjth ordered productth ordered product is
5. The problem is to determine kk:
where nn is the number of products in the line
1. Rank products in ascending order of expected prices, i.e., from low tohigh price.
2. Determine the lowlow--end price,end price, PPminmin..
3. Determine the highhigh--end price,end price, PPmaxmax..
4. The price of thejjth ordered productth ordered product is
5. The problem is to determine kk:
where nn is the number of products in the line
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ExampleExample
PminPmin= $25; PmaxPmax= $150; nn = 6
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ExampleExample
PA =$25
PB
= $25(1.431) = $ 35.78 ($ 36)
PC = $35.78(1.431) = $ 51.19 ($ 55)
PD = $51.19(1.431) = $ 73.25 ($ 79)
PE = $73.25(1.431) = $104.82 ($109)
PF = $150
PA =$25
PB
= $25(1.431) = $ 35.78 ($ 36)
PC = $35.78(1.431) = $ 51.19 ($ 55)
PD = $51.19(1.431) = $ 73.25 ($ 79)
PE = $73.25(1.431) = $104.82 ($109)
PF = $150
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GuidelinesGuidelines Segmented pricing strategySegmented pricing strategy:
Noticeable differences should be equivalent to perceived valuedifferences.
Highest and lowest prices in line have a special complementaryrelationship to other offerings priced to encourage desired buyer
perceptions.
Price differentials should get wider as price increases over product line.
TradingTrading--up pricing strategyup pricing strategy:
Decide which products are to be designed and priced similar to eachother.
Higher-priced product should have a feature or observable benefitperceived to be of value, but the incremental price is less than itsperceived value (a smaller price differential).
Segmented pricing strategySegmented pricing strategy:
Noticeable differences should be equivalent to perceived valuedifferences.
Highest and lowest prices in line have a special complementaryrelationship to other offerings priced to encourage desired buyer
perceptions.
Price differentials should get wider as price increases over product line.
TradingTrading--up pricing strategyup pricing strategy:
Decide which products are to be designed and priced similar to eachother.
Higher-priced product should have a feature or observable benefitperceived to be of value, but the incremental price is less than itsperceived value (a smaller price differential).
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Price BundlingPrice Bundling
Price bundling is the tactic of marketing two or moreproducts and/or services for a price below the sum of theindividual prices
It creates an incentive for purchasers of one product toalso buy other(s).
Examples:
Weekend hotel packages
Vacation packages
Cable TV plans
Season ticket plans
Price bundling is the tactic of marketing two or moreproducts and/or services for a price below the sum of theindividual prices
It creates an incentive for purchasers of one product toalso buy other(s).
Examples:
Weekend hotel packages
Vacation packages
Cable TV plans
Season ticket plans
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Developing A Price BundlingS
trategy
Developing A Price BundlingS
trategyFour basic steps
1. Define customer segment targets
2. Determine bundling objectives
3. Determine demand conditions for each
objective 4. Determine profitability of alternative
strategies
Four basic steps
1. Define customer segment targets
2. Determine bundling objectives
3. Determine demand conditions for each
objective 4. Determine profitability of alternative
strategies
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Selecting Products To
Bundle
Selecting Products To
Bundle
1. Select products that have relatively lowunbundled sales volume.
2. Select products that will generate newcustomers.
3. Mixed-leader bundling - the leader (A)
should be both the lower margin product andthe higher volume product. The increase involume of (B) will contribute more to profitsthan the loss in contributions in (A).
4.Mixed-joint bundling - both contribution margins and
unbundled volumes should be about equal.
5. Products should be functionally related to each other and ofequivalent quality.
Buyers evaluate the lead product first.
Then adjust evaluations based on assessment of other items in the bundle.
1. Select products that have relatively lowunbundled sales volume.
2. Select products that will generate newcustomers.
3. Mixed-leader bundling - the leader (A)
should be both the lower margin product andthe higher volume product. The increase involume of (B) will contribute more to profitsthan the loss in contributions in (A).
4.Mixed-joint bundling - both contribution margins and
unbundled volumes should be about equal.
5. Products should be functionally related to each other and ofequivalent quality.
Buyers evaluate the lead product first.
Then adjust evaluations based on assessment of other items in the bundle.
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Price Bundling DecisionsPrice Bundling Decisions
Pure bundle ormixed bundle?Pure bundle ormixed bundle?
Mixed bundles generally more profitable unless bundle purchase is normal orlogical (e.g., Car options; Furniture suites).
Magnitude of price discounts?Magnitude of price discounts? Sufficient to enhance transaction value (20% or more).
For mixed joint bundles, provide some discount on individual items and additionaldiscounts for the bundle (provides greater perceived transaction value).
Pure bundle ormixed bundle?Pure bundle ormixed bundle?
Mixed bundles generally more profitable unless bundle purchase is normal orlogical (e.g., Car options; Furniture suites).
Magnitude of price discounts?Magnitude of price discounts? Sufficient to enhance transaction value (20% or more).
For mixed joint bundles, provide some discount on individual items and additionaldiscounts for the bundle (provides greater perceived transaction value).
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Price Bundling DecisionsPrice Bundling Decisions
Choice and number of bundle itemsChoice and number of bundle itemsSince this is a tactic to enhance sales of low-volume products, do not bundle high-volume,
profitable products.
Items should be functionally related (benefits of use provide synergy to buyer/user).
Mixed leader product should be higher sales volume and lower margin product. Mixed jointproducts should be equivalent in sales volume and margin.
Items should have equivalent perceptions of quality (do not load poor quality items with higherquality items).
Bundles generally should not be larger than five items.
Presentingthe price bundlePresentingthe price bundleThe purchase requirements to qualify for the bundle price must be as transparent as the
bundle price.
This requirement is necessary to prevent customers from forming reference prices that arenot much lower than the bundle price.
Otherwise, confusion, anger and perceptions of unfairness may occur.
Choice and number of bundle itemsChoice and number of bundle itemsSince this is a tactic to enhance sales of low-volume products, do not bundle high-volume,
profitable products.
Items should be functionally related (benefits of use provide synergy to buyer/user).
Mixed leader product should be higher sales volume and lower margin product. Mixed jointproducts should be equivalent in sales volume and margin.
Items should have equivalent perceptions of quality (do not load poor quality items with higherquality items).
Bundles generally should not be larger than five items.
Presentingthe price bundlePresentingthe price bundleThe purchase requirements to qualify for the bundle price must be as transparent as the
bundle price.
This requirement is necessary to prevent customers from forming reference prices that arenot much lower than the bundle price.
Otherwise, confusion, anger and perceptions of unfairness may occur.
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Perishable-asset Revenue
Management
Perishable-asset Revenue
Management Generalizing from the airlines, we can call this management activity one of maximizing
revenues with perishable assets.
Managing perishable assets via price segmentation can be applied outside the airlines.
Lodging and travel
Spectator events (e.g., theater, sports)
Electric Utilities
Services (e.g., photo studio, hair salon, auto repair)
Shipping
High technology products
Broadcast advertising
Banks, savings and loans
Telephone companies
Retail markdowns and scheduling sales
Generalizing from the airlines, we can call this management activity one of maximizingrevenues with perishable assets.
Managing perishable assets via price segmentation can be applied outside the airlines.
Lodging and travel
Spectator events (e.g., theater, sports)
Electric Utilities
Services (e.g., photo studio, hair salon, auto repair)
Shipping
High technology products
Broadcast advertising
Banks, savings and loans
Telephone companies
Retail markdowns and scheduling sales
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The General ProblemThe General Problem
For a particular selling occasion, the seller has a fixed number of units (capacity) to sell by acertain date in the future,
If the units are not sold during this selling occasion, they cannot be sold at any price later.
Two price segments situation:
- Some buyers have a higher acceptable price than others.
- The total number of actual buyers with the high maximum acceptable price will be less thanavailable capacity.
If a single high price is set, then some unknown portion of units will be sold:
Where Is the number of units that could be sold to low-price buyers.
If units are sold at , a discounted price, revenues would increase.
For a particular selling occasion, the seller has a fixed number of units (capacity) to sell by acertain date in the future,
If the units are not sold during this selling occasion, they cannot be sold at any price later.
Two price segments situation:
- Some buyers have a higher acceptable price than others.
- The total number of actual buyers with the high maximum acceptable price will be less thanavailable capacity.
If a single high price is set, then some unknown portion of units will be sold:
Where Is the number of units that could be sold to low-price buyers.
If units are sold at , a discounted price, revenues would increase.
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The Decision ProblemsThe Decision Problems
Choose qlow, the number of units to offer at a discount.
Choose the discount price,plow
Choose the full price,phigh
To maximize revenues for the selling occasion.
Given the nature of demand that occurs for the discounted units,the seller must decide when, and whether to stop selling thediscounted units, and only offer the high price units for theremainder of the selling period.
Examples:Examples:
Electric utility selling power under contract.
Hotel setting aside number of rooms for convention.
Airline determining number of non-refundable discounted seats.
Choose qlow, the number of units to offer at a discount.
Choose the discount price,plow
Choose the full price,phigh
To maximize revenues for the selling occasion.
Given the nature of demand that occurs for the discounted units,the seller must decide when, and whether to stop selling thediscounted units, and only offer the high price units for theremainder of the selling period.
Examples:Examples:
Electric utility selling power under contract.
Hotel setting aside number of rooms for convention.
Airline determining number of non-refundable discounted seats.
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Decision CriterionDecision Criterion
Maximize contributions per sellingoccasionMaximize contributions per sellingoccasion
Operating cost structure: relatively high fixedcosts to total costs.
As long as plowis greater than unit directvariable costs, revenues will be greater than ifonly (qcap qlow) units are sold atphigh.
Maximize contributions per sellingoccasionMaximize contributions per sellingoccasion
Operating cost structure: relatively high fixedcosts to total costs.
As long as plowis greater than unit directvariable costs, revenues will be greater than ifonly (qcap qlow) units are sold atphigh.
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Total RevenuesTotal Revenues
Where X = the number of units sold at fullprice
Where X = the number of units sold at fullprice
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ImplicationsImplications
If one more unit is added to qlow , additional
revenue of plow will occur.
If there is sufficient capacity to meet demandXat phigh, no other effects occur.
If (qlow+X) exceeds capacity, revenue is lessthan optimal by (phigh-plow).
If one more unit is added to qlow , additional
revenue of plow will occur.
If there is sufficient capacity to meet demandXat phigh, no other effects occur.
If (qlow+X) exceeds capacity, revenue is lessthan optimal by (phigh-plow).
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Conditions for Using Yield ManagementConditions for Using Yield Management
Enabling Condition Requirement
Fixed capacity Capacity change costs are high
Perishable inventory Products/services cannot be sold after selling occasion
Fluctuating demand Sometimes stockouts & sometimes unused capacity
Fixed costs High ratio of fixed costs to total costs
Segmentable markets Price sensitive customers can be identified and separated
Arbitrage preventableCustomers who buy at low price cannot resell to less
price-sensitive customers
Early purchase feasibleCustomers are willing and able to purchase in advance of
use
Historical sales dataExisting IT facilitates developing data base to monitor
sales response to price and marketing
Accurate sales forecastSegment by segment demand forecasts facilitate
selective discounting to improve revenues
Information systems Need sophisticated systems to utilize yield management
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Benefits of Yield
Management
Benefits of Yield
Management Continuous monitoring of demand.
Facilitates use of proactive dynamic pricing. Focused price reductions offer leverage for
increasing profits.
Focusing on revenue management shiftsperformance measures from averages tocontributions per unit of resource.
Continuous monitoring of demand.
Facilitates use of proactive dynamic pricing. Focused price reductions offer leverage for
increasing profits.
Focusing on revenue management shiftsperformance measures from averages tocontributions per unit of resource.
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Developing a PriceStructure
Chapter 16
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Sales made in different quantities
Sales made to different types of distributors
Sales made to distributors who perform differentfunctions
Sales made to buyers in different geographicallocations
Sales made with different credit and collectionconditions
Sales made at different times of day, month, season,or year
Managing base/list prices
Pricing Management deals with organizingthe organizational unit responsible for pricing,
establishing, and implementing the tactics to useschedules
when adjusting prices or determining pricesthat establish price differentials
for sales made under different conditions, such as :
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The actual amount of revenues received for the same
product or service varies over time for the samecustomers and, of course, across customers.
Differences in customer profitability can occur eitherbecause of these variations in revenues received fromcustomers, or because of the differences in the cost to
serve this customers.
Every discount, rebate, or allowance result in areduction in revenues
Managing
Transactions
List/base price that is communicated inprice lists, advertisements, catalogs,websites, and other publicly available
outlets provides customers andcompetitors with the firms value
statement
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1. The time and conditions of payment
2. The nature of discounts
3. Where and when buyers will take title
4. Who pays for the transportation of thegoods and how these charges aredetermined
Price StructurePrice structures provide the
foundation for prices bydetermining :
Price structures decisions define how differentialcharacteristics of the product or service will be
priced
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Complex price structures provides flexibility
because they allow for price variations based onvariations in :
product/service attributes
customer characteristics
customer behavior
changing competitive conditions
Offering different product/services in the productline with different features or benefit at differentprices gives sellers the opportunity to develop
prices for buyers who have different degrees ofsensitivity to price levels and price differences
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Complex price structures can becomeinconsistent and incomprehensible tocustomers
Clear and consistent price signals can reducethe likelihood of price wars
This will also provide important qualityinformation to uncertain buyers
When buyers understand how prices they payare determined, they are more likely toperceive pricing procedures as fair and thusaccept the prices
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This illustrates the difficulitiesof making a price structure or
schedule too complex
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The decision makers mustdetermine how prices should varyacross customers, products,
territories, and purchaseoccasions to meet corporateobjectives
This will requires identifying
the key factors thatdifferentiate price-market
segments
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Often it is difficult to fully identify the variousfunction the distributors perform and therefore todetermine a trade and functional discountstructure that reflects the service performed
The justification for trade and functional discounts isthat different distributors perform different functions
within the distribution channel and should becompensated accordingly
Some distributors combine the functionsof wholesalers and retailers
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PromotionalPromotional- given to distributors as an
allowance for the distributors efforts topromote the manufacturers product throughlocal advertising, special displays, or otherpromotions
Discounts
TradeTrade- based on a distributors place in the distributivesequence
FunctionalFunctional- represent payment for performance of certainmarketing functions that would otherwise be performed by the
manufacturer
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Discounts
PeakPeak--load pricingload pricing- higher prices during periods ofhigher demand, and lower prices during off-peak periods
CashCash- reward for the payment of an invoice or anaccount within a specified period of time
AdvanceAdvance--purchasepurchase- lower prices for earlypurchases
QuantityQuantity- granted for volume purchases
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Quantity Discounts
this is granted for volume purchases (Rp or
Units), either in a :
single purchase (noncumulative), or
a specified period of time (cumulative,deferred, or patronage discount)
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Noncumulative
Quantity Discounts
serve to encourage large orders
fewer orders over a given period of time period
example : printing company
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10 ladders @ $30 $ 300
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Applying Discounts:The Order
10 ladders @ $30 $ 300
6 ladders @ $50 300
10 ladders @ $90 900
5 ladders @ $120 600
4 ladders @ $150 600
Total $ 2,700
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Applying QuantityDiscount
Totalorder
amount
$ 2,700
Discount, $2,700 x 0.05 135
Netorderamount $ 2,565
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ApplyingTrade Discounts
Netorderamount $ 2,565.00
Less: 40% discount 1,026.00
$ 1,539.00
Less: 10% discount 153.90
$ 1,385.10
Less: 5% discount 69.26
Amountduemanufacturer $ 1,315.84
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ApplyingCash Discount
Amountduemanufacturer $ 1,315.84
Less:3 % discount 39.48
Net Remittance $ 1,276.36
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Nonlinear Pricing
refers to situation when a pricestructure leads to a decline in per-unit
price as volume sold (ordered)increases
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ypes o r ce scoun
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Types of Discount
StructuresPricing Decisions Number of Decisions
Fixed (uniform) price Price 1
All units quantity discountPrice 2 or more
Break Points 1 or more
Two-part PricesFixed Price 1
Variable Price 1
Two-block PricesFixed Prices 2 or more
Variable Prices 2 or more
Price Points Prices 2 or more
Multiperson Pricing Prices 2 or more
Structures
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ypes o r ce scoun
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Types of Discount
StructuresPricing Decisions Number of Decisions
Fixed (uniform) price Price 1
All units quantity discountPrice 2 or more
Break Points 1 or more
Two-part PricesFixed Price 1
Variable Price 1
Two-block PricesFixed Prices 2 or more
Variable Prices 2 or more
Price Points Prices 2 or more
Multiperson Pricing Prices 2 or more
Structures
Total
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uniform two-part pricing
Unit Price
TR
Quantity
TotalRevenue
ypes o r ce scoun
S
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Types of Discount
StructuresPricing Decisions Number of Decisions
Fixed (uniform) price Price 1
All units quantity discountPrice 2 or more
Break Points 1 or more
Two-part PricesFixed Price 1
Variable Price 1
Two-block PricesFixed Prices 2 or more
Variable Prices 2 or morePrice Points Prices 2 or more
Multiperson Pricing Prices 2 or more
Structures
Total
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two block prices
Unit Price
TR
Quantity
TotalRevenue
ypes o r ce scoun
St t
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Types of Discount
StructuresPricing Decisions Number of Decisions
Fixed (uniform) price Price 1
All units quantity discountPrice 2 or more
Break Points 1 or more
Two-part PricesFixed Price 1
Variable Price 1
Two-block PricesFixed Prices 2 or more
Variable Prices 2 or more
Price Points Prices 2 or more
Multiperson Pricing Prices 2 or more
Structures
Total
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price points
Quantity
TotalRevenue
Unit Price
TR 1
TR 2
Fixed
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A Simple
Quantity Discount Model
The change in buyers inventory costs as quantity
purchased increases and changes in the sellerscosts as the purchase order size increases
Buyers cost function is given byBuyers cost function is given byTEKB = (Ad)/q + (qki)/2
Sellers cost function is given bySellers cost function is given byTEKS = (Ad)/q - (pkiq)/2
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Some Additional
Managerial Issues As prices are increased, more buyers qualify for a
discount
When buyers merge, the seller may give away
more discounts
As industrial buyers use the internet to track and
use different discount schedules, they can
selectively vary volume purchases across
venders
Buyers will find it profitable to buy in large
volumes and then ship the goods to other
markets for resale
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Pricing Special Orders
A special orderspecial orderis an order placed by anestablished customer for a quantity different fromthe normal one, a one-time-only customer for asubstantial quantity placed by a non-regular
customer, or an order placed for a product notusually produced by the firm but which the firmhas the capacity to produce
Use of the CPRU when establishing prices provides
a means of maintaining consistency overcustomers, product lines, or special orders
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Cash Discounts
and Credit Decisions The seller must determine :The seller must determine :
The amount of the cash discount
The length of the credit period
The amount to spend on attempting to collect overdueaccounts
The customers to whom to offer credit terms
The magnitude of the line of credit
Increasing the amount of the cash discount orlengthening the time period that the discount applies willresult in increases in demand
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Geographical PricingDecisions
F.O.B. origin pricingF.O.B. origin pricing means the seller quotesprices from the point of shipment
FFreeree OOnn BBoardoard means it is the buyersresponsibility to select the mode of
transportation, choose the specific carrier,
handle any damage claims, and pay all shippingcharges
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Geographical PricingDecisions
Delivered pricingDelivered pricing means the price quoted by themanufacturer includes both the list price and
transportation costsSingle-zone pricing- the seller receives a
different net return when transportationcosts for customers vary
Multiple-zone pricing- delivered pricesare uniform within two or more zones
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Using Price Structure
to Gain CompetitiveAdvantage
By using distance between seller and buyer and byunderstanding the buyers relative costs of carryinginventory and costs of capital, a price structure canbe developed that uses differential prices to reflectdifferential buyers, markets, and product or servicecharacteristics
When a price structure is kept simple, it is relativelymore difficult to take advantage of differential
characteristics that may lead to a competitiveadvantage, or it is more difficult to diminish or remove acompetitive disadvantage
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