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Competitor Based Pricing

Competitor Based Pricing. Cost. Customer. Competitor. The Goal. Setting a Price that is Competitive That is to say Choosing a Selling Price that is based on the prices chosen by the competition in our industry seeking to serve our market. Three Approaches to Pricing. Cost Based

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Competitor Based Pricing

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  1. Competitor Based Pricing Cost Customer Competitor

  2. The Goal • Setting a Price that is CompetitiveThat is to say • Choosing a Selling Price that is based on the prices chosen by the competition in our industry seeking to serve our market

  3. Three Approaches to Pricing • Cost Based • Competitive Based • Customer Based

  4. Classic Competitive Topics • Relative to Competitor’s Prices • Relative to Relative Product Quality • Bidding Models

  5. Relative to Competitor’s Pricesaka Going-rate pricing • Relative Price Ratio

  6. Relative Price Ratioaka Going-rate pricing • Your price per unit as a percentage of • the average industry price • the closest competitor’s price • Your price = $85 • Average industry price = $90 • Relative Price Ratio = $85/$90 = 94%

  7. Relative Price Ratio • Classic Application is Using the Relative Price Ratio in a Pricing Policy for Price Setting • Our Policy is to have a Price that is always 5% less than the industry’s average price • If our $85 Price is currently at 94% of average • We must raise our price to a new level • New price = 95%($90) = $85.50

  8. Classic Competitive Topics • Relative to Competitor’s Prices • Relative to Relative Product Quality • Bidding Models

  9. Value-Pricing Policy • “Value-pricing is not simply a matter of setting lower prices than the competitor... it is a commitment to having one’s operations designed to be the cost leader.”

  10. Relative Product Quality • Measuring Product Quality • Horse power, Speed, Reliability, etc. • Government, Industrial and Consumer Testing (performance index or 5 star rating system) • Product Version # (our simulation) • Average Product Quality is the sum of the individual ratings divided by the number of competitors • Relative product quality is your quality rating divided by the average quality rating

  11. Basic Price/Quality Theorem • The maximum price you can set is the point where your relative price, Pr, is equal to your product’s relative quality, Ur. • Pr = Ur • P/Pa = U/Ua where P = your price, Pa = average price, your quality = U, Ua = average product quality

  12. Basic Theorem Implies • 1) If you have a product with average quality, then the most you can charge is the average price. • 2) If you have a product that is 10% higher than the average quality, then you can charge up to 10% more than the average price.

  13. P/Pa = U/Ua • P = your price, Pa = average PriceU = your product quality, Ua = average quality Pr = P/Pa = relative price, Ur = U/Ua = relative quality • In a perfectly equal world Relative Price = Relative Quality P/Pa = U/Ua • To set the Upper Limit or Maximum Price • P = (U/Ua) x Pa

  14. Example • In the simulation your product has achieved version 2 quality and the average product version is 1.8 quality and the average price is $80. No new product versions will be reached next period. What is the maximum price you can charge? • Relative Quality = U/Ua = 2/1.8 =111% • Maximum Price to set = P* =(U/Ua)Pa • P* = 111%($80) = $88.89

  15. Upper and Lower Limits • Calculating your price on a cost plus basis to cover cost and achieve a target Return on Sales (Profit) for the lower limit. • Calculating your Pricing to Relative Product Quality is a popular benchmark for the upper limit on the price selection

  16. Setting a Specific Price • Using relative quality to set a specific price • Start with the definition that your selected price, P, equals your price relative to the average price,Pr, x the average price, Pa. • P = Pr x Pa • Remember the concept that in an ideal world the relative price = the relative quality • Pr = Ur

  17. To set a Specific Price In the normal world the relationship between Pr ≠ Ur and needs an adjustment for conversion efficiency, E. Pr = Ur x E This equation is estimated from current operations or forecasted for future products, etc. e.g., E = Pr/Ur

  18. To set a Specific Price Substitute the relationship Pr = Ur x E Into the price definition that P = Pr x Pa To get pricing formula P = Ur x E x Pa P = the specific price you want to set Ur = relative quality E = efficiency of marketing to convert relative quality into relative price Pa = average industry price

  19. For example • The traditional efficiency of your marketing department at converting your relative product quality into the highest relative price the customer will pay is E =105%Relative Quality is Ur = 90%Average Price is Pa = $80What Price, P, can you set? • P = Ur x E x x Pa • P = 0.9 x 1.05 x $80 = $75.6

  20. Other Classic Topics in Competitive Pricing • Bidding Models (American actions,Dutch auctions, etc.) • Sorry not enough time in this course for bidding! • See pages 271-272 for more on bidding • Game Theory • Measuring impact of relative price changes

  21. Any Questions?

  22. Game Theory Pricing Policy • Prediction of Competitor’s reaction to Your Price Changes • Building Pricing Policies ...How You Should React to Changes in Your competitor’s Policy

  23. Relative to Competitor’s Prices • Impact Analysis of Change in Price

  24. Analysis of Impact Due to Change • Change in Revenue Due to Change in Price and Change in Quantity • Change in Quantity Due to Change in Market Share and Change in Market Size • Change in Price Due to Change in Relative Price and Change in Average Competitive Price

  25. Revenue = Price x Quantity Quantity = Share x Market Size

  26. Revenue = Price x Quantity Quantity = Share x Market Size Price = Relative Price x Average Industry Price

  27. Relative Price Ratio Old price =$85 94.4% $90 Average Industry Price

  28. New price =$85.50 Relative Price Ratio Old price =$85 97.16% 94.4% $88 $90 Average Industry Price

  29. New price =$85.50 Impact on Price Change due to Relative Price Change Relative Price Ratio Old price =$85 97.16% 94.4% Impact on our price due to change in Industry Price $88 $90 Average Industry Price

  30. New price =$85.50 SLOW REACTION! YOUR FAULT? Relative Price Ratio Old price =$85 97.16% 94.4% NOT YOUR FAULT $88 $90 Average Industry Price

  31. Revenue = Price x Quantity Quantity = Share x Market Size Price = Relative Price x Average Industry Price Revenue = (Relative Price) x (Average Industry Price) x (Market Share) x (Market Size)

  32. Change in Revenue = (Change due to Relative Price + Change due to Average Industry Price + Change due to Market Share + Change due to Market Size) ∆R = ∆Pr +∆Pa +∆S + ∆M

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