Tom Reid Chief Problem Solver Certified Contracting Solutions, LLC Currently on assignment to

2. Pricing Do’s and Don'ts Tom Reid Chief Problem Solver Certified Contracting Solutions, LLC Currently on assignment to BWXT Pantex, LLC Thursday 2:00 NCMA 4th Annual Commercial Contract Management Conference Tools, Jewels, and Rules: Leveraging the Contract Management Process

3. Overview • Robinson-Patman • Unfair Trade Laws • Fair-Trade Laws • Pricing Objectives • Profit • Volume • Competition • Prestige NCMA 4th Annual Commercial Contract Management Conference Tools, Jewels, and Rules: Leveraging the Contract Management Process

4. Introduction • Who am I? • Who are you? • What questions do you have? NCMA 4th Annual Commercial Contract Management Conference Tools, Jewels, and Rules: Leveraging the Contract Management Process

5. Cost versus Price • Are they the same? • How are they different? • Whose costs are considered? • What is the market? NCMA 4th Annual Commercial Contract Management Conference Tools, Jewels, and Rules: Leveraging the Contract Management Process

6. Robinson-Patman • Depression era legislation • Amended Clayton Act (anti-trust) • Related to Grocery Chain growth • Intended to save jobs NCMA 4th Annual Commercial Contract Management Conference Tools, Jewels, and Rules: Leveraging the Contract Management Process

7. Robinson-Patman • Prohibits price discrimination • Differences in price must reflect cost differentials • Prohibits “predatory pricing” NCMA 4th Annual Commercial Contract Management Conference Tools, Jewels, and Rules: Leveraging the Contract Management Process

8. Predatory Pricing • Selling below cost in order to drive the competition out of business • What about “loss leaders”? • Price discrimination strategies are not per se illegal NCMA 4th Annual Commercial Contract Management Conference Tools, Jewels, and Rules: Leveraging the Contract Management Process

9. Cost Differentials • Price difference must reflect cost differences as between different classes of buyers • Not a model of clarity in American jurisprudence • Numerous court decisions have not necessarily clarified the field NCMA 4th Annual Commercial Contract Management Conference Tools, Jewels, and Rules: Leveraging the Contract Management Process

10. International Markets • Robinson-Patman does not apply to international markets • Domestic producers can sell to a foreign customer below domestic wholesale NCMA 4th Annual Commercial Contract Management Conference Tools, Jewels, and Rules: Leveraging the Contract Management Process

11. Unfair Trade Laws • Product of State Law • Sets a “floor” for certain pricing • Mostly ignored as ineffective • The 1993 Wal Mart decision NCMA 4th Annual Commercial Contract Management Conference Tools, Jewels, and Rules: Leveraging the Contract Management Process

12. Fair Trade Laws • Allows manufacturers to set minimum retail prices • Usually enforced through distribution agreements • Price reflects image which is a property right of the manufacturer NCMA 4th Annual Commercial Contract Management Conference Tools, Jewels, and Rules: Leveraging the Contract Management Process

13. What’s in a Name? • Faberge • Kodak • Cross pens • Rolex • Tiffany • Craftsman NCMA 4th Annual Commercial Contract Management Conference Tools, Jewels, and Rules: Leveraging the Contract Management Process

14. Fair Trade History • Dates back to the depression era • State laws deemed restrictive of interstate commerce • Miller-Tydings Resale Price Maintenance Act (1937) • State laws remained on the books • Consumer Goods Pricing Act (1975) NCMA 4th Annual Commercial Contract Management Conference Tools, Jewels, and Rules: Leveraging the Contract Management Process

15. Pricing • Four factors of production • Natural resources • Capital • Human resources • Entrepreneurship NCMA 4th Annual Commercial Contract Management Conference Tools, Jewels, and Rules: Leveraging the Contract Management Process

16. Pricing Objectives • Generally derived from the Marketing Objectives or Strategy • Profitability • Volume • Meeting Competition • Prestige NCMA 4th Annual Commercial Contract Management Conference Tools, Jewels, and Rules: Leveraging the Contract Management Process

17. Profit • Without profit there is no business • Without profit there is no motivation • Without sales there is no profit • Without perceived value there are no sales “We’re taking a loss on every unit, but we’ll make it up on volume” NCMA 4th Annual Commercial Contract Management Conference Tools, Jewels, and Rules: Leveraging the Contract Management Process

18. Profit Considerations - Seller • Cost to produce • Cost to ship • Cost to market • Cost to develop • Cost of keeping the doors open • Reasonable profit NCMA 4th Annual Commercial Contract Management Conference Tools, Jewels, and Rules: Leveraging the Contract Management Process

19. Value Considerations - Buyer • Life cycle costs • Internet market • Prestige • Lifestyle expectations • Affluence NCMA 4th Annual Commercial Contract Management Conference Tools, Jewels, and Rules: Leveraging the Contract Management Process

20. Formulas • Profits = Revenue – Expenses • Total Revenue = Price x Quantity Sold NCMA 4th Annual Commercial Contract Management Conference Tools, Jewels, and Rules: Leveraging the Contract Management Process

21. Marginal Analysis • Profit maximization occurs at the point where addition in total revenue exactly matches total increase in cost • Target Return Objectives are more common on a practical level NCMA 4th Annual Commercial Contract Management Conference Tools, Jewels, and Rules: Leveraging the Contract Management Process

22. Volume • Minimum acceptable profit • Seek to maximize sales • Sales expansion continues so long as minimum return is maintained • Service and quality also affect the equation NCMA 4th Annual Commercial Contract Management Conference Tools, Jewels, and Rules: Leveraging the Contract Management Process

23. Market Share • Establishing a “presence” • First to market • Boutique products • Commodities • PIMS Project • Market share improves profits • Market segmentation is critical NCMA 4th Annual Commercial Contract Management Conference Tools, Jewels, and Rules: Leveraging the Contract Management Process

24. Competition • Matching a competitor’s price is common • Easy to do • Very visible buying criterion • Easier to do on commodities • Falsely assumes similar cost structures among competitors NCMA 4th Annual Commercial Contract Management Conference Tools, Jewels, and Rules: Leveraging the Contract Management Process

25. Competitive Examples • Gas Stations • Airlines • Long Distance Service • Electronics NCMA 4th Annual Commercial Contract Management Conference Tools, Jewels, and Rules: Leveraging the Contract Management Process

26. How to Succeed • Drive costs as low as possible • Increase Market Share by: • Focus on product strategies • Promotional Decisions • Distribution Find a way other than price to improve the buyer’s value decision NCMA 4th Annual Commercial Contract Management Conference Tools, Jewels, and Rules: Leveraging the Contract Management Process

27. Value Pricing • Laundry detergents • Dry cereal • Computers • Peripherals NCMA 4th Annual Commercial Contract Management Conference Tools, Jewels, and Rules: Leveraging the Contract Management Process

28. Prestige Objectives • High price • High quality • Exclusiveness • Appeals to status-consciousness If you have to ask how much it costs, you can’t afford it. NCMA 4th Annual Commercial Contract Management Conference Tools, Jewels, and Rules: Leveraging the Contract Management Process

29. Pricing for Non-Profits • Profit maximization • Fund raising • Cost Recovery • Mass transit; public college • Providing Market Incentive • Downtown bus service • Market suppression • Sin taxes NCMA 4th Annual Commercial Contract Management Conference Tools, Jewels, and Rules: Leveraging the Contract Management Process

30. How to Determine Prices • Supply & Demand curves • Cost-oriented approach • Tradition & expectation NCMA 4th Annual Commercial Contract Management Conference Tools, Jewels, and Rules: Leveraging the Contract Management Process

31. Supply & Demand • Most theoretical • Harbors a logic that people accept • Assumes a perfect market • Assumes no other factors create price pressure NCMA 4th Annual Commercial Contract Management Conference Tools, Jewels, and Rules: Leveraging the Contract Management Process

32. Cost-Oriented Approach • Allows for logical business decisions • Rationalizes approach • Assumes costs are fixed • Ignores demand NCMA 4th Annual Commercial Contract Management Conference Tools, Jewels, and Rules: Leveraging the Contract Management Process

33. Tradition and Expectation • People “expect” certain things to cost a set amount • No requirement that these expectations be reasonable • No requirement that these expectations consider business realities • Candy bar example NCMA 4th Annual Commercial Contract Management Conference Tools, Jewels, and Rules: Leveraging the Contract Management Process

34. Conclusion • Pricing is not a black Art • Anti-trust concerns must be considered • Every dollar spent is a vote • Competition comes in many forms • Personal choices are expanding • You can’t be all things to all consumers NCMA 4th Annual Commercial Contract Management Conference Tools, Jewels, and Rules: Leveraging the Contract Management Process