1 / 23

Irwin/McGraw-Hill

C H A P T E R F I F T E E N . PRICE: ARRIVING AT THE FINAL PRICE. Irwin/McGraw-Hill. AFTER READING THIS CHAPTER YOU SHOULD BE ABLE TO:.

jeff
Download Presentation

Irwin/McGraw-Hill

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. C H A P T E R F I F T E E N PRICE: ARRIVING AT THE FINAL PRICE Irwin/McGraw-Hill

  2. AFTER READING THIS CHAPTER YOU SHOULD BE ABLE TO: • Understand how to establish the initial “approximate price level” using demand-oriented, cost-oriented, profit-oriented, and competition-oriented approaches. • Identify the major factors considered in deriving a final list or quoted price from the approximate price level. (continued)

  3. AFTER READING THIS CHAPTER YOU SHOULD BE ABLE TO: • Describe adjustments made to the approximate price level based on geography, discounts and allowances. • Prepare basic financial analyses useful in evaluating alternative prices and arriving at the final sales price. • Describe the principal laws and regulations affecting pricing practices.

  4. PP15-1 Steps in Setting Price Select an approximate price level -Demand- oriented approaches -Cost-Oriented approaches -Profit-oriented approaches -Competition- oriented approaches Identify pricing constraints and objectives Estimate demand and revenue Set list or quoted price -One price or flexible prices -Company, customer, and competitive effects -Incremental costs and revenues Make special adjustments to list or quoted price -Discounts -Allowances -Geographical adjustments Estimate cost, volume, and profit relationships

  5. PP15-AA The Gillette Mach 3 Shaving System Gillette’s world leading market share: 71% in North American and Europe 91% in Latin American 69% in India New Mach 3 shaving system is priced 35% above their highly successful Sensor Excel model, as marketing research indicated that men would be willing to pay 45% more than they were paying for Sensor given the additional benefits of the Mach 3.

  6. PP15–2 Four approaches for selecting an approximate price level Selecting an approximate price level Demand-based approaches skimming penetration prestige price lining odd-even target bundle yield management Cost-based approaches standard markup cost-plus experience curve Profit-based approaches target profit target return on sales target return on investment Competition-based approaches customary above, at, or below market loss leader © 1994, Richard D. Irwin, Inc. To accompany MARKETING, 4/E by Berkowitz, Kerin, Hartley, and Rudelius.

  7. PP15-BB Demand-Oriented Pricing Approaches Demand-Oriented Approaches include: • skimming pricing • penetration pricing • prestige pricing • price lining • odd-even pricing • target pricing • bundle pricing • yield management pricing

  8. PP15–3 Demand curves for two types of demand-based methods B A Price lining Prestige pricing A P1 PQ Price Price B P2 P3 C Quantity Quantity

  9. PP15-CC Concept Check 1. What are the circumstances in pricing a new product that might support skimming or penetration pricing? 2. What is odd-even pricing?

  10. PP15-DD Cost-Oriented Pricing Approaches Cost-Oriented Approaches include: • standard markup pricing • cost-plus pricing • experience curve pricing

  11. Retailer selling price = $ 100 $100 Retailer mark-up =$ 28.57 = 40% Wholesalerselling price = $ 71.43 80 Wholesaler mark-up= $ 11.90 = 20% Manufacturerselling price = $ 59.93 Retailer cost = $ 71.43 60 Manufacturer mark-up= $ 7.76 = 15% Price 40 Wholesalercost = $ 59.53 Manufacturercost = $ 51.77 20 10 0 Manufacturer Wholesaler Retailer PP15–A Mark-ups for a manufacturer, wholesaler and retailer on a home appliance sold to the consumer for $100

  12. 2,500 Cellular Phonein Service 3,000 Average costof Least-ExpensiveModels 2,000 2,500 1,500 2,000 1,500 1,000 1,000 500 500 0 0 ’83 ’84 ’85 ’86 ’87 ’88 ’89 ’90 ’91 ’92 ’93 ’94 ’95 ’83 ’84 ’85 ’86 ’87 ’88 ’89 ’90 ’91 ’92 ’93 ’94 ’95 3,000 Average Price ofLeast-ExpensiveModels 2,500 2,000 1,500 1,000 500 0 ’83 ’84 ’85 ’86 ’87 ’88 ’89 ’90 ’91 ’92 ’93 ’94 ’95 PP15–B Cellular phone unit sales, average cost and average price: evidence of the experience effect The Average Cost toProduce Decreases . . . As Cellular PhoneVolume Increases . . . 3,500 Followed by PriceDecreases Dollars Dollars Dollars

  13. PP15-EE Profit-Oriented Pricing Approaches Profit-Oriented Approaches include: • target profit pricing • target return-on-sales pricing • target return-on-investment pricing

  14. PP15-4 Results of computer spreadsheet simulation to select price to achieve a target return on investment Assumptions SIMULATION or Results Financial Element Year A B C D Assumptions Price per unit (P) $50 $54 $54 $58 $58 Units Sold (Q) 1.000 1,200 1,100 1,100 1,000 Change in Unit Variable Cost (UVC) 0% +10% +10% +20% +20% Unit variable cost $22.00 $24.20 $24.20 $26.40 $26.40 Total expenses $8,000 Same Same Same Same Owner’s salary $18,000 Same Same Same Same Investment $20,000 Same Same Same Same State and federal taxes 50% Same Same Same Same Spreadsheet Net Sales (P x Q) $50,000 $ 64,800 $59,400 $63,800 $58,000 simulation Less: COGS 22,000 29,040 26,620 29,040 26,400 results (Q x UVC) Gross Margin $28,000 $ 35,760 32,780 $ 34,760 $31,600 Less: total expenses 8,000 8,000 8,000 8,000 8,000 Less: owner’s salary 18,000 18,000 18,000 18,000 18,000 Net profit before taxes $ 2,000 $ 9,760 $6,780 $8,760 $5,600 Less: taxes 1,000 4,880 3,390 4,380 2,800 Net profit after taxes $ 1,000 $ 4,880 3,390 4,380 2,800 Investment $20,000 $20,000 $ 20,000 $20,000 $20,000 Return on Investment 5% 24.4% 17.0% 21.9% 14.0%

  15. PP15-FF Competition-Oriented Pricing Approaches Competition-Oriented Approaches include: • customary pricing • above-, at-, or below- market pricing • loss leader pricing

  16. PP15-GG Concept Check 1. What is standard markup pricing? 2. What profit-based pricing approach should a manager use if he or she wants to reflect the percentage of the firm’s resources used in obtaining the profit? 3. What is the purpose of loss-leader pricing when used by a retail firm?

  17. PP15-HH One-Price versus Flexible-price Policies • One-Price Policy: setting the same price for similar customers who buy the same product and quantities under the same circumstances. An example would be Saturn’s “no hassle-one price” policy for new and used cars. • Flexible-Price Policy: offering the same product and quantities to similar customers but at different prices. Car dealers have traditionally (and still do) used flexible pricing in getting to the final sale price.

  18. PP15-5 The Power of Marginal Analysis in real-world decisions Suppose the owner of a picture framing store is considering buying a series of magazine ads to reach her up-scale market. The cost of the ads is $1,000, the average price of a framed picture is $50, and the unit variable cost(materials plus labor) is $30. This is a direct application of marginal analysis that an astute manager uses to estimate the incremental revenue or incremental number of units that must be obtained to at least cover the incremental cost. In this example, the number of extra picture frames that must be sold is obtained as follows: Incremental number of frames = = Extra fixed cost Price - Unit variable cost $1,000 of advertising $50 - $30 50 frames =

  19. PP15-6 Three special adjustments to list or quoted price Special adjustments to list or quoted price Geographical adjustments FOB origin pricing Delivered pricing Single zone pricing Multiple zone pricing FOB with freight- allowed pricing Basing-point pricing Discounts Quantity cumulative non-cumulative Trade (functional) Cash Allowances Trade-in Promotional

  20. PP15–7 The Structure of Trade Discounts Manufacturer’ssuggestedlist Price $100.00 Retailer’s costor wholesalersales price $ 70.00 Wholesaler costor jobbersales price $ 63.00 Jobber cost ormanufacturer’ssale price $ 59.15 (minus)($ 30.00) (minus)($ 7.00) (minus)($ 3.15) Retail discount:30% of manufacturer’ssuggested price Wholesaler’s discount:10% of wholesaler’ssales price Jobber discount:5% of jobber sales price

  21. PP15–C Example of basing-point pricing Seattlecustomerpays $130 $30 freight $10 freight Chicago customer pays $110 Los Angeles customer pays $120 $20 freight St. Louis plant is “basing-point” $100 base price

  22. PP15–8 Pricing practices affected by legal restrictions Consumer GoodsPricing Act ShermanAct Federal TradeCommission Act Robinson-Patman Act Horizontalprice fixing Predatory pricing Geographical pricing Price discrimination Vertical price fixing Deceptive pricing

  23. PP15-II Concept Check 1. Why would a seller choose a flexible-price policy over a one-price policy? 2. If a firm wished to encourage repeat purchases by a buyer throughout the year, would a cumulative or non-cumulative quantity discount be a better strategy. 3. What pricing practices are covered by Sherman Act?

More Related