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Product & Pricing Issues

Product & Pricing Issues. May 5, 2004. Agenda. Product Positioning Meanings of Price Demand & Pricing Strategies Elasticity Bundling. What to Say?. Positioning – Main thought to associate with the company Sun Microsystems – “The Dot in Dot.Com”

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Product & Pricing Issues

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  1. Product & Pricing Issues May 5, 2004

  2. Agenda • Product Positioning • Meanings of Price • Demand & Pricing Strategies • Elasticity • Bundling

  3. What to Say? • Positioning – Main thought to associate with the company • Sun Microsystems – “The Dot in Dot.Com” • Microsoft – “Where Do You Want to Go Today”(Gates) to “Empower People Through Great Software Anyplace, Any Time, and on Any Device” (Balmer) • Dell – “Be Direct” • Gateway – “You’ve Got A Friend in the Business” to “Connect with Us”

  4. Price Definitions • Consumer – what must be sacrificed in order to possess or use a product. • (money, time, effort) • Producer – what is received in return for the transfer of possession or usage rights to the consumer • (money, products, goodwill)

  5. Prices Do Not Always Reflect Direct Costs

  6. Organizational Objectives & Pricing Strategies • Status Quo – Cost-oriented • Sales Revenue Maximization – Demand-oriented • Market Share Maximization – Competition-oriented • Profit Maximization – Demand & Cost-oriented

  7. Cost-Oriented Pricing

  8. Break Even Analysis 1. TR = TC + Pr where TR = Total Revenue TC = Total Cost = Fixed + Variable = FC + VC * Q Pr = Profit Margin Desired 2. P * Q = (FC + VC * Q) + Pr 3. Q = (FC + Pr) / (P - VC)

  9. Break Even Analysis (example) • Let FC = $1000 VC = $2 / unit Pr = $600 Price - $10 Q = ($1000 + $600) / ($10 - $2) = 200 units Price - $8 Q = ($1000 + $600) / ($ 8 - $2) = 266 units

  10. Economics of Pricing

  11. Pricing & Strategy • Volume - Maximize unit sales • (subject to not losing money) • Market Share – Maximize market share • Maximize Profits • Maximize Sales Revenue

  12. Price Elasticity • Percent change in quantity sold for a given percent change in price. E = (Q / Q) / ( P / P)

  13. Price Elasticity • Quantity (3-2)/2 = 50% • Price ($117-$130)/$130 = -10% • Elasticity = 50% / -10% = -5

  14. Price Bundling • Bundling – when several related items are sold together for a packaged price, usually lower than each item separately. • Amazon – always offers the album selected with a similar one for a combined price.

  15. Advantages of Bundling (Variable Cost is $3 per service)

  16. Current ($5.50 for Voice & $5 for Hot Line)

  17. Optimal Prices

  18. Sell All Services to Everyone(Variable Cost is $3 per service)

  19. Optimal Prices

  20. Sell to Everyone(Variable Cost is $3 per service)

  21. Optimal Prices

  22. Pure Bundling(Variable Cost is $3 per service)

  23. Optimal Prices

  24. Mixed Bundling(Variable Cost is $3 per service)

  25. Mixed Bundling($5 for Voice, $4.50 for Hot Line & $9 for bundle)

  26. Optimal Prices

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