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Chapter 17

Chapter 17. Pricing Objectives and Policies. Pricing Strategy Determines. 1] How flexible prices will be 2] At what level prices will be set over the Product Life Cycle 3] To whom and when discounts and allowances will be given. 4] How transportation costs will be handled. Review some Terms.

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Chapter 17

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  1. Chapter 17 Pricing Objectives and Policies

  2. Pricing Strategy Determines • 1] How flexible prices will be • 2] At what level prices will be set over the Product Life Cycle • 3] To whom and when discounts and allowances will be given. • 4] How transportation costs will be handled

  3. Review some Terms • Profit = Revenues - Costs • Contribution = Revenues - Direct Variable • Costs • Unit Contribution = Selling Price – • Unit Variable Costs • Variable costs increase with every unit sold or produced • Most (but not all) marketing costs are variable costs

  4. Price Cuts & Increases Have a Direct Profit Impact • You have a contribution margin of 20%, unit price = $100, 80 units were sold last month. You decide to cut your price 5%. • How many units will you have to sell to have the same contribution as last month?

  5. Price Cuts & Increases • Last month’s unit contribution = $20 • $20 unit contribution x 80 units sold • = $1,600 contribution last month • We would like to have a contribution of $1,600 or better this month.

  6. Price Cuts & Increases • New unit contribution = $20 - ($100 x .05) = $15 • To make same contribution as last month • $1,600 = $15x • x = 106.67 or 107 units (round up since you can’t sell partial units). • Your sales must increase (107-80)/80 = 33.75% to make the same contribution

  7. Price Cuts & Increases • Note: Increasing or cutting prices usually does not effect the costs of a firm. • If you can make a price increase stick and demand does not fall (much), your profitability is sharply increased. • If you cut your price, you have to sell a LOT MORE UNITS to make the same profit level

  8. Second Example • Unit contribution = $15. Unit price = $50 • Sold 300 units last year. You decide to cut prices 10%. How many units do you have to sell to have the same contribution as last year?

  9. Example 2 continued • Old total contribution = $15 x 300 = $4,500 • New unit contribution = $15 - ($50 x .10) • = $10 • Units needed to be sold to make the same contribution as last year = • $4,500 = 10x = 450 units • Sales increase of (450-300)/300 = 50% • Can you get this 50% sales increase?

  10. Example 3 • Unit contribution = $9, unit price = $90, sold 900 units last year. You decide to raise prices $10. How many units do you have to sell to have the same contribution as last year?

  11. Example 3 cont. • Total Contribution = $9 x 900 = $8,100 • New unit contribution = $9 + $10 = $19 • $8,100 = $19x = 427 units

  12. Pricing Objectives • 1] Target Return (459) • 2] Profit Maximization (460) • 3] Sales Oriented • Market share = Firms sales in units (dollars)/ • Industry sales in units ($s) • Status Quo (460)

  13. Product Life Cycle & Pricing • Skimming (464) vs Penetration (466) • Skimming • Recoup Costs Quickly • Aim at members of the target that have strongest desire • Helps with production & distribution • Penetration - discourages competitive entry & builds market share quickly

  14. Quantity Discounts • Discounts offered to encourage customers to buy in larger amounts (469). • Can be price cuts or free goods • Often given due to economies of scale in production, distribution, & ordering • Two types • Cumulative Quantity Discounts (469) • Noncumulative Quantity Discounts (469)

  15. Cumulative vs Noncumulative • Your firm sells plastic containers. Your price structure is: • Less than 1000 units - $0.65 each • 1000 - 4999 units - $0.60 each • 5000 - 9999 units - $0.55 each • 10,000 + units - $0.50 each

  16. Cumulative vs Noncumulative 2 • Zed buys 1200 units in January, 500 units in February and 3,800 units in March. What was the total price paid if the discounts were: • Cumulative? • Noncumulative?

  17. Cumulative vs Noncumulative • Cumulative: 1200 + 500 + 3800 = 5500 units. Total price = 5500 x $0.55 = $3,025 • Noncumulative • 1200 x $0.60 = $720 • 500 x $0.65 = $325 • 3800 x $0.60 = $2,280 • Total = $3,325

  18. Cash Discounts • Reduction in price to encourage buyers to pay in cash (470). • Ex: 2/10, net 30. Reads: • 2% discount if paid in 10 days of the invoice date; full amount due in 30 days. • What is the annual interest rate here?

  19. Cash Discount • Paying for 20 days use of the money • (net 30 - 10 day discount period) • How many annual periods? 365/20 = 18.25 • Annual interest rate = 36.5% • You can change credit terms by altering the net date, the discount period, or the discount %

  20. Distribution Pricing • F.O.B. - Free on Board some vehicle at some place. FOB delivered - seller pays freight and retains title until product is delivered (474) • F.O.B. Shipper - buyer pays freight and takes title at the shippers loading dock.

  21. Distribution Pricing • F.O.B. Delivered (474) • Zone Pricing (474) • Uniform Delivered Pricing (474)

  22. Legal Issues • Price Fixing (480) (mins & maxes) • Robinson Patman Act (480) • illegal to sell to different business buyers at different prices if it injures competition • Can have different prices if: • Based on cost differences • Meet the actions of competitors • Must make allowances available to all customers on a proportionally equal basis unless there is a cost basis for doing so.

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