View
228
Download
1
Category
Preview:
Citation preview
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• 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
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?
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.
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
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
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?
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?
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?
Example 3 cont.
• Total Contribution = $9 x 900 = $8,100
• New unit contribution = $9 + $10 = $19
• $8,100 = $19x = 427 units
Pricing Objectives
• 1] Target Return
• 2] Profit Maximization
• 3] Sales Oriented– Market share = Firms sales in units (dollars)/– Industry sales in units ($s)
• Status Quo (460)
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
Quantity Discounts
• Discounts offered to encourage customers to buy in larger amounts
• 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)
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
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?
Cumulative vs Noncumulative
• Cumulative: 1200 + 500 + 3800 = 5500 units. Total price = 5500 x $0.55 = $3,025$3,025
• Noncumulative
• 1200 x $0.60 = $720
• 500 x $0.65 = $325
• 3800 x $0.60 = $2,280
• Total = $3,325$3,325
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?
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 %
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
• F.O.B. Shipper - buyer pays freight and takes title at the shippers loading dock.
Distribution Pricing
• F.O.B. Delivered (474)
• Zone Pricing (474)
• Uniform Delivered Pricing (474)
Meeting Competition
Meeting Competition
Cost Differences
Cost Differences
“Like Grade & Quality”
“Like Grade & Quality”
Robinson-Patman ActRobinson-
Patman Act
KeyIssuesKeyIssues
“Proportionately Equal” Basis
“Proportionately Equal” Basis
Price Discrimination
Recommended