McGraw-Hill/Irwin Copyright © 2009 by the McGraw-Hill Companies, Inc. All rights reserved.

Chapter 14

Pricing and

Negotiating for Value

AssignmentAssignment

• You are setting up a new coffee shop:• Your target customers are students, young adults such as 9X, 8X.

• Your rent: 2,000 USD/ month

• Initial investment (construction, interior design, furniture…): 100.000 USD

• Work in Group:

- Design your products/ services and pricing plan for your products and services

- Discuss all the factors that you consider when designing your product and pricing plan.

- How many pricing options do your group have?

- How pricing plan is linked with your overall marketing strategy and plan?

PRICING ISSUES: WHY PRICING IS DIFFICULT

Objective & Explicit

1. STRATEGY ISSUES(Pricing objectives)

2. COMPETITIVEFACTORS(Rivals’ prices)

3. TRADE FACTORS(Channel power)

4. LEGAL FACTORS(Restrictions anddiscrimination)

1. DEMAND FACTORS(How much docustomers want)

2. COST FACTORS(Actual outlays)

Subjective andInterpretive

14-4

A MODEL FOR MANAGING PRICE

Evaluation and Formation of

Prices & policy

Demand Factors• Elasticity of demand

• Cross elasticities

• Customer value

perceptions

1

Cost Factors

• Costs now

• Anticipated costs

• Economic objectives

2

Cost Factors• Structure of competition• Barriers to entry• Intent of rivals

3

Strategy Issues• Target market selection• Product positioning• Price objectives• Marketing program

4

Trade Factors• Power in the channel• Traditions and roles• Margins

5

Legal Factors• Vertical restrictions• Price discrimination

6

Exhibit 14-2

14-5

SUPPLY AND DEMAND

Quantity

Demand

SupplyPrice

Exhibit 14-3

14-6

Exhibit 14-5

Types ofsituations

Importantdimensions

Pure Competition Oligopoly

MonopolisticCompetition Monopoly

Uniqueness of each firm’s product None None Some Unique

Number of competitors Many Few Few to many None

Size of competitors (compared to size of market

Small Large Large to small None

Elasticity of demand facing firm

Completely Elastic

Kinked demand curve (elastic and inelastic

Either Either

Elasticity of industry demand Either Inelastic Either Either

Control of price by firm None Some (with care) Some Complete

ANALYZING MARKET STRUCTURES

14-7

Exhibit 14-9

BREAK-EVEN ANALYSIS

BREAK-EVEN IS DONE TO FIND THE LEVEL OF SALES TO COVER ALL FIXED AND VARIABLE COSTS

Q is quantity; FC, fixed costs; VC, variable costs;UVC, unit variable costs; Price, average revenue

BREAK-EVEN OCCURS WHEN: TOTAL REVENUE=TOTAL COSTBREAK-EVEN OCCURS WHEN: TOTAL REVENUE=TOTAL COST

Given: Price x Q = FC + VC = FC x (UVC x Q)Given: Price x Q = FC + VC = FC x (UVC x Q)

Solve for Q (quantity) (Price × Q) – (UVC × Q) = FC Q(Price – UVC) = FC Q = FC/(Price-UVC) = FC / unit margin

Solve for Q (quantity) (Price × Q) – (UVC × Q) = FC Q(Price – UVC) = FC Q = FC/(Price-UVC) = FC / unit margin

Solve for Q (quantity) (Price × Q) – (UVC × Q) = FC Q(Price – UVC) = FC Q = FC/(Price-UVC) = FC / unit margin

Solve for Q (quantity) (Price × Q) – (UVC × Q) = FC Q(Price – UVC) = FC Q = FC/(Price-UVC) = FC / unit margin

14-8

KEY DECISIONS IN MANAGING PRICE

• DETERMINE PRICING STRATEGY– Develop specific approach to achieve price objectives

• DETERMINE CHANNEL INTERMEDIARY PRICES, COSTS AND MARGINS

• DETERMINE SINGLE PRODUCT AND PRODUCT LINE PRICING

• Develop pricing structures for substitute and complementary products

• DETERMINE WHETHER TO PARTICIPATE IN BIDDING AND NEGOTIATION FOR SALES

• ESTABLISH A PRICING SYSTEM

• Based on the 4 C’s : Costs, Customers, Competitors, and Channels 14-9

SCENARIO: What sales increase is needed to cover a $1.2 million increase in expenditures?

MARGINAL ANALYSIS

NR = $1.2 million + COGS

NR = $1.2 million + .75 NR

.25 NR = $1.2 million

NR = $1.2 million / .25

NR = $4.8 million

WHERE: COGS = 75% of Net Sales NR = New Revenue

14-10

Exhibit 14-11

A PRICE INCREASE/DECREASE BY ONE CHANNEL MEMBER WILLIMPACT THE PRICE CHARGED BY SUBSEQUENT CHANNEL MEMBERS

CALCULATING MARGIN CHAINS

ASSUME: Given a new product selling for $10,what is the maximum factory price allowable?

WHOLESALER DEALERNet Sales 100% Net Sales 100%

COGS 85% COGS 70%

Gross Profit 15% Gross Profit 30%

Apply $10 dealer priceNet Sales $7.00 Net Sales $10.00

COGS 5.95 COGS 7.00

Gross Profit $1.05 Gross Profit $ 3.0014-11

TYPES OF PRICINGTYPES OF PRICING

1. ADMINISTERED PRICES - Prices established by seller as impersonal and take-it-or-leave it offers

2. COMPETITIVE BIDDING –OPEN BIDDING – Any organization can compete for business CLOSED BIDDING - Solicits bids from exclusive list of potential suppliers

3. NEGOTIATED PRICESSeeks prices based on mutually agreeable terms

14-12

ROBINSON-PATMAN ACTROBINSON-PATMAN ACT

VIOLATIONS OCCUR:

1. When different prices are charged to competitors;

2. The differences are not attributable to cost differences;

3. The product is essentially the same for each competitor;

4. The effects are damaging to competition

14-13

NEGOTIATION PRIMERNEGOTIATION PRIMER

● AVOIDANCE: When a company doesn’t need to deal with the partner or to make a deal

*● ACCOMMODATION: Sacrifice necessary to hold or sustain a relationship

● COMPROMISE: Hybrid of competition and accommodation

*● COMPETITIVE NEGOTIATION: There is a winner and a loser

*● COLLABORATION: Joint problem solving for a creative win-win solution

*NEGOTIATION STRATEGY OPTIONS

14-14

LEVERAGE FOR A GLOBAL PRICING CONTRACT

These products or services are a significant portion of customer’s purchases.

Local markets are reasonably homogeneous.

Customer’s top management is omitted.

Customer seeks value enhancement more than cost cutting.

Supplier has good working relationships not just at HQ, but with the company’s country managers.

Customer and supplier have some implementation experience with global strategies played out at local levels.

Exhibit 14-1614-15