Pertemuan < 22 > Pricing Techniques and Analysis Pricing Techniques and Analysis

( Continued from before)( Continued from before)

Matakuliah : J0434 / Ekonomi Managerial

Tahun : 01 September 2005

Versi : revisi

Learning Outcomes

Pada akhir pertemuan ini, diharapkan mahasiswa

akan mampu :

Membuat analisis teknik penetapan harga ( C4)

Outline Materi

• Pricing In Segmented Markets

• Pricing of Multiple Product

• Substitutes & Complements• Pricing of Joint Products

2002 South-Western Publishing

• Value-based more than cost-based pricing often helps build profits.

• Firms charge different customers different prices, which is known as price discrimination.

• This chapter also looks at pricing within a firm called transfer pricing.

• Pricing techniques that are used by many multi-product firms, such as full-cost pricing and target return pricing.

Pricing Techniques and AnalysisPricing Techniques and Analysis

Pricing In Segmented Markets

• Segment markets by price sensitivity

• Charge higher prices in the markets that are the most inelastic

• Then P1 = $150 and

• P2 = $120

P ( 1 + 1/ EQ•P ) = MC

Suppose MC = $100 in 2 marketsand E1 = - 3 and E2 = - 6

Why are haircuts forkids cheaperthan for adults?

• Products are INDEPENDENT when changes in price and quantity of one product do not alter revenues or cost in the others

• Products are INTERDEPENDENT, when changes DO affect other products

• Ex: Procter & Gamble makes both Luvs and Pampers

– TR = TRA + TRB

Pricing of Multiple Product

Substitutes & Complements

• Look for interdependencies in marginal revenues:– MRA = TRA / QA + TRB / QA

– MRB = TRA / QB + TRB / QB

• Substitutes when cross terms are negative– Erosion or Cannibalism are terms used

• Complements when cross terms are positive– BASE sells tapes and tape head cleaners

Decision Rule for Multiple Product Firms

• Do NOT use the rule to produce where MR=MC, as in MRA = MCA

• INSTEAD: – Produce where the FULL MR = FULL MC– For a Two Product Firm of A & B– Produce where:

TRA /QA + TRB /QA = TCA /QA + TCB /QA

Include all relevant revenue and cost effects

Pricing Example in Supermarkets

• Turkey prices fall during Thanksgiving– Yet we would expect DEMAND to be

greatest?!

• Loss Leader Pricing– Consider T as turkey– and A as all other food

• TRstore = TRT + TRA

MRstore for turkey = TRT /QT + TRA /QT • Complementarity with other food explains

the apparent conundrum

Pricing of Joint Products

• Interdependencies in costs occur in products that are produced simultaneously

• Excess means the price would be ZERO

• The solution is to hold back some of the excess to reach the Unit Elastic Point on the Demand Curve.

• This Maximizes Total Revenue.

Multi-Divisional Firms and the Economics of Transfer Pricing

Transfer Pricing serves two functions:

1. Measure of the marginal value of the resource

2. Provides a performance measures of resources used

For international firms, transfer pricing may assist in reducing worldwide taxation, but the ability to reducetaxation is limited because the IRS requires arm’s length prices.

Create Transfer Prices Similar to Competitive Market Prices

• Disagreements across divisions are common– “Selling” Division wants a HIGH transfer price– “Buying” Division wants a LOW transfer price

• When External Markets exists, use those prices for transfer (a market-based competitive price)

motor assemblyfinal carassembly

sell to others @ “P”

purchase motors from others @ “P”

Transfer Pricing With No External Markets

• When no external markets exist, use the MC of the transferred good.

• Often, however, the MC is a function of output.

• Marketing and Production steps (M & P)

• Transfer price is PT = MC P on following figure

Find Where MCM+P = MR

D

MCM

MCP

MCM+P

MR

P

PT

Pricing in Practice

• In practice, pricing strategy involves the whole life-cycle of the product.

• Managers report wide use of cost-plus pricing methods because it:– Streamlines pricing of multiple products

– Streamlines pricing of retail prices

Cost-Plus and Full Cost Pricing

P = ACn + Markup

or P = ACn(1 + m) where ACn is average cost at a normal

output and m is a percentage markup• Notice: Little reliance on MC pricing or use

of elasticities, as in: P( 1 + 1/Ep ) = MC

Cost-Plus Pricing: Illustrated

Manufacturing pricing illustrated: One Good

AFC

AVC

Qn Qcapacity

ACn

} markup

PATC

Cost-Plus Pricing: Illustrated

AFC

AVC

Qn Qcapacity

ACn

} markup

P

D1 D2

quantityvaries asdemandvaries

Cost-Plus Pricing: Illustrated

AFC

AVC

Qn Qcapacity

ACn

} markup

P

D1 D2

quantityvaries asdemandvaries

Q1Q2

Full Cost Pricing

• Full Cost--– Covers all Costs at the standard or normal output – Plus a return on the investment

• P = AFCn + AVCn + K / Qn

– where K is the target amount of profit

– and is the desired profit rate and K is gross operating assets

• Example: Low Tech SecurityFC = 200,000, Qn = 3000, VC = 90,000

= 20% and K=$500,000. Find Full Cost Price!

Full Cost Pricing

• Answer– P = AVC + AFC + (.20)(500,000)/Q– P = 30 + 66.67 + 33.33

= $130

• Also, suppose a 35% markup on cost– P = [ ACn] (1.35)

– P = [ 30 + 66.67 ](1.35)– P = $130.50

Advantages• Cost-plus is simple• It is easy to delegate to

others• Easy to apply to

thousands of items– Can use categories

of markups for different classes of products

Disadvantages• But cost-plus ignores

demand changes• Pricing may be based on

poor cost data• Output varies in business

cycle

Hybrid Method: VariableCost-Plus Pricing -- the markup can vary over the season or business cycle

Cost-Plus Pricing

1999 South-Western College Publishing

Optimal Markups in Practice

• Grocery stores have low markups

• Many close substitutes -- at other grocery stores (bread varieties and qualities are standardized)

• Frequent purchase, so customers are knowledgeable about prices & quality

• Demand is therefore highly elastic

• Optimal markup would consequently be small

1999 South-Western College Publishing

Markups on Jewelry• Jewelry Markups are known to be

large• Difficult to make comparisons across

jewelry stores• Little repeat purchases, so

knowledge about prices is low• Consequently, lower price elasticity

for jewelry• The optimal markup is larger

1999 South-Western College Publishing

Skimminga form of block rate pricing over time

• Price declines over time

• Those who wish to get it first pays the highest price, others are willing to wait

• Examples:– Hardcover & Paperback

Books – New electrical & Computer

Products TIME

P D

Revenue Management:

• Revenue Management is the problem of the disappearing inventory.

• Managers must be flexible to change their predicted sales by market segment as information arrives.

• Airlines price discriminates between business and non-business travelers. If too few business travelers have booked tickets compared to the amount expected, then more non-business tickets should be released.

Optimal Overbooking

• Managers may authorize reservation clerks to sell more seats (rooms) than are available.

• The greater the overbooking, the lower are the costs of spoilage.

• Spoilage is an inventory NOT sold. If capacity is large, an airline or hotel will have high spoilage.

• The greater the overbooking, the greater are the costs of spillage, making customers unhappy by finding that they have no seat or reservation.

Spillage

• Spillage is the excess demand that cannot be met.

• If the service industry has low capacity, the spillage will be great

• Customers leave the hotel or airline unable to get a room or an airplane seat.

Optimal Overbooking

• Spillage and spoilage costs go in opposite directions, the sum of these costs has a minimum with the optimal amount of overbooking.

• Since business travelers tend to a large extent to be repeat customers, the cost of spillage (oversells) may be very high.

• The optimal amount of overbooking for this market segment may well be lower than for non-business clients.

100% 110% 120% ...

Percent Overbooked

Spoilage

Spillage

TotalCost

optimal