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Ppt 7

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Bin Saadun
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16 views

7

Ppt 7

Uploaded by

Bin Saadun
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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7

PM 15 DAYS REVISION CRASH


COURSE
Pricing

BY SABI AKTHER 1
What to focus on?

• Factors to consider when pricing (The 3 C’s).

• Calculation aspects.

• Pricing approaches.

• Marketing-based approaches

2
Factors to consider when pricing
(The 3 C’s)
Costs Competitors Customers

• Need to cover costs to make a • We need to be • How much are


profit. competitive. they willing to
• May need to consider whole • How close a pay? (Need to do
product portfolio (e.g. some substitute are market research)
products may be loss leaders). competitors’ • Consider power
• In the short term, may be happy products? of customers to
just to cover variable costs to go elsewhere;
make some contribution. pressurise you to
• May need to consider whole drop prices 3
lifecycle
Calculation Aspects

Price elasticity of demand (PED)

• PED = % change in demand / % change in price.

• PED >1 (elastic) - revenue increases if the price is cut.

• PED <1 (inelastic) - revenue increases if the price is raised.

4
Pricing Approaches

Demand-based approach

Algebraic approach

• Profit maximised when MR = MC

• MR = a – 2bQ

• P = a – bQ

• ‘a’ is the price at which demand falls to 0

• ‘b’ = gradient = Change in price / Change in demand.


5
Pricing Approaches
Tabular approach
Price per unit 22 20 19 18 17 15
Variable cost per unit 6 6 6 6 6 6
Contribution per unit 16 14 13 12 11 9
Number of units sold 50,00 60,00 70,00 80,00 90,00 90,00
Total Contribution, in 0 0 0 0 0 0
$000 800 840 910 960 990 810
Less Fixed costs, in 200 200 280 280 360 360
$000 600 640 630 680 630 450
Net Profit in $000

6
Pricing Approaches

Cost plus pricing

• Establish cost per unit – options include MC, full cost, prime cost.

• Calculate price using target mark-up or margin.

• Often used as a starting point even when using other methods

7
Pricing Approaches

Advantages of cost plus pricing

• Widely used and accepted.

• Simple to calculate if costs are known.

• Selling price decision may be delegated to junior management.

• Justification for price increases.

• May encourage price stability – if all competitors have similar cost structures
and use similar mark-up.

8
Pricing Approaches
Disadvantages of cost plus pricing

• Ignores the economic relationship between price and demand.

• No attempt to establish optimum price.

• Different absorption methods give rise to different costs and hence different selling
prices.

• Does not guarantee profit – if sales volumes are low fixed costs may not be
recovered

• Must decide whether to use full cost, manufacturing cost or marginal cost.

• This structured method fails to recognise the manager’s need for flexibility in pricing

• Circular reasoning – price changes affect volume which affect unit fixed costs which
9
affect price.
Marketing-based Approaches
Price Skimming Suitability

• Set a high initial price to ‘skim • Little effective competition (e.g. where the
off’ customers who are willing to product is new and different or where
pay extra. Prices fall over time barriers to entry deter competition).

• A firm with liquidity problems may use


market skimming to generate high cash
flows early on.

• Where high prices in the early stages of a


product’s life might generate high initial
cash flows.
10
• Where products have a short life cycle
Marketing-based Approaches
Penetration pricing Suitability

• Set a low initial price to gain • If a firm wishes to increase market share.
market share. If a high volume is
• If the firm wishes to discourage new
achieved, the low price could be entrants from entering the market.
sustainable.
• If the firm wishes to shorten the initial
period of the product’s life cycle.

• If there are significant economies of scale


to be achieved from high-volume output.

• Demand is highly elastic and so would


respond well to low prices. 11
Marketing-based Approaches
Linking pricing decisions for
different products Suitability

• Basic idea: product A is cheap to • Complementary products.


attract customers who then also
• Product line pricing.
buy the higher margin product B.

• Key issue is the extent to which


customer must buy the other
products

12
Marketing-based Approaches
Volume discounts Suitability

• Discount for individual large • To increase customer loyalty.


order.
• To attract new customers.
• Cumulative quantity discounts
• To reduce sales processing costs.

• To Lower customer’s purchasing costs.

• Clearance of surplus stock.

• Increased use of off peak capacity.

13
Marketing-based Approaches
Price discrimination Suitability

• Have different prices in different • The seller has some degree of monopoly
markets for the same product power.

• Customers can be segregated into different


markets.

• Barriers exist (or can be created) to


prevent transfer between markets.

• Different elasticity in each market (set


higher prices in the more inelastic
segment).
14
Marketing-based Approaches
Relevant cost pricing Suitability

• Price = net incremental cash flow • One-off projects

15
Exam Focus
Questions to attempt from revision kit

Constructed Response
Objective Case Questions
Questions

ALG Co (June 2015) HS equation (December 2009)


MKL
Sniff Co

16
Thank You for Watching!!

17

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