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PRICING Examples

PRICING Examples. First Year 2010 Term 2. Pricing Principles: Cost Value Competition. Example of a Linear Price-Quantity Demand Function. MWB(uy). Two observations on the price-quantity demand schedule. Quantity Demanded. *. *. MWP(ay). 0. 0. Price Charged. Variable Cost (VC).

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PRICING Examples

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  1. PRICING Examples First Year 2010 Term 2

  2. Pricing Principles: • Cost • Value • Competition Pa

  3. Example of a Linear Price-Quantity Demand Function MWB(uy) Two observations on the price-quantity demand schedule Quantity Demanded * * MWP(ay) 0 0 Price Charged Variable Cost (VC) The Optimal price is the mid point between the Maximum Willingness to pay and Variable Cost of the Product GM* = -1/e Where, GM*, (gross margin*) indicates the gross margin at the optimal price and e = the elasticity of demand. Since GM*= (P*-VC)/P* =-1/e,

  4. Customer Segment 1 UnitsPrice Unit Cost Unit MarginProfit 70 $2.00 $0.80 $1.20 $84.00 75 $1.80 $0.80 $1.00 $75.00 80 $1.60 $0.80 $0.80 $64.00 85 $1.40 $0.80 $0.60 $51.00 Customer Segment 2 UnitsPrice Unit Cost Unit Margin Profit 0 $2.00 $0.80 $1.20 $ 0.00 30 $1.80 $0.80 $1.00 $30.00 60 $1.60 $0.80 $0.80 $48.00 90 $1.40 $0.80 $0.60 $54.00 Adapted from Farris & Quelch, SMR, 1989.

  5. Single Price Dual-Price List $1.60 140 $1.60 $0.80 $0.80 140 $112 List $2.00 70 Promotion $1.40 90 Price Units Avg. Unit Price Variable Cost Contribution Total Units Total Contrib. $1.66 $0.80 $0.86 160 $138 Paul Farris and Erv Shames

  6. Calculating Promotion Budgets with Demand Pricing List Price Promotion Price Discount Units Sold Promotion Cost $2.00 $1.40 $0.60 90 $54.00

  7. The Maestro of Marketing

  8. Smart discounts can raise real prices and margins • Good targeting is needed to make this happen • Calculating the profitability of price promotions is a difficult, challenging exercise Some Conclusions

  9. Features, technologies • Quality, reliability • Ease of use, convenience • Price Product Life Cycle Clay Christensen Paul Farris

  10. Cost, value, competition and sense of strategy over the product life cycle • One price will rarely do the job • Segmentation • Bundling • Selling through distributors • Pricing is a process that can be improved and innovated Summary Paul Farris

  11. Mon. Tues. Wed. Thur. Fri. Marketing Forum Sunnyside Sealed Air Earthlight Aqualisa 9/27 Mktg Econ Note Seven Qs Note iPhone/Pricing Progressive Google Speakers 10/4 Pricing Note Levis at Walmart? Kalashnikov Black & Decker 10/11 Mid-term Exam Brand Equity Note Ohio Art 10/18 Fed. Express ZS Associates Mktg Experiments Note BREAK 10/25 11/1 Retail Relay Stainmaster CustLifeValue Note 11/8 Conjoint Heinz + Spkr 11/15 Snapple Beer Game 11/22 Sorrell Ridge Netflix

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