Mastering Pricing Strategies: Insights from the NCMA Commercial Contract Management Conference

2. Pricing Do’s and Don'ts Tom Reid Chief Problem Solver Certified Contracting Solutions, LLC Currently on assignment to BWXT Pantex, LLC Thursday 2:00 NCMA 4th Annual Commercial Contract Management Conference Tools, Jewels, and Rules: Leveraging the Contract Management Process

3. Overview • Robinson-Patman • Unfair Trade Laws • Fair-Trade Laws • Pricing Objectives • Profit • Volume • Competition • Prestige NCMA 4th Annual Commercial Contract Management Conference Tools, Jewels, and Rules: Leveraging the Contract Management Process

4. Introduction • Who am I? • Who are you? • What questions do you have? NCMA 4th Annual Commercial Contract Management Conference Tools, Jewels, and Rules: Leveraging the Contract Management Process

5. Cost versus Price • Are they the same? • How are they different? • Whose costs are considered? • What is the market? NCMA 4th Annual Commercial Contract Management Conference Tools, Jewels, and Rules: Leveraging the Contract Management Process

6. Robinson-Patman • Depression era legislation • Amended Clayton Act (anti-trust) • Related to Grocery Chain growth • Intended to save jobs NCMA 4th Annual Commercial Contract Management Conference Tools, Jewels, and Rules: Leveraging the Contract Management Process

7. Robinson-Patman • Prohibits price discrimination • Differences in price must reflect cost differentials • Prohibits “predatory pricing” NCMA 4th Annual Commercial Contract Management Conference Tools, Jewels, and Rules: Leveraging the Contract Management Process

8. Predatory Pricing • Selling below cost in order to drive the competition out of business • What about “loss leaders”? • Price discrimination strategies are not per se illegal NCMA 4th Annual Commercial Contract Management Conference Tools, Jewels, and Rules: Leveraging the Contract Management Process

9. Cost Differentials • Price difference must reflect cost differences as between different classes of buyers • Not a model of clarity in American jurisprudence • Numerous court decisions have not necessarily clarified the field NCMA 4th Annual Commercial Contract Management Conference Tools, Jewels, and Rules: Leveraging the Contract Management Process

10. International Markets • Robinson-Patman does not apply to international markets • Domestic producers can sell to a foreign customer below domestic wholesale NCMA 4th Annual Commercial Contract Management Conference Tools, Jewels, and Rules: Leveraging the Contract Management Process

11. Unfair Trade Laws • Product of State Law • Sets a “floor” for certain pricing • Mostly ignored as ineffective • The 1993 Wal Mart decision NCMA 4th Annual Commercial Contract Management Conference Tools, Jewels, and Rules: Leveraging the Contract Management Process

12. Fair Trade Laws • Allows manufacturers to set minimum retail prices • Usually enforced through distribution agreements • Price reflects image which is a property right of the manufacturer NCMA 4th Annual Commercial Contract Management Conference Tools, Jewels, and Rules: Leveraging the Contract Management Process

13. What’s in a Name? • Faberge • Kodak • Cross pens • Rolex • Tiffany • Craftsman NCMA 4th Annual Commercial Contract Management Conference Tools, Jewels, and Rules: Leveraging the Contract Management Process

14. Fair Trade History • Dates back to the depression era • State laws deemed restrictive of interstate commerce • Miller-Tydings Resale Price Maintenance Act (1937) • State laws remained on the books • Consumer Goods Pricing Act (1975) NCMA 4th Annual Commercial Contract Management Conference Tools, Jewels, and Rules: Leveraging the Contract Management Process

15. Pricing • Four factors of production • Natural resources • Capital • Human resources • Entrepreneurship NCMA 4th Annual Commercial Contract Management Conference Tools, Jewels, and Rules: Leveraging the Contract Management Process

16. Pricing Objectives • Generally derived from the Marketing Objectives or Strategy • Profitability • Volume • Meeting Competition • Prestige NCMA 4th Annual Commercial Contract Management Conference Tools, Jewels, and Rules: Leveraging the Contract Management Process

17. Profit • Without profit there is no business • Without profit there is no motivation • Without sales there is no profit • Without perceived value there are no sales “We’re taking a loss on every unit, but we’ll make it up on volume” NCMA 4th Annual Commercial Contract Management Conference Tools, Jewels, and Rules: Leveraging the Contract Management Process

18. Profit Considerations - Seller • Cost to produce • Cost to ship • Cost to market • Cost to develop • Cost of keeping the doors open • Reasonable profit NCMA 4th Annual Commercial Contract Management Conference Tools, Jewels, and Rules: Leveraging the Contract Management Process

19. Value Considerations - Buyer • Life cycle costs • Internet market • Prestige • Lifestyle expectations • Affluence NCMA 4th Annual Commercial Contract Management Conference Tools, Jewels, and Rules: Leveraging the Contract Management Process

20. Formulas • Profits = Revenue – Expenses • Total Revenue = Price x Quantity Sold NCMA 4th Annual Commercial Contract Management Conference Tools, Jewels, and Rules: Leveraging the Contract Management Process

21. Marginal Analysis • Profit maximization occurs at the point where addition in total revenue exactly matches total increase in cost • Target Return Objectives are more common on a practical level NCMA 4th Annual Commercial Contract Management Conference Tools, Jewels, and Rules: Leveraging the Contract Management Process

22. Volume • Minimum acceptable profit • Seek to maximize sales • Sales expansion continues so long as minimum return is maintained • Service and quality also affect the equation NCMA 4th Annual Commercial Contract Management Conference Tools, Jewels, and Rules: Leveraging the Contract Management Process

23. Market Share • Establishing a “presence” • First to market • Boutique products • Commodities • PIMS Project • Market share improves profits • Market segmentation is critical NCMA 4th Annual Commercial Contract Management Conference Tools, Jewels, and Rules: Leveraging the Contract Management Process

24. Competition • Matching a competitor’s price is common • Easy to do • Very visible buying criterion • Easier to do on commodities • Falsely assumes similar cost structures among competitors NCMA 4th Annual Commercial Contract Management Conference Tools, Jewels, and Rules: Leveraging the Contract Management Process

25. Competitive Examples • Gas Stations • Airlines • Long Distance Service • Electronics NCMA 4th Annual Commercial Contract Management Conference Tools, Jewels, and Rules: Leveraging the Contract Management Process

26. How to Succeed • Drive costs as low as possible • Increase Market Share by: • Focus on product strategies • Promotional Decisions • Distribution Find a way other than price to improve the buyer’s value decision NCMA 4th Annual Commercial Contract Management Conference Tools, Jewels, and Rules: Leveraging the Contract Management Process

27. Value Pricing • Laundry detergents • Dry cereal • Computers • Peripherals NCMA 4th Annual Commercial Contract Management Conference Tools, Jewels, and Rules: Leveraging the Contract Management Process

28. Prestige Objectives • High price • High quality • Exclusiveness • Appeals to status-consciousness If you have to ask how much it costs, you can’t afford it. NCMA 4th Annual Commercial Contract Management Conference Tools, Jewels, and Rules: Leveraging the Contract Management Process

29. Pricing for Non-Profits • Profit maximization • Fund raising • Cost Recovery • Mass transit; public college • Providing Market Incentive • Downtown bus service • Market suppression • Sin taxes NCMA 4th Annual Commercial Contract Management Conference Tools, Jewels, and Rules: Leveraging the Contract Management Process

30. How to Determine Prices • Supply & Demand curves • Cost-oriented approach • Tradition & expectation NCMA 4th Annual Commercial Contract Management Conference Tools, Jewels, and Rules: Leveraging the Contract Management Process

31. Supply & Demand • Most theoretical • Harbors a logic that people accept • Assumes a perfect market • Assumes no other factors create price pressure NCMA 4th Annual Commercial Contract Management Conference Tools, Jewels, and Rules: Leveraging the Contract Management Process

32. Cost-Oriented Approach • Allows for logical business decisions • Rationalizes approach • Assumes costs are fixed • Ignores demand NCMA 4th Annual Commercial Contract Management Conference Tools, Jewels, and Rules: Leveraging the Contract Management Process

33. Tradition and Expectation • People “expect” certain things to cost a set amount • No requirement that these expectations be reasonable • No requirement that these expectations consider business realities • Candy bar example NCMA 4th Annual Commercial Contract Management Conference Tools, Jewels, and Rules: Leveraging the Contract Management Process

34. Conclusion • Pricing is not a black Art • Anti-trust concerns must be considered • Every dollar spent is a vote • Competition comes in many forms • Personal choices are expanding • You can’t be all things to all consumers NCMA 4th Annual Commercial Contract Management Conference Tools, Jewels, and Rules: Leveraging the Contract Management Process