Chapters 22

1. Chapters 22 Guidelines for Better Pricing Decisions: Summary

2. Four Basic Rules • Know your costs. • Know your demand. • Know your competition and your market. • Know your objectives

3. Criteria for Pricing Decisions • When operating below normal capacity: Firm needs additional business which can contribute towards overheads and profits. Hence, pricing criteria is to maximize contribution per sales dollar generated. • When operating at or near maximum capacity: Conditions similar to scarce resources; hence the pricing criteria is to maximize the contribution per scarce resource unit. • When operating at normal capacity: Firms should seek to maximize dollar contributions consistent with target return on investment, e.g., CPRU criteria.

4. Principles of Pricing Management • The more the competitors and customers know about your pricing, the better off you are. Be transparent about prices and value. • In highly competitive markets, focus on segments that provide opportunities to gain competitive advantage. • Pricing decisions must be made within the context of overall marketing strategy (and embedded in business or corporate strategy). • Successful pricing decisions should be profit oriented and not sales volume or market share oriented? • Prices should be set according to customer’s perceptions of value. • Pricing for new products should start as soon as product development begins.

5. Principles of Pricing Management • Prices should be set according to customer’s perceptions of value. • The relevant costs for pricing are the incremental avoidable costs, avoid using average total or variable costs, unitizing fixed costs and fully allocated costs. • A price may be profitable when it provides for incremental revenues in excess of incremental costs. • A central administrative unit should administer the pricing function. • Pricing management should be viewed as a process and price setting as a daily management activity, not a once-a-year activity.

6. Basis for Effective Pricing Decisions • Determine consistent objectives – short and long run. • Establish a pricing research program: • Demand effects of price changes. • Costs effects of price changes. • Develop an information system for pricing – includes actual price and quantity information, group similar products and customer segments together, include activity based cash costs, include competitive data, include other relevant information, track price, volume and costs data. • Reengineering the pricing process – establish clear goals, document the existing processes, best practices study, establish the new pricing process.

7. Guidelines for Better Pricing Decisions • Set consistent and clear objectives • Identify alternatives • Acquire relevant information. • Make the pricing decision • Encourage feedback and maintain control.