1. LPC’S Pricing Supplements DEMAND & COST BASED QUANTITATIVE PRICING

2. A Framework for Developing and Applying a Pricing Strategy Objectives Consumers Broad Pricing Policy Costs Government Pricing Strategy Channel Members Implementation of Pricing Strategy Competition Price Adjustments Feedback

3. A Framework for Developing and Applying a Pricing Strategy Objectives Consumers Broad Pricing Policy Costs Government Pricing Strategy Channel Members Implementation NOW LET’S ADVISE SEAN 2/10 NET 30 $100m Competition Price Adjustments Feedback

4. LPC Law of Demand Demand • The law of demand states that consumers usually purchase more units at a low price than at a high price. • When demand is high and supply low, prices rise. • If supply is high and demand is low, prices fall. $ S u p p l y

5. Consumers and Price by LPC • Price elasticity explains consumer reaction to price changes. • It indicates the sensitivity of buyers to price changes in terms of quantities they will purchase. • Demand may be elastic,inelastic, or unitary. • Unitary demand exists if price changes are exactly offset by changes in quantity demanded, so total sales revenue remains constant.

6. Demand Elasticity Is Based on Availability of substitutes and the urgency of need. • Brand loyal consumers do not want to settle for less than the most desirable attributes of a particular product. • Price shoppers want the best deals possible. • What about SW Airlines?

7. Elastic Demand • Occurs if relatively small changes in price result in large changes in the quantity demanded. • Consumers perceive there to be many substitutes and/or have a low urgency of need. • With elastic demand, total revenue goes up when prices are decreased and goes down when prices rise.

8. WHAT IS THE SOUTH WEST AIRLINES ARC ELASTICITY?ST. LOUIS - KCLA - SFWHAT ARE THEY TRYING TO STIMULATE?(PRIMARY OR SELECTIVE DEMAND)WHO IS THEIR PRIMARY COMPETITION?

9. Inelastic Demand • Occurs if price changes have little impact on the quantity demanded. • Consumers perceive there are few substitutes and/or have a high urgency of need. • With inelastic demand, total revenue goes up when prices are raised and goes down when prices decline.

10. Honda Accord Economy Car = Elastic Demand Price Elastic Demand $12,000 $10,000 Quantity (Units) 12,000 100,000

11. Rolls Royce Luxury Car = Inelastic Demand Price $50,000 Inelastic Demand $40,000 Quantity (Units) 18,000 20,000

12. NYC Subway Pricing: Elastic Or Inelastic? No Monorail Price increases in NYC subway fares: • Availability of substitutes? • Urgency of need? Bronx to Brooklyn ? 3 hours + $ $ $ $ $$

13. Demand-Based Pricing Techniques Price-Discrimination *Sets two or more prices to appeal to distinct market segments Demand-Minus Pricing*Works backward from selling price to costs Demand-Based Pricing Techniques Modified Break-Even Analysis *Combines traditional break-even analysis with demand evaluation at different prices Chain-Markup Pricing *Extends demand-minus pricing back through the channel

14. Cost-Based Pricing A firm sets prices by computing merchandise, service, and overhead costs and then adding an amount to cover its profit goal. • It is easy to derive. • The price floor is the lowest acceptable price a firm can charge and attain profit. • Goals may be stated in terms of ROI. O R I +Profit goals Price Floor (Merchandise, service, and overhead costs)

15. LPC Cost-Based Pricing Techniques Traditional Break-Even Analysis *Determines sales quantity needed to break even at a given price Price-Floor Pricing *Determines lowest price at which to offer additional units for sale Cost-Plus Pricing*Pre-determined profit added to costs Cost-Based Pricing Techniques Target Pricing*Seeks specified rate of return at a standard volume of production Markup Pricing *Calculates percentage markup needed to cover selling costs and profit

16. Cost-Plus Pricing Prices are set by adding a pre-determined profit to costs. It is the simplest form of cost-based pricing. Price = Total fixed costs + Total variable costs + Projected profit Units produced

17. Markup Pricing A firm sets prices by computing the per-unit costs of producing (buying) goods and/or services and then determining the markup percentages needed to cover selling costs and profit. It is most commonly used by wholesalers and retailers. Price = Product cost (100 – Markup percent)/100 Some firms use a variable markup policy, whereby separate categories of goods and services receive different percentage markups.

18. Traditional Break-Even Analysis Break-even point (units) = Total fixed costs Price - Variable costs (per unit) Total fixed costs Price - Variable costs (per unit) Price Break-even point (sales dollars) = These formulas are derived from the equation: Price X Quantity = Total fixed costs + (Variable costs per unit X Quantity)

19. Break-Even Analysis Can Be Adjusted to Take into Account the Profit Sought Break-even point (units) Total fixed costs + Projected Profit Price - Variable costs (per unit) = Break-even point (sales dollars) Total fixed costs + Projected Profit Price - Variable costs (per unit) Price =

20. Chain-Markup Pricing • Chain-markup pricing extends demand-minus calculations all the way from resellers back to suppliers. Final selling price is determined and the maximum acceptable costs to each channel member are computed.

21. NOW LETS PRICE INTERNATIONALLY • WE WILL ALSO PRICE A BUSINESS IN PAGEDALE THAT MANUFACTURES FILM PRODUCING EQUIPMENT FOR MAJOR MOVIE STUDIOS