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Chapter 14 Pricing and Negotiating for Value

PRICING ISSUES: WHY PRICING IS DIFFICULT Objective & Explicit 1.STRATEGY ISSUES (Pricing objectives) 2.COMPETITIVE FACTORS (Rivals’ prices) 3.TRADE FACTORS (Channel power) 4.LEGAL FACTORS (Restrictions and discrimination) 1.DEMAND FACTORS (How much do customers want) 2.COST FACTORS (Actual outlays) Subjective and Interpretive 14-3

A MODEL FOR MANAGING PRICE Evaluation and Formation of Prices & policy Demand Factors Elasticity of demand Cross elasticities Customer value perceptions 1 Cost Factors Costs now Anticipated costs Economic objectives 2 Cost Factors Structure of competition Barriers to entry Intent of rivals 3 Strategy Issues Target market selection Product positioning Price objectives Marketing program 4 Trade Factors Power in the channel Traditions and roles Margins 5 Legal Factors Vertical restrictions Price discrimination 6 Exhibit 14-2 14-4

SUPPLY AND DEMAND Quantity Demand Supply Price Exhibit 14-3 14-5

Exhibit 14-5 Types of situations Important dimensions Pure CompetitionOligopoly Monopolistic CompetitionMonopoly Uniqueness of each firm’s product None SomeUnique Number of competitors ManyFewFew to manyNone Size of competitors (compared to size of market SmallLargeLarge to smallNone Elasticity of demand facing firm Completely Elastic Kinked demand curve (elastic and inelastic Either Elasticity of industry demand EitherInelasticEither Control of price by firm NoneSome (with care)SomeComplete ANALYZING MARKET STRUCTURES 14-6

Exhibit 14-9 BREAK-EVEN ANALYSIS BREAK-EVEN IS DONE TO FIND THE LEVEL OF SALES TO COVER ALL FIXED AND VARIABLE COSTS Q is quantity; FC, fixed costs; VC, variable costs; UVC, unit variable costs; Price, average revenue BREAK-EVEN OCCURS WHEN: TOTAL REVENUE=TOTAL COST Given: Price x Q = FC + VC = FC x (UVC x Q) Solve for Q (quantity) (Price × Q) – (UVC × Q) = FC Q(Price – UVC) = FC Q = FC/(Price-UVC) = FC / unit margin Solve for Q (quantity) (Price × Q) – (UVC × Q) = FC Q(Price – UVC) = FC Q = FC/(Price-UVC) = FC / unit margin 14-7

KEY DECISIONS IN MANAGING PRICE DETERMINE PRICING STRATEGY– Develop specific approach to achieve price objectives DETERMINE CHANNEL INTERMEDIARY PRICES, COSTS AND MARGINS DETERMINE SINGLE PRODUCT AND PRODUCT LINE PRICING Develop pricing structures for substitute and complementary products DETERMINE WHETHER TO PARTICIPATE IN BIDDING AND NEGOTIATION FOR SALES ESTABLISH A PRICING SYSTEM Based on the 4 C’s : Costs, Customers, Competitors, and Channels 14-8

SCENARIO: What sales increase is needed to cover a \$1.2 million increase in expenditures? MARGINAL ANALYSIS NR = \$1.2 million + COGS NR = \$1.2 million +.75 NR.25 NR = \$1.2 million NR = \$1.2 million /.25 NR = \$4.8 million WHERE: COGS = 75% of Net Sales NR = New Revenue 14-9

Exhibit 14-11 A PRICE INCREASE/DECREASE BY ONE CHANNEL MEMBER WILL IMPACT THE PRICE CHARGED BY SUBSEQUENT CHANNEL MEMBERS CALCULATING MARGIN CHAINS ASSUME: Given a new product selling for \$10, what is the maximum factory price allowable? WHOLESALERDEALER Net Sales100%Net Sales100% COGS85%COGS70% Gross Profit15%Gross Profit30% Apply \$10 dealer price Net Sales\$7.00Net Sales\$10.00 COGS5.95COGS7.00 Gross Profit\$1.05Gross Profit\$ 3.00 14-10

TYPES OF PRICING 1.ADMINISTERED PRICES - Prices established by seller as impersonal and take-it-or-leave it offers 2.COMPETITIVE BIDDING – OPEN BIDDING – Any organization can compete for business CLOSED BIDDING - Solicits bids from exclusive list of potential suppliers 3.NEGOTIATED PRICES Seeks prices based on mutually agreeable terms 14-11

ROBINSON-PATMAN ACT VIOLATIONS OCCUR: 1.When different prices are charged to competitors; 2.The differences are not attributable to cost differences; 3.The product is essentially the same for each competitor; 4.The effects are damaging to competition 14-12

NEGOTIATION PRIMER ●AVOIDANCE: When a company doesn’t need to deal with the partner or to make a deal *●ACCOMMODATION: Sacrifice necessary to hold or sustain a relationship ● COMPROMISE: Hybrid of competition and accommodation *●COMPETITIVE NEGOTIATION: There is a winner and a loser *●COLLABORATION: Joint problem solving for a creative win-win solution *NEGOTIATION STRATEGY OPTIONS 14-13

LEVERAGE FOR A GLOBAL PRICING CONTRACT These products or services are a significant portion of customer’s purchases. Local markets are reasonably homogeneous. Customer’s top management is omitted. Customer seeks value enhancement more than cost cutting. Supplier has good working relationships not just at HQ, but with the company’s country managers. Customer and supplier have some implementation experience with global strategies played out at local levels. Exhibit 14-16 14-14