1. Chapter 13 Pricing Topics: Determinants of Pricing Strategy
Cost Issues
Competition Issues
Customer Value and Pricing
The Pricing Plan using Marketing-orientated pricing.
Hansen (A) case

2. Dr Martens moves to China
The makers of Dr Martens boots have announced the company is moving production to China with the loss of more than 1,000 jobs.
A spokesman for the company said the decision was made because it was far cheaper to produce footwear in China. It plans to cease all production in the UK, but will continue to employ a number of office and design staff.
'Positive direction'
"Dr Martens will remain a brand true to its heritage and deliver footwear of the highest quality.
"The offshore strategy is the first step in moving the company and the brand forward in a positive direction."
Paul Gates, general secretary of KFAT, said: "It may be cheaper in China, but this is an issue of added value and quality.
"It does not matter if the boots are cheap if nobody is going to buy them (because of their poorer quality)."

3. Pricing methods
Cost
Pricing methods
Competition
Marketing

4. Ceiling and Floor of Price – Pricing’s ‘Black Box’
COMPETITOR PRICES
Low Price
No Possible
Profit at this
Price
High Price
No Possible
Demand at
this Price
USP’s
DIFFERENTIATION
COSTS

5. What may cause an ‘inelastic’ market/demand curve?
The demand curve
Price
Does the Demand Curve Always look like this?? P1
What of Luxury Goods – so called ‘Giffen’ goods P2
What may cause an ‘inelastic’ market/demand curve? Q1 Q2
Quantity 7 7 7 7 7

6. Determining the break even point
Total revenue
Units of Production
Money (£)
Total variable costs
Total cost
Break even point
Profits
Losses
Fixed costs 10 10 10 10 10

7. Cost-oriented Pricing
Full Cost Pricing
Direct (Marginal) Cost Pricing
Direct Costs (per unit) £2
Fixed Costs £200,000
Expected Sales ,000
Costs per Unit
Direct Costs £2
Fixed Costs (200K/100K) £2
Full Costs £4
Mark-up (10%) £0.4
Price (costs + mark-up) £4.4
Costs are taken into account only when they are directly attributable to the production of a particular product. Fixed costs or overheads are not included in the marginal cost.
Marginal cost for the example given:
Fixed Costs £200,000
Expected Sales 100,000
Marginal Cost £2
Mark-up (10%) £0.2
Marginal Price £2.2 4

8. Evaluating Cost-Plus Pricing
Benefits
Cost-plus is easy and quick to evaluate. It is perceived by firms to be inexpensive.
It might be required or desired by customers.

9. Evaluating Cost-Plus Pricing
Disadvantages
Often delegated to inappropriate management levels.
In the initial calculations, there are obvious difficulties in allocating appropriate figures for contribution to fixed costs.
Such calculations are meaningless if estimated volume levels are greatly above/below actual levels achieved.
No consideration of competitive prices or response.
Does not systematically evaluate demand.
Logically corrupt. Uses estimate of volume to calculate price. In competitive markets price determines volume.
Opportunities to charge a higher price may be missed.

10. Competitor-oriented Pricing
Going-rate Pricing:
With no product differentiation producers are forced to accept the going rate. In reality there is almost no situation in which no differentiation occurs.
Competitive bidding:
The supplier will price according to a specification drawn up by the purchaser. Usually the supplier will choose the lowest (most competitive) price tendered.
Statistical modelling has resulted in the following basis for calculating expected profits.
Expected profit = Profit X Probability of winning

11. Pricing Plans Premise:
Experience of pricing decisions in a range of companies suggests that the biggest gains are likely to result not from additional knowledge or insights concerning specific aspects of pricing, but from a more consistent and rational application of what is already known. More specifically, there is a need to ensure that the decisions that are taken concerning the many different aspects of a company’s price structure form part of a coherent plan.

12. Marketing-orientated pricing
Marketing strategy
Value to customer
Price-quality relationships
Explicability
Marketing-oriented pricing PLAN
Product line pricing
Competition
Effect on distributors/ retailers
Negotiating margins
Costs
Political factors

13. EVC Analysis 40000 Added Value Life Cycle Cost EVC = 90000 50000 EVC =
80000
Purchase Price
Start-up Costs
30000
30000
120000
20000
120000
100000
Post-Purchase Costs
Reference Product
New Product X
New Product Y

14. Nine Marketing-Mix Strategies on Price/Quality
High
Medium
Low
1. Premium strategy
2. High-value strategy
3. Superb-value strategy
High
Product Quality
4. Overcharging strategy
6. Good value strategy
Medium
5. Average strategy
7. Rip-off strategy
8. False economy strategy
Low
9. Economic strategy
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15. The Product Life Cycle Revenue Time Introduction stage Growth stage
Maturity stage
Decline stage
Revenue
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Time

16. New product launch strategy
Promotion
High
Low
Slow
skimming
Rapid
skimming
High
Price
Low
Rapid
penetration
Slow
penetration

17. Distinctiveness from Competitive Products
When To Use a Penetration or a Skimming Strategy for Pricing New Products
Level of Desire
in Market
Distinctiveness from Competitive Products
Importance of
Price to Market
Ease of
Duplicating Product
Return on
Investment Objective
Dimension
Skimming
Strategy
Penetration
High
Low
Similar
Important
Easy
Gradual
Fast
Not Easy
Not Important
Distinctive
Source: Hise, R, Gillett, P and Ryans, J, (1979), Basic Marketing Concepts and Decisions, Winthrop Publishers, Cambridge, Massachusetts, p 450.

18. Initiating Price Changes

19. Initiating Price Changes

20. Initiating Price Changes

21. Reacting to Competitors’ Price Changes

22. Reacting to Competitors’ Price Changes

23. Reacting to Competitors’ Price Changes

24. Hansen Bathrooms (A) case
What other factors should be taken into account with regards Rob Vincent’s proposal?
Suggest alternative pricing strategies and the likely sort of price to the customer this would lead to
What impact would this have on the rest of the mix?