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Chapter 5

Chapter 5. Strategic Planning Regarding Operating Processes. What are these examples of?. http://library.thinkquest.org/03oct/00921/supplyanddemand.htm. Essential Questions:. What are the Primary Influences on Selling Price? Explain how they influence the SP.

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Chapter 5

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  1. Chapter 5 Strategic Planning Regarding Operating Processes

  2. What are these examples of? • http://library.thinkquest.org/03oct/00921/supplyanddemand.htm

  3. Essential Questions: • What are the Primary Influences on Selling Price? Explain how they influence the SP. • How do different price strategies affect the introduction of a new product into the market?

  4. Students will be able to: • Describe the process of determining selling prices and demonstrate how various strategies are used to determine selling price.

  5. What are the Primary Influences on Selling Price? • Customers— • customers want high quality and service at a reasonable price • Must understand customers and respond to their needs • Price increase, demand decreases • Price decrease, demand increases • These trends can be affected by • loyalty and unwillingness to substitute (ex: coffee) • staple vs. luxury item (hamburger vs steak) • Perceived high quality and service (Toyota vs Ford)

  6. What are the Primary Influences on Selling Price? • Competitor— • Depending on the competitiveness of the market, competitors may influence the selling price • Must monitor and learn from them • Pure competition • Monopolistic competition

  7. What are the Primary Influences on Selling Price? Pure Competition • Abundance of suppliers • Products Identical • Market determines selling price • Individual company is price taker (ex: agriculture industry) Monopolistic Competition • Abundance of suppliers • Products Similar not identical • Market has impact but NO control over SP • Individual company can influence selling price by advertising quality and service • Monitor Competitors – price wars

  8. Monopolistic Competition • DELL VERSES APPLE • http://kb.wisc.edu/showroom/page.php?id=3045

  9. What are the Primary Influences on Selling Price? • Legal and social forces— • there are legal restrictions and social influences on selling price • Must monitor changes and learn from them • Monopolies and Oligopolies • Monopoly (ex: utility companies) • One company controls market and selling price • Government approves price changes • Oligopoly (ex: oil companies) • Very few companies control selling price • Government monitors selling prices • Price fixing • Price gouging- illegal

  10. What are the Primary Influences on Selling Price? • Cost— • In the long run, the selling price set by a company must cover all its costs and provide a sufficient return to the owners • Must control costs and eliminate non-value added activities • Markup - what is added to cost of product to ensure profit • Selling margin = selling price - cost • Selling margin % = selling margin/selling price

  11. How does the External Market Influence Selling Prices? • Pure competition • Monopolistic competition • Oligopoly • Monopoly

  12. Bellringer • What kind of customer are you? • http://www.youtube.com/watch?v=0tjtrZl7sdQ

  13. What is the Difference between Penetration Pricing and Predatory Pricing? • Penetration pricing - LEGAL • Early Product life cycle -setting a lower initial selling price to entice customers to try the product/service • Later Product life cycle – Company intends to increase selling price. • Predatory pricing - ILLEGAL • Setting a low initial selling price (usually below cost) to drive out the competition • Then raise prices once they control the market

  14. What is the Difference between Skimming Pricing and Price Gouging? • Skimming pricing - LEGAL • Early Product life cycle -setting higher initial selling prices due to uniqueness of product • Appeals to customers who want to be the first to own the product and are willing to pay more • Later Product life cycle -when novelty wears off, lowers the price • Opposite of Penetration Pricing • Gouging - ILLEGAL • Setting high price due to unusual increase in demand (gas prices on 9/11)

  15. SKIMMING PRICING • UGGS • I POD • IPAD • IPHONE

  16. What is the Difference between Life-cycle and Target Pricing? • Life-cycle pricing – set price based on cost • Early Product Life Cycle price set below initial costs with idea that costs will decrease over product life cycle. (operational efficiencies). • Later in life – does not plan on altering selling price once established market for goods and services. • R&D, design, supply & demand, production, marketing, customer service, distribution. • Once determine cost, - determine required markup, set selling price

  17. What is the Difference between Life-cycle and Target Pricing? • Target pricing – Market Based • Used to determine whether to introduce a new product or not to introduce new product. • Determine SP based on market surveys • Determine markup for sufficient return to owners • Selling Price – Markup = determined Target Cost • Company must figure out how to manufacture product NOT to exceed TARGET COST. • Industry example – Apple at some level - competitiveness • Goal of Target Pricing - Produce products cost effectively and provide an adequate return.

  18. What is the Difference between Life-cycle and Target Pricing? • Life-cycle pricing– Cost Based • Setting a selling price for the life of the product/service based on the cost • Determine cost, determine required markup, set selling price • Target pricing – Market Based • Setting a selling price for the life of the product/service based on the market • Determine selling price, determine required return, set target cost

  19. What are the Common Reasons for Holding Inventory? • Meet customer demand • Smooth production scheduling • Take advantage of quantity discounts • Hedge against anticipated cost increases

  20. What are the Common Reasons for Not Holding Inventory? • Significant costs are incurred • Maintain separate warehouse • Insure inventories: theft, fire, or floods • Property tax on inventories in some states • Holding inventory allows the company the “hide” its internal process problems because demand can be met from inventory

  21. What are the Common Compensation Plans? • Piece rate • Pay based on units completed • Commission • Pay based on sales • Hourly • Pay based on hours worked • Salary • Pay based on period of time

  22. What are Other Compensation Issues? • Insurance • Protection for employees • Paid leave • Protection for the company • Bonuses • Additional pay based on some future event • Gross pay versus net pay • Gross = amount earned • Net = amount received

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