# PRICING Examples - PowerPoint PPT Presentation

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PRICING Examples. First Year 2010 Term 2. Pricing Principles: Cost Value Competition. Example of a Linear Price-Quantity Demand Function. MWB(uy). Two observations on the price-quantity demand schedule. Quantity Demanded. *. *. MWP(ay). 0. 0. Price Charged. Variable Cost (VC).

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## PRICING Examples

First Year 2010 Term 2

• Pricing Principles:

• Cost

• Value

• Competition

Pa

Example of a Linear Price-Quantity Demand Function

MWB(uy)

Two observations on the price-quantity demand schedule

Quantity

Demanded

*

*

MWP(ay)

0

0

Price Charged

Variable Cost (VC)

The Optimal price is the mid point between the Maximum Willingness to pay and Variable Cost of the Product

GM* = -1/e

Where, GM*, (gross margin*) indicates the gross margin at the optimal price and e = the elasticity of demand.

Since GM*= (P*-VC)/P* =-1/e,

Customer Segment 1

UnitsPrice Unit Cost Unit MarginProfit

70\$2.00\$0.80\$1.20\$84.00

75\$1.80\$0.80\$1.00\$75.00

80\$1.60\$0.80\$0.80\$64.00

85\$1.40\$0.80\$0.60\$51.00

Customer Segment 2

UnitsPrice Unit Cost Unit Margin Profit

0\$2.00\$0.80\$1.20\$ 0.00

30\$1.80\$0.80\$1.00\$30.00

60\$1.60\$0.80\$0.80\$48.00

90\$1.40\$0.80\$0.60\$54.00

Adapted from Farris & Quelch, SMR, 1989.

Single Price

Dual-Price

List

\$1.60

140

\$1.60

\$0.80

\$0.80

140

\$112

List

\$2.00

70

Promotion

\$1.40

90

Price

Units

Avg. Unit Price

Variable Cost

Contribution

Total Units

Total Contrib.

\$1.66

\$0.80

\$0.86

160

\$138

Paul Farris and Erv Shames

### Calculating Promotion Budgets with Demand Pricing

List Price

Promotion Price

Discount

Units Sold

Promotion Cost

\$2.00

\$1.40

\$0.60

90

\$54.00

The Maestro

of Marketing

• Smart discounts can raise real prices and margins

• Good targeting is needed to make this happen

• Calculating the profitability of price promotions is a difficult, challenging exercise

### Some Conclusions

• Features, technologies

• Quality, reliability

• Ease of use, convenience

• Price

### Product Life Cycle Clay Christensen

Paul Farris

• Cost, value, competition and sense of strategy over the product life cycle

• One price will rarely do the job

• Segmentation

• Bundling

• Selling through distributors

• Pricing is a process that can be improved and innovated

### Summary

Paul Farris

Mon.Tues.Wed.Thur.Fri.

Marketing Forum

Sunnyside

Sealed Air

Earthlight

Aqualisa

9/27

Mktg Econ Note

Seven Qs Note

iPhone/Pricing

Progressive

Google

Speakers

10/4

Pricing Note

Levis at Walmart?

Kalashnikov

Black & Decker

10/11

Mid-term Exam

Brand Equity Note

Ohio Art

10/18

Fed. Express

ZS Associates

Mktg Experiments Note

BREAK

10/25

11/1

Retail Relay

Stainmaster

CustLifeValue Note

11/8

Conjoint

Heinz + Spkr

11/15

Snapple

Beer Game

11/22

Sorrell Ridge

Netflix