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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

PRICING Examples

First Year 2010 Term 2

slide2
Pricing Principles:
  • Cost
  • Value
  • Competition

Pa

slide3

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,

slide4

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.

slide5

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
Calculating Promotion Budgets with Demand Pricing

List Price

Promotion Price

Discount

Units Sold

Promotion Cost

$2.00

$1.40

$0.60

90

$54.00

slide7

The Maestro

of Marketing

some conclusions
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
product life cycle clay christensen
Features, technologies
  • Quality, reliability
  • Ease of use, convenience
  • Price
Product Life Cycle Clay Christensen

Paul Farris

summary
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

slide11

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

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