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PRICING Examples

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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

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

- Features, technologies
- Quality, reliability
- Ease of use, convenience
- Price

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

Paul Farris

Mon.Tues.Wed.Thur.Fri.

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