Pricing examples
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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

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Pricing examples

PRICING Examples

First Year 2010 Term 2


Pricing examples

  • Pricing Principles:

  • Cost

  • Value

  • Competition

Pa


Pricing examples

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,


Pricing examples

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.


Pricing examples

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


Pricing examples

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


Pricing examples

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

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11/22

Sorrell Ridge

Netflix


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