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# PRICING Examples - PowerPoint PPT Presentation

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

Pa

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,

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.

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

of Marketing

Some Conclusions

Product Life Cycle Clay Christensen

Paul Farris

Summary

Paul Farris

Mon. Tues. Wed. Thur. Fri. product life cycle

Marketing Forum

Sunnyside

Sealed Air

Earthlight

Aqualisa

9/27

Mktg Econ Note

Seven Qs Note

iPhone/Pricing

Progressive

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