Chap014 Pricing & Negotiating

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  • 7/27/2019 Chap014 Pricing & Negotiating

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    McGraw-Hill/Irwin Copyright 2009 by the McGraw-Hill Companies, Inc. All rights reserved.

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    Chapter 14

    Pricing and

    Negotiating for Value

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    PRICING ISSUES: WHY PRICING IS DIFFICULT

    Objective & Explicit

    1. STRATEGY ISSUES

    (Pricing objectives)2. COMPETITIVEFACTORS(Rivals prices)

    3. TRADE FACTORS(Channel power)

    4. LEGAL FACTORS(Restrictions anddiscrimination)

    1. DEMAND FACTORS

    (How much docustomers want)2. COST FACTORS

    (Actual outlays)

    Subjective andInterpretive

    14-3

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    A MODEL FOR MANAGING PRICE

    Evaluation andFormation of

    Prices & policy

    Demand Factors Elasticity of demand Cross elasticities Customer value

    perceptions

    1

    Cost Factors Costs now Anticipated costs Economic objectives

    2

    Cost Factors Structure of competition Barriers to entry Intent of rivals

    3

    Strategy Issues Target market

    selection Product positioning Price objectives Marketing program

    4

    Trade Factors Power in the channel Traditions and roles Margins

    5

    Legal Factors Vertical restrictions Price discrimination

    6

    Exhibit 14-2

    14-4

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    SUPPLY AND DEMAND

    Quantity

    Demand

    SupplyPrice

    Exhibit 14-3

    14-5

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    Exhibit 14-5

    Types of

    situationsImportantdimensions

    PureCompetition Oligopoly

    MonopolisticCompetition Monopoly

    Uniqueness of eachfirms product None None Some Unique

    Number of competitors Many Few Few to many NoneSize of competitors(compared to sizeof market

    Small Large Large to small None

    Elasticity of demand facingfirm

    Completely

    Elastic

    Kinked demandcurve (elastic andinelastic

    Either Either

    Elasticity of industry demand Either Inelastic Either Either

    Control of price byfirm None Some (with care) Some Complete

    ANALYZING MARKET STRUCTURES

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    Exhibit 14-9

    BREAK-EVEN ANALYSIS

    BREAK-EVEN IS DONE TO FIND THE LEVEL OF SALES TOCOVER ALL FIXED AND VARIABLE COSTS

    Q is quantity; FC, fixed costs; VC, variable costs;UVC, unit variable costs; Price, average revenue

    BREAK-EVEN OCCURS WHEN: TOTAL REVENUE=TOTAL COST

    Given: Price x Q = FC + VC = FC x (UVC x Q)

    Solve for Q (quantity)(Price Q) (UVC Q) = FC

    Q(Price UVC) = FCQ = FC/(Price-UVC) = FC / unit margin

    Solve for Q (quantity)(Price Q) (UVC Q) = FC

    Q(Price UVC) = FCQ = FC/(Price-UVC) = FC / unit margin

    14-7

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    KEY DECISIONS IN MANAGING PRICE

    DETERMINE PRICING STRATEGY Develop specific

    approach to achieve price objectives DETERMINE CHANNEL INTERMEDIARY PRICES,

    COSTS AND MARGINS DETERMINE SINGLE PRODUCT AND PRODUCT LINE

    PRICING Develop pricing structures for substitute and

    complementary products DETERMINE WHETHER TO PARTICIPATE IN BIDDING

    AND NEGOTIATION FOR SALES

    ESTABLISH A PRICING SYSTEM

    Based on the 4 Cs : Costs, Customers, Competitors, andChannels

    14-8

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    SCENARIO: What sales increase is needed to cover a$1.2 million increase in expenditures?

    MARGINAL ANALYSIS

    NR = $1.2 million + COGS

    NR = $1.2 million + .75 NR

    .25 NR = $1.2 million

    NR = $1.2 million / .25

    NR = $4.8 million

    WHERE: COGS = 75% of Net Sales

    NR = New Revenue

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    Exhibit 14-11

    A PRICE INCREASE/DECREASE BY ONE CHANNEL MEMBER WILLIMPACT THE PRICE CHARGED BY SUBSEQUENT CHANNEL MEMBERS

    CALCULATING MARGIN CHAINS

    ASSUME: Given a new product selling for $10,what is the maximum factory price allowable?

    WHOLESALER DEALER Net Sales 100% Net Sales 100%COGS 85% COGS 70%Gross Profit 15% Gross Profit 30%

    Apply $10 dealer priceNet Sales $7.00 Net Sales $10.00COGS 5.95 COGS 7.00Gross Profit $1.05 Gross Profit $ 3.00

    14-10

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    TYPES OF PRICING

    1. ADMINISTERED PRICES -Prices established by seller as impersonal andtake-it-or-leave it offers

    2. COMPETITIVE BIDDING OPEN BIDDING Any organization cancompete for businessCLOSED BIDDING - Solicits bids fromexclusive list of potential suppliers

    3. NEGOTIATED PRICESSeeks prices based on mutually agreeable terms

    14-11

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    ROBINSON-PATMAN ACT

    VIOLATIONS OCCUR:

    1. When different prices are charged to

    competitors;2. The differences are not attributable to cost

    differences;

    3. The product is essentially the same for eachcompetitor;

    4. The effects are damaging to competition

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    NEGOTIATION PRIMER

    AVOIDANCE: When a company doesnt need to dealwith the partner or to make a deal

    * ACCOMMODATION: Sacrifice necessary to hold orsustain a relationship

    COMPROMISE: Hybrid of competition andaccommodation

    * COMPETITIVE NEGOTIATION: There is awinner and a loser

    * COLLABORATION: Joint problem solving for acreative win-win solution

    *NEGOTIATION STRATEGY OPTIONS

    14-13

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    LEVERAGE FOR A GLOBAL PRICING CONTRACT

    These products or services are a significant portion of customers purchases.

    Local markets are reasonably homogeneous.

    Customers top management is omitted.

    Customer seeks value enhancement more than cost cutting.

    Supplier has good working relationships not just at HQ, but

    with the companys country managers. Customer and supplier have some implementation experience

    with global strategies played out at local levels.

    Exhibit 14-1614-14