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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

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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

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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

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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

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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

14-9


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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

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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

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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

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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

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