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  • Types of BEP BEP AnalysisType II: BEP of a fixed-cost investmentType I: BEP of a price change Type IV: BEP of Cannibalization*

  • Example: Type III BEPSun Manufacturing sells bookcases at a price of $100 a piece. Variable costs per unit are $50. Suppose that the unit variable costs have changed to $60, what will be the percentage increase in sales volume in order to make the profit remains the same? *

  • Break-Even Point = ( Unit Contribution_oldVCUnit Contribution_newVC) -1Formula for Type III BEP Analysis*

  • SolutionMargin at the old unit variable cost is $50 Margin at the new unit variable cost is $40

    To make sure the profit remains the same, the sales volume has to go up by 25%.

    *

  • Types of BEP BEP AnalysisType III: BEP of the change in variable costType II: BEP of a fixed-cost investmentType I: BEP of a price change *

  • Example: Type IV BEPSun Manufacturing sells bookcases at a price of $100 a piece. Variable costs per unit are $50. Suppose that the company is considering introduce a new brand that sells $120 and costs $60 each, what will be the percentage of sales for the new brand that is coming from the existing brand, so that the profit remains the same? *

  • Break-Even Rate = ( Unit Contribution_old offeringUnit Contribution_new offeringFormula for Type IV BEP Analysis)*

  • SolutionMargin of the existing product is $50 Margin of the new product is $60

    To make sure the profit remains the same, the new product can take up to 83.3% of the market share from the existing product.

    *

  • Chapter 7

    Price Levels*

  • *The Pricing Strategy PyramidValue CommunicationCommunication, Value Selling Tools

  • Price Setting Process*

  • Preliminary Segment Pricing PositiveDifferentiationCompetitive Reference

    Negative DifferentiationKey question: How much differential value should be captured in each segment?The answer to this question can differ substantially across segments based on strategic considerations and differences in price sensitivity*

  • Price Setting Illustration *

  • Three Generic Pricing Strategies

    Skim

    Penetration

    Neutral

    *

  • SKIMPENETRATIONNEUTRALCOSTSCUSTOMERSCOMPETITIONConditions for Different Pricing Strategies*

  • Pricing StrategySKIMPENETRATIONNEUTRALCOSTSCUSTOMERSCOMPETITIONCosts similar to competitorsSufficient CM to finance adv, etc.Little excess capacityIncremental capacity is expensiveCustomers are more sensitive to other elements of the marketing mixAvoid threat of retaliationLarge share brands with a lot to loseSustainable mktg mix advantagesOligopoliesHigh CMsHigh volumesChanges in volume drive profitabilitySmall BE Sales ChangesExcess capacityHigh price sensitivity-Total Expend Effect-Large Part of End-BenefitLittle differentiationSustainable cost & resource advantageCompetitors not willing to retaliateFinancial strengthAggressive small share brandsLow CMsLow VolumesChanges in Unit Price Drive ProfitLarge BE Sales ChangesAt or near capacityLow Price Sensitivity-Reference Price Effect-Price Quality Effect-Difficult Comparison EffectLimited threat of opportunismLimited opportunity for scale economiesSustainable differentiationLow threat brands*

  • Categorize These Pricing Strategies

    How would you categorize the pricing strategies for the following products and retailers? (S=skim, N=neutral, P=penetration)

    Pepperidge Farm Cookies_______Suave Shampoo _______Land O' Lakes Butter _______T.J. Maxx (Clothing) _______L'Oreal Hair Coloring _______ Bloomingdales_______Sears_______

    *

  • Analytical Approaches to Profitability Analysis*

  • Analyzing Profitability Using theBreakeven Sales Change Approach*

  • Risk Analytic Approach to Profitability Analysis*

  • Determinants of Price SensitivityThe Reference Price Effect

    The Difficult Comparison Effect

    The Switching Cost Effect

    The Price-Quality Effect

    The Expenditure Effect

    The End-Benefit Effect

    The Fairness Effect

    The Framing Effect

    The Shared-Cost Effect*

  • Price Sensitivity IllustrationFor each of the following purchase decisions, what factors are likely to affect the consumer's price sensitivity?A diamond engagement ringAutomobile repairsFood for meals at homeWhich university to attendA company carDraperies for your new homeText booksHealth insurance planSouvenirsVacation resort

    *

  • Price Sensitivity Discussion Questions

    What can a company do to decrease its customer's price sensitivity?

    Would all of the company's customers be likely to react in the same way?

    *

  • Price Sensitivity Discussion Questions

    Would a company ever want to do anything to increase its customers' price sensitivity? Why?

    What steps might it take?*

  • Price Sensitivity Discussion Questions

    Which of the following statements are always true, sometimes true, never true? Why?

    (a) Price elasticity is generally the same for all brands in a product category.

    (b)Advertising increases price sensitivity.(c)As a product category matures, the consumers become more price sensitive. (d)Each consumer has different price sensitivities for different products.*

  • Price Sensitivity QuestionsThe gasoline service stations in Rochester, New York convinced the City Council to ban signs displaying gasoline prices

    Why would they want to do this?

    What effect do you think this law had on gasoline prices? Why?

    *

  • Price Sensitivity QuestionsDespite the fact that rental rates for commercial space and labor costs are generally higher in big cities than in small towns, the prices of many products--such as stereo equipment and clothing--are higher in small towns than in large cities.

    *

  • Price Sensitivity Discussion QuestionsMany local rental car agencies rent late model cars at substantially lower prices than national companies such as Hertz and Avis. Despite their higher prices, the national companies still retain most of the market

    (a) Explain why most renters patronize the national car rental companies despite their higher prices. How have the national companies encouraged this price insensitivity?

    (b)If you were a small, local company, what factors would you look for to identify the price-sensitive segment of renters likely to be attracted to your lower price?

    (c)If you were a small company trying to become national, how might you overcome the low price sensitivity of customers to induce them to try your cars and evaluate the quality of your service?

    *

  • Next Lecture

    Price and Promotion

    *

    **This class session is about setting prices. After building the foundation for pricing -- value creation, price structure, value communication, and pricing policy -- now the final step is to set and adjust prices.**

    **********Answer: Diamond ring: Reference price (of discount jewelers), difficult comparison (or quality across stores), price-quality, end-benefit.Food: Expenditure, end-benefit (guests or just family), reference price effects.Company Car: Shared cost, price-quality (image).Text Books: Shared cost (Is educational expense tax deductible and does company or scholarship reimburse?), End-Benefit (small part of total cost of course), reference price (substitutes are few and poor).Souvenirs: End-benefit (cost as share of total vacation), expenditure, reference price effects.Automobile repairs: Difficult comparison, price quality, end-benefit (How expensive are repairs as a share of total cost of owning the car?), framing (fear of a potential loss if taken to an "unauthorized dealer" using "aftermarket" parts installed by "non-factory-trained" mechanics?).University to attend: Shared cost, expenditure (as percent of family income), difficult comparison.Draperies for new home: End-benefit (share of total cost of decorating room), price-quality (for living room where expense has prestige value or in other rooms), reference price (Can buyer make own draperies as an option?).Health insurance plan: Shared cost (employer payment), price-quality, expenditure.Vacation resort: Reference price, end-benefit (cost as a percent of total including travel), expenditure, price quality (The premium priced hotel is assumed to have better accommodations).**Answer: Yes, a company selling a relatively low-priced product would want to increase price sensitivity. It might advertise to convince customers that there really is no difference among brands except the price (e.g., Motel 6 ads). It might also use promotional prices to induce trial, thus reducing the difficult comparison effect.*****