BUSSPP 0020 1st EditionExam # 3 Study Guide Lectures: 13-17Lecture 13I. Price & Pricing A. Definition of price: amount of money that a seller is asking or a buyer is bidding for a product1. Contains all known information 2. Refers to the idea that both parties to the transaction have complete symmetric informationB. Definition of pricing: process by which price is arrived at 1. Decision-making process C. Decision-making process 1. Objectives of pricing a. Profit – focus nudges prices upward i. Maximizingii. Satisficing/target setting b. Market Share – nudges prices downward i. Attract customers/increase market share with low pricesc. Status Quo Pricing – keeps prices constant i. customers much prefer a stable price for a predictable period of timeii. Won’t have to adjust frequently d. Entry Barrier Pricing – nudges price downwardi. Someone is going to attempt to enter the marketii. Lower price e. Survival i. when a firm believes that its existence is threatened, it does weird things with prices ii. Drop prices, generate as much $ as possible, get outiii. Lower/raise prices on certain things etc. II. Strategies A. Primary 1. Focus on demand a. Up – raise price b. Down – drop price c. Price at maximum, adjust for demandd. May adjust in real time or in anticipation of future demand e. In anticipation of spring break – hotel prices in spring break towns go up long before demand is actually observed 2. Focus on Cost a. set price as to cover costs and hopefully make a profit 3. Focus on Competition a. Price similarly to competition 4. Auction Pricing a. buyer pricing b. reserve price: seller won’t sell below x5. Negotiations a. involve both parties setting price b. house-buying concept i. price not set by one party (common agreement) c. jobs – negotiation is acceptable within bounds i. signing bonus ii. Time of vacation accumulation iii. Moving Expenses iv. Schedule (home/long hours & long weekend etc) 6. Gray Market: crossing a border to obtain legal/illegal goods at a lower price for personal consumption B. Secondary Lecture 14 I.) Legal ConsiderationsA.) Story 1—tells us a story about two people meeting in secret to change pricesILLEGALStory 2—when one person changes prices, and another follows, that is considered LEGALB.) Collusion to fix prices (story 1) is illegal and a FEDERAL OFFENSE1. Explicit collusion: flat-out conspiring to raise prices in a joint and organized manner 2. Implicit collusion: looks like there has been a collaboration between two companies, but have nota. Signal: when any party puts information into the market place and has been perceived by other players; overall, puts information into market and have people adjust accordinglyi. Example is raising prices and others following alongii. Adjusting your behavior accordinglyiii. One party (buyer, seller, third) puts information into the marketplaceb. If the market is expecting information and doesn’t get iti. This is the absence of expected informationii. Ex: your mom knows you had a test today and when you don’t call after it she will assume the worstTakeaways:Pricing is one of the things a company has control over, but also has significant legal constraints on how to spread informationII.) Objectives/Strategies part 2A.) Multiples/ combinations of objectivesB.) combining strategies1. Competition based 2. Types of pricesa. Premium prices—Nordstrom’sb. Middle price (middle of the road)—Macy’sc. Discount price—Wal-Mart3.a. Back in the day—used to be many middle of the road storesb. Today, there is a growth in discount and premium stores, and a decrease in middle of the road stores4. Stores try to stay in their price range for competitors.a. i.e. Wal-mart will crush any competition, so there are many stores between macy’s and WMi. Target, kohls, JCP, etcb. Below WM are the dollar stores5. Strategic decisions, where all of these stores decided to be located in terms of competition and pricingIII.) Cost-basisA.) Types1. Multiple break-even pointB.) Develop1. Algebraically2. Geometrically 3. AlgebraProfit= revenue – expensesProfit= (P*Q)- [variable + fixed]Total variable is equal to (variable costs*quantity)+ fixed and P-V is equal to contribution marginProfit= PQ- VQ- FAt break even profit=00= PQ- VQ –F0= Q(P-V) – F0= CMQ- FF= CMQ fixed costs are always positiveF= (P-V) QUnless CM is positive, we can never break even!!Necessary conditions:1.) (P-V)> 0; price must exceed variable costs2.) Q of break even must be less than or equal to capacity3.) If break even price is outside the range fo what customers typically pay, the price of Break even must be “gettable”Lecture 15 I. Promotion A. Make the customer understand that we exist in the market as a sellerB. Value proposition II. A Story…A. Firm: buy a car. 1. Atkin REALY loves cars. (yet buys them as transportation only) 2. 2002/2003… Atkin’s in Dublin3. Letter from fancy car dealer. 4. Salespeople match the demographics of the buyer (think Saturn)B. What elements of promotion? 1. Direct marketing 2. Personal sales3. Sales promotion – try or buy4. Advertising – throughout 5. Public relations – salesperson attire, business presentation a. try to estimate how much this campaign cost (fixed cost, independent of quantity sold)b. Who pays for this campaign? Dealership Domner-Benz Saks $25,000 Gift card #1 x $35 Gift card #2 x $350. Mailing #1 x x $10 Mailing #2 x x $10 Sales, reception, cookies -- -- ------ Car x x $20 Mailing List x $50?*Mark-up: there’s a cost to the retailer. Retailer multiplies by some factor to get price (2-3x amt)*Retail value DOES NOT imply total cost Lecture 16 I. Introduction to supply chain A. Has moved from an engineering focus to a business function 1. Area useful for cost reduction (if utilized efficiently) 2. Used as a way of driving business in general (provide competitive advantage)B. Many terms used to identify this area 1. Logistics: math modeling of supply chains, now just generally refers to supply chain mgmt2. Distribution:concept of linking any two particular parts of a supply chain3. Distribution System: