Pricing a process decision making process of setting a price Random Systematically decision making process policy o Could be reoccurring problem heuristic or very complicated o Price the outcome of this process Objective goal Profitability want to price the product to achieve some profit target o Usually want to max profit but it doesn t usually happen so they use a target price o This drives the price up Market share want to build it often the firm is new to market or have a small market share and o They enter with a clone product and price low o Underprice to stimulate revenue and market share o Want to build market share in order to satisfy public s needs o This drives the price down Entry barrier rivals to clone and underprice the product firm has a large market share can increase price but this invites o Often price under what they could price o Price lower to create entry barriers drives price down Status quo once you put a price in market you don t have to really change it o Price stays the same hard to tell what price will do to stay in the game feel threatened Survival No one objective is better than another Can mix and match price strategies with different products Strategy ways to achieve the objective Cost based figure out costs and add a little to generate revenue profit o Breakeven o Markup price increase price based no focus on price but on observed historical expected Demand based demand concerts hotels on spring break Competition based Cost demand and competition based strategies are what sellers use to set a price relative to rival s prices price Auction negotiation buyer sets price not seller o Auction is based on buyers wants Signal any party puts any info into a marketplace that is visible to other parties in the same market place No info when market expects it Simple to complex signals variety Any info into market Defensive pricing Response yes or no response to signal o Absence of info when market expects it powerful signal o 1 rival moving down price another rival moves down price o Can move it down however they want don t have to move it down the same amount Collusion explicit illegal and implicit legal Explicit illegally fixing prices making agreement with other companies Implicit increase price or shut down o Put up a sign saying increase price Other companies see this raise in price and then change their prices similarly LEGAL Breakeven problem Profit Revenue expenses o PQ VQ F VQ variable costs DM DL Overhead costs 0 DM material used in production DL labor used in production F fixed cost constant for a period of time Profit PQ VQ F PQ VQ F o At breakeven profit 0 PQ VQ F 0 Breakeven price VQ F Q price needed not to make profit and no costs Breakeven quantity P V Q F 0 o o o o o o P V contribution margin CM F 0 P V Q F always positive doesn t exist no negative quantity doesn t work CM 0 in order to breakeven doesn t exist no negative quantity Sufficient condition if this happens that WILL happen Necessary condition if this happens that MAY happen o CM 0 P V necessary to breakeven BUT doesn t mean that you WILL o Breakeven Quantity capacity o Breakeven price must be obtainable getable use a price that customers breakeven will pay Just because the math works doesn t mean we are going to breakeven in practice Competition based pricing There is a general middle of the road price MACYS o People above this price premium prestige pricers o People below this price discount pricers Deciding at which price point we are at we decide who we are competing against It is hard to switch price margins once you choose one
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