Pricing – a process/decision making process of setting a priceRandomSystematically (decision making process) = policyCould be reoccurring problem (heuristic) or very complicatedPrice = the outcome of this processObjective – goalProfitability – want to price the product to achieve some profit targetUsually want to max profit, but it doesn’t usually happen so they use a target priceThis drives the price upMarket share – often the firm is new to market or have a small market share and want to build itThey enter with a clone product and price lowUnderprice to stimulate revenue and market shareWant to build market share in order to satisfy public’s needsThis drives the price downEntry barrier – firm has a large market share, can increase price – but this invites rivals to clone and underprice the productOften price under what they could pricePrice lower to create entry barriers – drives price downStatus quo – once you put a price in market, you don’t have to really change itPrice stays the sameSurvival – hard to tell what price will do to stay in the game (feel threatened)No one objective is better than anotherCan mix and match price strategies with different productsStrategy – ways to achieve the objectiveCost based – figure out costs and add a little to generate revenue/profitBreakevenMarkup price – increase priceDemand based – based no focus on price but on observed/historical/expected demand – concerts/ hotels on spring breakCompetition based – price relative to rival’s pricesCost, demand, and competition based strategies are what sellers use to set a priceAuction & negotiation – buyer sets price, not sellerAuction is based on buyers’ wantsSignal - any party puts any info into a marketplace that is visible to other parties in the same market placeSimple to complex signals (variety)Any info into marketNo info when market expects itAbsence of info when market expects it = powerful signalResponse  yes or noDefensive pricing – response to signal1 rival moving down price  another rival moves down priceCan move it down however they want/ don’t have to move it down the same amountCollusion = explicit (illegal) and implicit (legal)Explicit – illegally fixing prices  making agreement with other companiesImplicit – increase price or shut downPut up a sign saying increase price. Other companies see this raise in price and then change their prices similarly  LEGALBreakeven problemProfit = Revenue – expenses= PQ – (VQ – F)VQ – variable costs = DM+DL+Overhead costs (0)DM – material used in productionDL – labor used in productionF = fixed cost – constant for a period of timeProfit = PQ – (VQ+F)  = PQ – VQ – FAt breakeven, profit = 0PQ – VQ – F = 0Breakeven price = (VQ + F)/ Q  price needed not to make profit and no costsBreakeven quantity = (P-V)Q – F = 0(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 quantitySufficient condition = if this happens, that WILL happenNecessary condition = if this happens, that MAY happenCM>0, P>V  necessary to breakeven, BUT doesn’t mean that you WILL breakevenBreakeven Quantity ≤ capacityBreakeven price must be obtainable/getable – use a price that customers will payJust because the math works, doesn’t mean we are going to breakeven in practiceCompetition based pricingThere is a general, middle of the road price (MACYS)People above this price – premium/prestige pricersPeople below this price – discount pricersDeciding at which price point we are at, we decide who we are competing againstPricing – a process/decision making process of setting a price - Random- Systematically (decision making process) = policyo Could be reoccurring problem (heuristic) or very complicatedo Price = the outcome of this processObjective – goal- Profitability – want to price the product to achieve some profit targeto Usually want to max profit, but it doesn’t usually happen so they use a target priceo This drives the price up- Market share – often the firm is new to market or have a small market share and want to build ito They enter with a clone product and price lowo Underprice to stimulate revenue and market shareo Want to build market share in order to satisfy public’s needso This drives the price down- Entry barrier – firm has a large market share, can increase price – but this invites rivals to clone and underprice the producto 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 ito Price stays the same- Survival – hard to tell what price will do to stay in the game (feel threatened)- No one objective is better than another- Can mix and match price strategies with different productsStrategy – ways to achieve the objective- Cost based – figure out costs and add a little to generate revenue/profito Breakeveno Markup price – increase price- Demand based – based no focus on price but on observed/historical/expected demand – concerts/ hotels on spring break- Competition based – price relative to rival’s prices- Cost, demand, and competition based strategies are what sellers use to set a price- Auction & negotiation – buyer sets price, not sellero Auction is based on buyers’ wantsSignal - any party puts any info into a marketplace that is visible to other parties in the samemarket place- Simple to complex signals (variety)- Any info into market- No info when market expects it o Absence of info when market expects it = powerful signal- Response  yes or no- Defensive pricing – response to signal o 1 rival moving down price  another rival moves down priceo Can move it down however they want/ don’t have to move it down the same amountCollusion = explicit (illegal) and implicit (legal)- Explicit – illegally fixing prices  making agreement with other companies- Implicit – increase price or shut downo Put up a sign saying increase price. Other companies see this raise in priceand then change their prices similarly  LEGALBreakeven problem- Profit = Revenue – expenseso = PQ – (VQ – F) VQ – variable costs = DM+DL+Overhead costs (0) DM – material used in production DL – labor used in