Cost Plus Pricing

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Share Driven Pricing - Some Companies are driven to get the most market share. But your goal shouldn’t be market share but maximizing contribution margin.

Value Creation – Economic Value, Offering Design, Segmentation. Product manager face challenge as they are expected to set prices that capture the value offered by their products that also maximize price. Typically turns to marketing, where research is completed. Example research shows 10% higher customer response, but doesn’t gaurntee payment of 10% more.

Price Structure – Price Structure aligned with the value received instead of the products delivered. Two techniques to creating a price structure: Price metric and fences.

Price Metrics are simply the unit by wich price is applied to the product or servies. Barbers serving primarly male clients – fair because each hair cut takes the same amount of time. Not the same in female hair salon. Some haircuts take longer and require more skill.

Price Fencing – ways to segment the market. Buyer identification (how much do they know). Segment the buyer by how much they know.

Segment by ID - Military discounts.

Segment by location - HEB in Borne vs San Antonio

Segment by time of purchase – Lunch prices, matinee movies, happy hour.

Segment by Quantiy – by how much you buy, Quanity discounts, volume discounts.

Segment by product design.

Price and value communication - Marketer must address issues through effective price and value creation. Ex. IPOD $229 thought to originally be price to high for what you get. Apple responded by putting cutting edge music and large camapaign to give the IPOD credibility w/ less informed people through huge campaign.

Pricing Policy – Pricing involve the art of managing expectations of customers & employees to encourage more profitable behaviors. Ex. Gillete offering “one time price” discounts to delivery by end of quarter. Slowed orders and sales pressure in early parts of each quarter.

Role of value in pricing - value: the utility gained from the product. Ex. Hot summer day a 12 oz can of coke could cost $10 by a vendor willing to sell less at a higher price

Economic value estimation – what would a new product be worth to a consumer, doesn’t necessarly mean you will get.

Price Offer Configuration –

Exam questions:

What do we mean by “sound pricing” – Quoting a price greater than a firm’s variable cost of performance plus the maximum contribution to fix cost and profit attainable in the competitive environment of the procurer.

Explain the difference between product driving pricing and customer driving pricing. Which approach is best?

Cost Plus Pricing – Most Common because carries and aura of financial prudence. Financial Prudence, according to this view is achieved by pricing every product or service to yield a fair return over all costs, fully and fairly allocated. In Theory, it is a simple guide to profitability; in practice, it is a blueprint for mediocre financial performance. Problems: Impossible to determine products unit cost before determining price, because units change with volume. Doesn’t react to market conditions.

Customer Driven Pricing - Result of a need to react to market conditions. The purpose of strategic pricing is not simply to create satisfied customers. The purpose is to price more profitably by capturing more value, not necessarily by making more sales. Problem is buyers rarely honest about how much they will pay and more fundamental problem with pricing to reflect customer’s willingness to pay.

Lee Lacocca – Before w/ Chysler w/ Ford. Designed Ford Mustang by asking people what they wanted and how much they would pay. Caution. May not be willing to pay.

What is the minimum price for which a seller would never sell below?

Never sell below variable costs

What is the goal of any pricing decision?

Maximize profits....
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