Agenda
• Product Positioning
• Meanings of Price
• Demand & Pricing Strategies
• Elasticity
• Bundling
What to Say?• Positioning – Main thought to associate with the company
– Sun Microsystems – “The Dot in Dot.Com”
– Microsoft – “Where Do You Want to Go Today”(Gates) to “Empower People Through Great Software Anyplace, Any Time, and on Any Device” (Balmer)
– Dell – “Be Direct”
– Gateway – “You’ve Got A Friend in the Business” to “Connect with Us”
Price Definitions
• Consumer – what must be sacrificed in order to possess or use a product.– (money, time, effort)
• Producer – what is received in return for the transfer of possession or usage rights to the consumer– (money, products, goodwill)
Prices Do Not Always Reflect Direct Costs
Sales # Albums Selling
> 1 million 60
500,000 – 999,999 52
250,000 – 499,999 95
100,000 – 249,999 208
< 100,000 6,040
Organizational Objectives & Pricing Strategies
• Status Quo – Cost-oriented
• Sales Revenue Maximization – Demand-oriented
• Market Share Maximization – Competition-oriented
• Profit Maximization – Demand & Cost-oriented
Cost-Oriented Pricing
Manufacturer(20%)
Wholesaler(25%)
Retailer(50%)
Cost $20
Markup $4
Selling Price
$24
Break Even Analysis
1. TR = TC + Pr where TR = Total Revenue
TC = Total Cost = Fixed + Variable= FC + VC * Q
Pr = Profit Margin Desired
2. P * Q = (FC + VC * Q) + Pr
3. Q = (FC + Pr) / (P - VC)
Break Even Analysis (example)
• Let FC = $1000
VC = $2 / unit
Pr = $600
Price - $10 Q = ($1000 + $600) / ($10 - $2) = 200 units
Price - $8 Q = ($1000 + $600) / ($ 8 - $2) = 266 units
Q P TR TC Profit MR MC
0 $150 $200
1 $140 $296
2 $130 $316
3 $117 $331
4 $105 $344
5 $92 $355
6 $79 $368
7 $66 $383
8 $53 $423
9 $42 $507
10 $31 $710
Q P TR TC Profit MR MC
0 $150 0 $200 -$200
1 $140 $140 $296 -$156 $140 $96
2 $130 $260 $316 -$ 56 $120 $20
3 $117 $351 $331 $ 20 $ 91 $15
4 $105 $420 $344 $ 76 $ 69 $13
5 $92 $460 $355 $105 $ 40 $11
6 $79 $474 $368 $106 $ 14 $13
7 $66 $462 $383 $ 79 -$ 12 $15
8 $53 $424 $423 $ 1 -$ 38 $40
9 $42 $378 $507 -$129 -$ 46 $84
10 $31 $310 $710 -$400 -$ 68 $203
Economics of Pricing
-$100
-$50
$0
$50
$100
$150
$200
$250
$300
$350
1 2 3 4 5 6 7 8 9 10 11
MR
Demand
MC
Avg Cost
Pricing & Strategy
1. Volume - Maximize unit sales
• (subject to not losing money)
2. Market Share – Maximize market share
3. Maximize Profits
4. Maximize Sales Revenue
Price Elasticity
• Percent change in quantity sold for a given percent change in price.
E = (Q / Q) / ( P / P)
Price Elasticity
• Quantity (3-2)/2 = 50%
• Price ($117-$130)/$130 = -10%
• Elasticity = 50% / -10% = -5
Q P TR %Q % P Elast
0 $150 $0
1 $140 $140
2 $130 $260 100% 7.1% -14.1
3 $117 $351 50% 10.0% -5.0
4 $105 $420 33% 10.2% -3.2
5 $92 $460 25% 12.4% -2.0
6 $79 $474 20% 14.1% -1.4
7 $66 $462 16.7% 16.4% -.98
8 $53 $424 14.3% 19.7% -.72
9 $42 $378 12.5% 20.8% -.60
10 $31 $310 11.1% 26.2% -.42
Price Bundling
• Bundling – when several related items are sold together for a packaged price, usually lower than each item separately.
• Amazon – always offers the album selected with a similar one for a combined price.
Advantages of Bundling (Variable Cost is $3 per service)
Customer Voice Mail Hot Line Both
A $5.00 $3.50 $8.50
B $5.50 $4.00 $9.50
C $4.00 $5.00 $9.00
D $3.50 $4.50 $8.00
Current ($5.50 for Voice & $5 for Hot Line)
Customer Voice Mail Hot Line Both
A $5.00 $3.50 $8.50
B $5.50 $4.00 $9.50
C $4.00 $5.00 $9.00
D $3.50 $4.50 $8.00
Optimal PricesPrice-Voice Mail
Price- Hot Line
Price-Both
Services Purchased
Sales Revenue
Variable Costs
Gross Profit
Current
$5.50 $5.00 2 $10.50 $6 $4.50
Sell All Services to Everyone(Variable Cost is $3 per service)
Customer Voice Mail Hot Line Both
A $5.00 $3.50 $8.50
B $5.50 $4.00 $9.50
C $4.00 $5.00 $9.00
D $3.50 $4.50 $8.00
Optimal PricesPrice-Voice Mail
Price- Hot Line
Price-Both
Services Purchased
Sales Revenue
Variable Costs
Gross Profit
Current
$5.50 $5.00 2 $10.50 $6 $4.50
Max Units
$3.50 $3.50 8 $28 $24 $4
Sell to Everyone(Variable Cost is $3 per service)
Customer Voice Mail Hot Line Both
A $5.00 $3.50 $8.50
B $5.50 $4.00 $9.50
C $4.00 $5.00 $9.00
D $3.50 $4.50 $8.00
Optimal PricesPrice-Voice Mail
Price- Hot Line
Price-Both
Services Purchased
Sales Revenue
Variable Costs
Gross Profit
Current
$5.50 $5.00 2 $10.50 $6 $4.50
Max Units
$3.50 $3.50 8 $28 $24 $4
Max Cust
$5.00 $4.50 4 $20 $12 $8
Pure Bundling(Variable Cost is $3 per service)
Customer Voice Mail Hot Line Both
A $5.00 $3.50 $8.50
B $5.50 $4.00 $9.50
C $4.00 $5.00 $9.00
D $3.50 $4.50 $8.00
Optimal PricesPrice-Voice Mail
Price- Hot Line
Price-Both
Serv. Purch.
Sales Rev.
Variable Costs
Gross Profit
Current
$5.50 $5.00 2 $10.50 $6 $4.50
Max Units
$3.50 $3.50 8 $28 $24 $4
Max Cust
$5.00 $4.50 4 $20 $12 $8
Pure Bund.
$8 8 $32 $24 $8
Mixed Bundling(Variable Cost is $3 per service)
Customer Voice Mail Hot Line Both
A $5.00 $3.50 $8.50
B $5.50 $4.00 $9.50
C $4.00 $5.00 $9.00
D $3.50 $4.50 $8.00
Mixed Bundling($5 for Voice, $4.50 for Hot Line & $9 for bundle)
Customer Voice Mail Hot Line Both
A $5.00 $3.50 $8.50
B $5.50 $4.00 $9.50
C $4.00 $5.00 $9.00
D $3.50 $4.50 $8.00