Chapter 1 Boundaries of a Good Price Using

Transcript:Chapter 1 Boundaries of a Good Price Using:
Chapter 1 Boundaries of a Good Price Using Exchange Value Models to Understand Price Competition and Value oriented pricing Agenda Who is involved in pricing decisions? Why is pricing so important to the health of the firm? Can firms influence their pricing power? What is the nature of a good price? How relevant are marginal costs and consumer surplus in setting a good price? How should the comparable alternatives on the market influence the pricing of a product? How can exchange value models be used to set prices? The Importance of Price Too high Lost profits from lack of volume The price is eventually dropped and the company must fight for market interest and perception repositioning Potential allegations of price gouging and unfairness, leading to public relations and regulatory ramifications Too low Forgone profit in an attempt to gain volume which may not come Incorrectly set expectations for the product category, making future price increases being driven against a headwind of customer expectations Ultimately, lost profits, revenues, and a shrinking/irrelevant firm If the price is…… Cross Functional Nature of Pricing CFO Responsible for measuring and reporting performance Almost always involved in pricing decisions from a quantitative analysis / forecasting perspective General bias towards higher contribution margins Sales & Marketing Responsible for promotion, product strategy, and placement, along with pricing Almost always involved in pricing decisions from a value positioning perspective General bias towards discounting and market share Research & Development Responsible for developing new products that customers value Technical individuals often are challenged to understand commercial aspects Production Responsible for quality, throughput, and capacity utilization General bias towards volume to reduce overhead allocation CEO Arbitrator between competing stakeholders Executives Customers Shareholders CEO Value Exchange and Profit Capture Price is the value that the firm captures in a mutually beneficial exchange with its customers Firm’s reason for existence is to produce value for customers, value which they exchange for cash Customers purchase because they gain value from the product in excess of the price they pay Profit Profit = Quantity X (Price – Variable Costs) – Fixed Costs p = Q (P – V) – F Variable Costs (V) Fixed Costs (F) Volume or Quantity Sold (hence the Q) Price (P) Profit (p) Impacting Profits The Art and Science of Pricing The science of pricing refers to the act of gathering information, conducting quantitative analysis, revealing an accurate understanding of the