PRICING
STRATEGIES
( R E S O U RC E S M A I N LY TA K E N F R O M E -B O O KF U N DA M E N TA L O F M A N A G E R I A L E C O N O M I C S )Departement of Management and Business, Faculty of
Economics, Universitas Padjadjaran English Class
TOPICS
I. Mark Up Pricing
II. Proft Maximiaation
III. Price Discrimination
IV. Multiple-Unit Pricing Strategies
WHAT IS PRICING
STRATEGIES?
(FROM MANY PERSPECTIVES)
https://
www.youtube.com/watch?v=XBmWEduod5k
INTRODUCTION
Why do Business Week, Forbes, Fortune, and The Wall Street Journal ofer bargain rates to students but not to business executives?
It is surely not because it costs less to deliver the
MARK UP PRICING
Regular prices, discounts, rebates, and coupon promotions are all pricing mechanisms used to probe the breadth and depth of customer demand and to maximiae proftability. Although proft maximiaation requires that prices be set so that marginal revenues equal marginal cost, it is not necessary to calculate both to set optimal prices. Just using information on marginal costs and the point price elasticity of demand, the calculation of proft-maximiaing prices is quick and easy.
MARKUP ON COST
MARKUP ON PRICE
Proft margins, or markups, are sometimes calculated as a percentage of price instead of cost.
HOWEVER,
Markup pricing is sometimes criticiaed as a naive pricing method based solely on cost considerations— and the wrong costs at that. Some who employ the technique may ignore demand conditions, emphasiae fully allocated accounting costs rather than marginal costs, and arrive at suboptimal price decisions.
Although inappropriate use of markup pricing formulas will lead to suboptimal managerial decisions, successful frms typically employ the method in a way that is consistent with proft maximiaation.
ROLE OF COST IN
MARKUP PRICING
Fully allocated costs are determined by frst estimating direct costs per unit, then allocating the frm’s expected indirect expenses, or overhead, assuming a standard or normal output level. Price is then based on standard costs per unit, irrespective of short-term variations in actual unit costs.
ROLE OF DEMAND IN
MARKUP PRICING
Successful companies diferentiate markups according to variations in product demand elasticity. Foreign and domestic automobile companies regularly ofer rebates or special equipment packages for slow-selling models. Similarly, airlines promote diferent pricing schedules for business and vacation travelers. The airline and automobile industries are only two examples of sectors in which vigorous competition requires a careful refection of demand and supply factors in pricing practice.
ROLE OF DEMAND IN
MARKUP PRICING
“Price sensitivity” of an item is the primary consideration in setting margins. Staple products like bread, cofee, ground beef, milk, and soup are highly price sensitive and carry relatively low margins.
MARKUP PRICING AND
PROFIT MAXIMIZATION
There is a simple inverse relation between the optimal markup and the price sensitivity of demand.
OPTIMAL MARKUP ON
COST
OPTIMAL MARKUP ON
COST (CONT’D)
The equation states that the proft-maximiaing price is found by multiplying marginal cost by the term
EXAMPLE
Consider the case of a leading catalog retailer of casual clothing and sporting equipment that wishes to ofer a basic two-strap design of Birkenstock leather sandals for easy on-and-of casual wear.
Assume the catalog retailer pays a wholesale price of $25 per pair for Birkenstock sandals and markets them at a regular catalog price of $75 per pair.
EXAMPLE
In a pre-season sale, the catalog retailer ofered a discounted “early bird” price of $70 on Birkenstock sandals and noted a moderate increase in weekly sales from 275 to 305 pairs per week.
EXAMPLE
In the absence of additional evidence, this arc price elasticity of demand EP = –1.5 is the best available estimate of the current point price elasticity of
demand.
OPTIMAL MARKUP ON
PRICE
Just as there is a simple inverse relation between a product’s price sensitivity and the optimal markup on cost, so too is there a simple inverse relation between price sensitivity and the optimal markup on price.
EXAMPLE
The catalog retailer pays a wholesale price of $25 per pair for Birkenstock sandals, markets them at a regular catalog price of $75 per pair, and the arc price elasticity of demand EP = –1.5 is the best available estimate of the current point price elasticity of demand.
EXAMPLE
CONCLUSION
The more elastic the demand for a product, the more price sensitive it is and the smaller the optimal margin. Products with relatively less elastic demand have
higher optimal markups. In the retail grocery example, a very low markup is consistent with a high price
elasticity of demand for milk.
Demand for fruits and vegetables during their peak seasons is considerably less price sensitive, and
PRICE DISCRIMINATION
With multiple markets or customer groups, the
potential exists to enhance profts by charging diferent prices and markups to each relevant market segment. Market segmentation is an important fact of life for frms in the airline, entertainment, hotel, medical, legal, and professional services industries.
Firms that ofer goods also often segment their market between wholesale and retail buyers and between
REQUIREMENTS FOR
PROFITABLE PRICE
DISCRIMINATION
Price discrimination occurs whenever diferent classes of customers are charged diferent markups for the same product.
DEGREES OF PRICE
DISCRIMINATION
Under frst-degree price discrimination, the frm extracts the maximum amount each customer is willing to pay for its products. Each unit is priced separately at the price indicated along each product demand curve.
Second-degree price discrimination, a more frequently employed type of price discrimination, involves setting prices on the basis of the quantity purchased.
The most commonly observed form of price
discrimination, third-degree price discrimination,
CUSTOMER
CLASSIFICATION
Customer classifcations can be based on for-proft or not-for proft status, regional location, or customer age.
Barron’s, Forbes, The Wall Street Journal, and other publishers routinely ofer educational discounts that can be in excess of 30 percent to 40 percent of list prices.
These publishers are eager to penetrate the classroom on the assumption that student users will become loyal future customers.
Many hospitals also ofer price discounts to various patient groups. If unemployed and uninsured patients are routinely charged only what they can easily aford to pay for medical service, whereas employed and
insured medical patients are charged maximum
allowable rates, the hospital is price discriminating in favor of the unemployed and against the employed. Widespread price discounts for senior citiaens
TRANSFER PRICING
The transfer pricing problem results from the difculty of establishing proftable relationships among divisions of a single company when each separate business unit stands in vertical relation to the other.
RIDDLES IN PRICING
PRACTICE
99¢ is much more commonly employed than $1
because buyers feel they are getting a “bargain” for 99¢.
A $1 price seems “signifcantly” more expensive. For buyers, 99¢ often “feels” more than 1¢ cheaper than $1.
One innovative explanation for the popularity of odd-number pricing is that readers of Latin-based
languages like English process written material from left to right.
ASSIGNMENT
Brief explanation and examples from the fve topics.
Resources, you may use the e-books from my e-learning sites Email me by tomorrow afternoon 11.59AM
wardhanawardhana3@gmail.com
