Pricing Strategies Part 2 PDF

Strategies for Pricing: Part 2: Quantitative/Variable BMI3C  I am learning to… Price products strategically. Learning Goals I will be successful when I can… Choose which of the 7 Success strategies...

Strategies for Pricing: Part 2: Quantitative/Variable BMI3C  I am learning to… Price products strategically. Learning Goals I will be successful when I can… Choose which of the 7 Success strategies from today to Criteria use on specific video case studies. Arrive at an actual price for a product, given today’s strategies.  Previous 1.Psychological 2.Going Rate lessons; 3.Value 4.Skimming Which do you need help with? 5.Penetration 6.Barrier 7.Loss Leading TODAY 1.Variable Pricing 2.Price Differentiation 3.Absorption Target Pricing 4.Marginal Cost Pricing Quantitative/Variable Strategies Yesterday’s strategies were mostly based on responding to competition. Today’s strategies will be mostly based on cost and customers. _______________________________________________ Yesterday’s strategies were qualitative. Today’s are mostly quantitative. Category D: Changing Price Strategies #8 Variable Pricing  Variable Pricing REDUCING PRICES WHEN NEEDING TO INCREASE SALES, AND INCREASING PRICES WHEN NEARING CAPACITY. “Variable” means changing. This strategy means lowering the price when there is an urgency to offload inventory (e.g., expiry or going out of fashion) and increasing the price when either the demand is high (e.g., umbrellas in the rain) or the supply is low (e.g., last PS4 available). For some businesses, this is only used in extreme situations. Variable Pricing Strategy Example: Variable Pricing is simple. Here are both sides of it: If you have a group of oranges on the shelf that will expire tomorrow and there are too many of them to normally sell in 24 hours, what would you do to the price? Conversely, if you’re running out of oranges because they’re selling more quickly than expected and you’re on pace to sell out of oranges 6 hours before the day is over, what would you do to the price of oranges? #9 Price Differentiation Price Differentiation DIFFERENT PRICES FOR DIFFERENT MARKETS. QUESTION - “But... what does different markets mean?!?!” ANSWER - “Well ___, it could mean a different country, demographic, category of buyer, or any other way that you can segment the market” E.g., charging more in one region than another. E.g., charging more to consumers than businesses. E.g., charging less to educational institutions. E.g., giving a discount to students or seniors. Price Differentiation In theory, price differentiation = highest revenue possible. BUT it only works if the following conditions are met: 1. Customers either don’t know or don’t care that they’re paying more in certain markets. 2. Barriers to entry (e.g., tariffs or laws) prevent your consumers/competitors from buying your product in the cheaper market CATEGORY E: Cost-based Price Strategies #10 Absorption Pricing ABSORPTION TARGET PRICING SETTING PRICE TO COVER YOUR VARIABLE COSTS, ABSORB SOME OF YOUR FIXED COSTS, AND ADD ONTO THAT A MARKUP THAT ALLOWS YOU TO REACH DESIRED PROFIT, GIVEN YOUR SALES ESTIMATES. ABSORPTION TARGET PRICE = VC + FC + NP VC: Variable Cost = Cost of producing each unit. FC: Fixed Cost = However much of the period’s fixed costs are going to be absorbed by each unit. NP: Net Profit = Desired net profit for the period/projected number of units. ABSORPTION TARGET PRICE = VC + FC + NP E.g.,) My business will sell 100 chairs next month. They each cost $20 to produce. Additionally, the business’ fixed expenses will be $1000. Our target net profit will be $3400. Absorption Target Price = $20 + $10 + $34 = $64 price per chair. $20 was the variable cost to make each chair. $10 was the monthly fixed cost ($1000) absorbed/spread across the 100 projected units that will be sold. $34 was the month target net profit ($3400) absorbed/spread across ABSORPTION TARGET PRICE = VC + FC + NP YOU TRY! The Green Spiders are selling retail soft drinks at a school sports event in order to raise money for their upcoming trip to Lantau Island. They buy each soft drink from the local convenience store for $8. Furthermore, they needed to buy materials to make their signs which cost them $150. Based on last year’s event, they expect a sales volume of 160 bottles. Using absorption target pricing, what should their price per bottle be if they need to raise $500 for their trip to Lantau Island? Good and Bad of Absorption Target Price Good: Bad: It’s accepted by customers Doesn’t consider competitors actions If your sales estimates are correct, you’ll hit your Relies heavily on making profit target. accurate estimates of sales If your costs are low as a business, it’s good If your costs are high as a because it allows you to business, it’s trouble charge the lowest price because this would cause your absorption target #11 Marginal Cost Pricing Marginal Cost Pricing A SHORT-TERM STRATEGY OF SETTING THE PRICE BASED ON THE COST OF EACH UNIT FOR SALE; (MAY BE A HIGHER OR LOWER COST) Definition of Marginal Cost - The cost of providing one extra (or one fewer) unit Two Basic Situations of MC Pricing Company has unused production capacity that will either be used or wasted (e.g., remaining seats on an airplane), so it reduces the cost to at/near the variable unit cost; or, The cost of supplying an extra unit to the customer is expensive, so we increase Examples of Marginal Cost Pricing EXAMPLES OF MC PRICING RESULTING IN A LOWER PRICE: The orange example from the “Variable Pricing” strategy - E.g., needing to lower the cost of an orange to sell it before it expires. E.g., needing to fill space on an airplane before it takes off. EXAMPLE OF MC PRICING RESULTING IN A HIGHER PRICE: You wholesale bottles of Dr. Pepper. One of your customers, a local retailer, normally orders 150 bottles per week. This week, the retailer makes a last-minute order for an extra 50 bottles. As the wholesaler, you buy the Dr. Pepper in bulk from the producer. Since you need to make this extra, non-bulk purchase from the producer in order to meet the needs of your customer, it will cost you more; therefore, you price these extra 50 bottles higher. REVIEW TURN TO A PARTNER Take turns explaining and giving an example of EACH of the following: 1. Variable Pricing 2. Price Differentiation 3. Absorption Target Pricing 4. Marginal Cost Pricing Price Strategy Case Analysis See Google Classroom for worksheet