MKTG 300 - Chapter #14/15 Material

COST-BASED pricing?

• The practice of setting prices by estimating the average cost of producing and selling the product plus a profit margin.

Cost-Based pricing acronym?

• Product

• Cost

• Price

• Value

• Customer

Price formula?

• [Variable cost + fixed cost/N] * [1+%profit margin]

GhenusBio has developed a far UVC disinfection light, SANA222. The unit cost of SANA222 is $340. The fixed cost to produce SANA222 is $600,000. GhenusBio wants to set price of SANA222 which covers all costs plus 20% profit margin. What will be the price for SANA222?

Suppose GhenusBio expect to sell 10,000 of SANA222.

a) $350
b) $410
c) $480
d) $530

• ($340,000 + 600,000/10,000) * (1+0.20)

  • $480

Drawbacks of cost-based pricing?

• In order for companies to calculate costs, they must make an assumption about how many units they will sell, and this number is often unknown and driven by the price.

What if the cost-based price is?

• Different from what customers are willing to pay?

• Not competitive?

Profit margin?

• (Price – Unit cost) / Price

%Gross Margin formula?

• (Revenue - COGS) / Rev

Markup rate formula?

• (Price - Cost) / Cost

It costs Rockport Shrimp Fisheries, Inc. $30 to catch, process, freeze, package and ship each 5-pound package of gulf shrimp. Assume that the company applies a 60 percent markup on its
cost of shrimp products. This means that the company will charge customers ________ for each 5- pound package of gulf shrimp?

• 60 = Price - $30 / 30

• $30 × 0.60 = Price - $30

Break even formula?

• Fixed Costs / (Price - Variable Costs)

Imagine a company contemplating entering a new market where it will be able to sell its product for $10 per unit. The variable cost of production is $2 per unit, and the total fixed costs are $3 million. How much volume must this company be able to sell in order to break even in this new market?

a) Less than 100,000
b) 375,000
c) 500,000
d) 750,000
e) More than 800,000

• $3,000,000 / ($10 - $2)

  • 375,000

Why competitor-based pricing?

• Easy to implement

• When the competitor’s price is well accepted in the market

• When customers compare prices among choice

Drawbacks of competitor-based pricing?

• Matching prices could mean copying competitors’ strategy and positioning.

• Lowering below competitor’s price could lead to price war.

Lowering below competitor’s price could lead to price war?

• Price war

You have 3 choices when competitor cut prices?

• Focused price response

• Non–price response

• Don’t respond

Decide how to react considering the two things?

• The magnitude of our sale loss

• The strength of the competitor

The loss will be severe if you would lose?

• Exclusive and loyal customers

• Customers who are easy to serve

• Customers who pay full prices

• Those who buy a lot from you

• Reference accounts

• Innovative accounts

• High growth potential account

When we estimate that:
(1) our revenue loss will be severe

(2) competitor is weaker than we are

We should do?

•  “Focused price response”

Focused price response?

• Proactively discount to customers at risk.

• Discount vulnerable products and non-core markets

When we estimate that:
(1) our revenue loss will be severe

(2) competitor is stronger than we are

What should we do?

• “Non-price responses”

Non-price responses?

• Improve differentiation

• Strengthen relationship with market collaborators

• Communicate the risks of switching to a low-price and low-quality competitor.

• Cut cost for long-term survival

• Switch business model from selling to service

CUSTOMER VALUE-BASED pricing?

• The practice of setting prices by estimating the willingness to pay for of our customers.

CUSTOMER VALUE-BASED pricing flowchart?

• Customer

• Value

• Product

• Price

• Cost

Sales oriented goal?

• Set the price to maximize sales revenue.

Profit oriented goal?

• Set the price to maximize gross margin.

Market share oriented goal?

• In general, set the price to maximize unit sales.

When the customers are price sensitive?

• Price elasticity is high.

In general, there is a short-term illusion that?

• Raising price increases total sales revenue

When the customers are price insensitive?

• Price elasticity is low.