AAEC 3100   Food and Fiber Marketing
Dr. Steven C. Turner


Chapter 15
Designing Pricing Strategies and Programs

What are prices?

Ratios - $/unit, bu/performance.

Prices are everywhere
Price generates revenue
Price can be changed quickly
Price competition is number one problem facing companies


Price-Quality Segments

Setting the Price

Six-step Procedure
    1)select price objective
    2)determining demand
    3)estimating costs
    4)analyzing competitors' prices and offers
    5)select pricing method
    6)selecting final price


Pricing Objectives
    survival
    maximize current profits
    maximize market share
    maximize sales growth
    maximize market skimming
    price quality leadership
Nonprofit and Public Organizations
    partial cost recovery
    full cost recovery
    social price

Profit Maximization

demand - Q = 1000 - 4P

cost - C = 6000 +50Q

total revenue - R = P*Q

total profits - Z = R - C

Z = R - C

Z = PQ - C

Z = PQ - (6000 + 50Q)

Z = P(1000 - 4P) - 6000 - 50(1000 -4P)

Z=1000P-4P2-6000-50000 +200P

Z = 56000+1200P - 4P2

use calculus

P = 150


Determining Demand

demand schedules

price elasticity of demand

E =  % change in Q
        % change in P

Categories
    Elastic - % quantity demanded changes mores than the % price change
    Inelastic -  % quantity demanded changes less than the % price change
    Unitary -  % quantity demanded changes same as the % price change

Elasticity is affected by:
    substitutes or competitors
    information
    buying habits
    attitudes


Estimating Costs
    fixed & variable
    total & average
    marginal

Cost Behavior
    different levels of production / period
    function of accumulated production(learning curve)
    function of differentiated offers
    target costing

Analyzing Competitors Costs, Prices, and Offers

use competitor as benchmark


3 C's of Price Setting
    customer demand schedule
    costs
    competitors' prices

Pricing Methods
    Markup Pricing
    Target Return Pricing
    Perceived Value Pricing
    Value Pricing
    Going Rate Pricing
    Sealed Bid Pricing

Markup Pricing

MP=            unit cost
                (1-desired return on sales)

unit cost = variable costs +     fixed costs
                                            unit sales
Example
variable cost = 10
Fixed cost = 300,000
Expected sales = 50,000 units
Desired rate = 20%
unit cost=10 + 300000 = 16
                        50000
MP = 16        = 20
            1-.20

Profit is 4/unit


Target Return Pricing

TRP = unit cost +  (desired return* invested capital)
                                unit sales
Invested capital = 1000000
TRP=16 +   (.20* 1000000) = 20
                    50000


Break - Even Volume

BEV = FC / (Price - VC)

= 300,000 / (20 - 10)
= 30,000


Perceived Value Pricing

Key - accurately determine market's perception of product's value


Value Pricing
low price for high quality offer
Every day low pricing
Must be low cost producer of high quality good

Going Rate Pricing

Price based on competitors' prices


Sealed Bid Pricing

Two competing considerations
    1 - Price based on competitors' expected price
    2 - Price based on costs
Expected Profit - takes into account probability of getting the account


Selecting Final Price
    Consider psychology, other elements of marketing mix, company
    policies, and impact of price on others


Adapting Price

    Geographical Pricing
    Discounting & Allowances
    Promotional Pricing
    Discriminatory Pricing
    Product Mix Pricing


Five Geographical Pricing Strategies
    1 - FOB Origin
    2 - Uniformed Delivered
    3 - Zone
    4 - Basing Point
    5 - Freight Absorption
Countertrade
    barter
    compensation
    buyback
    offset

Discounting & Allowances

Cash Discounts - 2/10, net 30 Payment is due in 30 days but buyer can deduct 2% if paid w/in 10 days
Quantity Discounts
Functional Discounts
Seasonal Discounts
Allowances - trade-in, promotional

Promotional Pricing
    loss-leader
    special-event
    cash rebates
    low-interest financing
    longer payment periods
    warranties and service contracts
    Psychological discounts
Discriminatory pricing
    Customer segmenting
    Product form
    Image
    Location
    Time

Product-Mix Pricing
    firm searches for set of prices that maximizes profit on total mix

    Product-Line pricing
    Optional Feature Pricing
    Captive-Product Pricing
    Two-part Pricing
    By-product Pricing
    Product-Bundling Pricing


Reacting to Price Changes
    Initiating Price cuts
      Initiating Price increases
Customers Reactions
Competitors Reaction

Responding To Competitors' Price Changes