LPC’S Pricing Supplements

DEMAND & COST

BASED QUANTITATIVE PRICING

A Framework for Developing and Applying a Pricing Strategy

Consumers

Costs

Government

Channel

Members

Competition

Feedback

Objectives

Broad Pricing Policy

Pricing Strategy

Implementation of Pricing Strategy

Price Adjustments

A Framework for Developing and Applying a Pricing Strategy

Consumers

Costs

Government

Channel

Members

Competition

Implementation NOW LET’S ADVISE SEAN

2/10 NET 30 $100m

Feedback

Objectives

Broad Pricing Policy

Pricing Strategy

Price Adjustments

LPC Law of Demand

The law of demandlaw of demand states that consumers usually purchase more units at a low price than at a high price.

When demand is high and supply low, prices rise.

If supply is high and demand is low, prices fall.

Supply

Demand

$

Consumers and Price

Price elasticityPrice elasticity explains consumer reaction to price changes. It indicates the sensitivity of buyers to price changes in terms of quantities

they will purchase. Demand may be elasticelastic, inelasticinelastic, or unitaryunitary. Unitary demand exists if price changes are exactly offset by changes in

quantity demanded, so total sales revenue remains constant.

by LPC

Demand Elasticity Is Based on

Availability of substitutesAvailability of substitutes and the urgency of needurgency of need.

Brand loyal consumers do not want to settle for less than the most desirable attributes of a particular product.

Price shoppers want the best deals possible.

What about SW Airlines?

Elastic Demand Occurs if relatively small

changes in price result in large changes in the quantity demanded.

Consumers perceive there to be many substitutes and/or have a low urgency of need.

With elastic demand, total revenue goes up when prices are decreased and goes down when prices rise.

WHAT IS THE SOUTH WEST AIRLINES ARC ELASTICITY?

ST. LOUIS - KCLA - SF

WHAT ARE THEY TRYING TO STIMULATE?(PRIMARY OR SELECTIVE DEMAND)

WHO IS THEIR PRIMARY COMPETITION?

Inelastic Demand Occurs if price changes

have little impact on the quantity demanded.

Consumers perceive there are few substitutes and/or have a high urgency of need.

With inelastic demand, total revenue goes up when prices are raised and goes down when prices decline.

Honda Accord Economy Car = Elastic Demand

Quantity (Units)

Elastic Elastic DemandDemand

12,000 100,000

Price

$10,000

$12,000

Rolls Royce Luxury Car = Inelastic Demand

Quantity (Units)

Inelastic DemandInelastic Demand

18,000 20,000

$50,000

$40,000

Price

NYC Subway Pricing: Elastic Or Inelastic?

Price increases in NYC subway fares:

Availability of substitutes?

Urgency of need?

$ $ $ $ $$

Bronx to Brooklyn ?

No Monorail

3 hours +

Modified Break-Even Analysis *Combines traditional break-even analysis with demand evaluation at different prices

Price-Discrimination *Sets two or more prices to appeal to distinct market segments

Demand-Based Pricing Techniques

Demand-Based Pricing

Techniques

Chain-Markup Pricing *Extends demand-minus pricing back through the channel

Demand-Minus Pricing *Works backward from selling price to costs

Cost-Based PricingA firm sets prices by computing

merchandise, service, and overhead costs and then adding an amount to cover its profit goal.

It is easy to derive. The price floor is the lowest

acceptable price a firm can charge and attain profit.

Goals may be stated in terms of ROI.

Price Floor

+Profit goals

(Merchandise, service, and

overhead costs)

RO

I

Target Pricing *Seeks specified rate of return at a standard volume of production

Price-Floor Pricing *Determines lowest price at which to offer additional units for sale

LPC Cost-Based Pricing Techniques

Cost-Based Pricing

Techniques

Traditional Break-Even Analysis *Determines sales quantity needed to break even at a given price

Cost-Plus Pricing *Pre-determined profit added to costs

Markup Pricing *Calculates percentage markup needed to cover selling costs and profit

Cost-Plus PricingPrices are set by adding a pre-determined profit to costs. It is the simplest form of cost-based pricing.

Price = Total fixed costs + Total variable costs + Projected profit

Units produced

Markup Pricing

A firm sets prices by computing the per-unit costs of producing (buying) goods and/or services and then determining the markup percentages needed to cover selling costs and profit. It is most commonly used by wholesalers and retailers.

Price = Product cost (100 – Markup percent)/100

Some firms use a variable markup policy, whereby separate categories of goods and services receive different percentage markups.

Traditional Break-Even Analysis

Total fixed costs Price - Variable costs (per unit)

Break-even point (units)

Break-even point (sales dollars) =

These formulas are derived from the equation: Price X Quantity = These formulas are derived from the equation: Price X Quantity = Total fixed costs + (Variable costs per unit X Quantity)Total fixed costs + (Variable costs per unit X Quantity)

=

Total fixed costs Price - Variable costs (per unit)

Price

Break-Even Analysis Can Be Adjusted to Take into Account the Profit Sought

Total fixed costs + Projected Profit

Price - Variable costs (per unit)

Break-even point (units)

Break-even point

(sales dollars)=

=

Total fixed costs + Projected ProfitPrice - Variable costs (per unit)

Price

Chain-Markup Pricing

Chain-markup pricingChain-markup pricing extends demand-minus calculations all the way from resellers back to suppliers. Final selling price is determined and the maximum acceptable costs to each channel member are computed.

NOW LETS PRICE INTERNATIONALLY

WE WILL ALSO PRICE A BUSINESS IN PAGEDALE THAT MANUFACTURES FILM PRODUCING EQUIPMENT FOR MAJOR MOVIE STUDIOS