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Lecture 8

Lecture 8 March 18th 2014.docx

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Department
Business
Course
BUSI 2204
Professor
Les Melamed
Semester
Winter

Description
Lecture 8                                                                                                             March 18 2014 Chapter 15 continued: Pricing The Competitive Market • Pure competition: the market consists of many buyers and sellers trading in a  uniform commodity, i.e. products are identical • Monopolistic Competition: Limited price competition where products are  differentiated • Oligopolistic competition: Small number of suppliers; highly sensitive to each  other’s pricing and marketing strategies; price competition avoided • Pure monopoly: single supplier sets the prices; prices often government regulated Channel Members • Manufacturers, wholesalers and retailers can have different perspectives on  pricing strategies • Manufacturers must protect against grey market transactions Other Influences on Pricing • The internet  o Increased price sensitivity o More customer information o Greater customer choice  o Growth of online auctions • Economic Factors o Drive price sensitivity  o Local economic conditions o Increasing globalization o Increasing status consciousness  o Increasing disposable income Pricing strategies • Cost based pricing: prices reflect product costs • Value based pricing: prices signal product value • Competition based pricing: prices signal comparisons with competitors • Pricing is driven by two competing factors: o Pricing to what the market will bear o Pricing to sustain an organization Cost Issues: The Pricing Floor Fixed costs are the costs that do not vary with production or sales level Variable costs are the costs that vary with the level of production Total costs are the sum of the fixed and variable costs for any given level of production Average cost is the cost per unit associated with a given level of output Average costs drop as volume increases Average costs drop with experience Price Floor and Ceiling  Price Ceiling: Customer perceptions of value No demand above this price Price Floor: Product costs: price floor No profits below this price Prices are set between those two limits, depending on e.g. Marketing strategy and mix Nature of the market and demand Time scale / Time frame Two approaches to pricing • Cost base pricing: o Design a product o Determine product costs o Set prices based on costs o Convince buyers of product value • Value based pricing o Assess customer needs and value perceptions o Set target price to match customer perceived value o Estimate costs that can be included Design a product to deliver the desired  value at the target price Cost Based Pricing • Cost­plus pricing adds a standard markup to the cost of the product • Benefits:
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