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ECON 208 (210)
Lecture 3

lecture 3.docx

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Economics (Arts)
Course Code
ECON 208
Paul Dickinson

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Eco Lecture (1) Even slight improvements in pricing can yield significant results. For ex­ample, for a company with 8% profit margins, a 1% improvement in price realization, assuming a steady unit sales volume, would boost the companys profits by 12.5%. By contrast, decreasing fixed costs by 1% would only lead to an increase in profits of 4%. • Continental Airlines had 44 million passengers in 2001, at an average ticket price of $193. Charging $2, or 1.04%, more per ticket would have transformed a loss into a profit. (2) 80% of managers know how much it costs to produce their product. 23%say they know their customers’ willingness to pay for the product. (3) 41% of firms have identified their inability to recruit employees with the right pricing tool sets as their major barrier to implementing pricing prac­tice overhauls. Three Cs and Pricing Typically an introductory marketing class teaches that any pricing strategy should reflect the ‘3 Cs’ of pricing: • Costs • Customer • Competition Advanced pricing analysis, however, views the 3 Cs as describing a set of con­straints that pricing strategies must overcome to succeed. The 3 Cs also describe three bad pricing strategies. PRICING BEYOND THE 3 CS • Cost-Based Pricing. Or, pricing on the basis of what it costs you to make the product. • Customer-Based Pricing. Or, allowing your customers to dictate your pricing policy. • Competition-Based Pricing. Or, choosing your pricing strategy exclusively on the basis of what your competitors do. Cost-Based Pricing. Cost-Based Pricing involves setting a price such that Price = (1+percentmarkup)(UnitVariableCost + AverageFixedCost) Practical implementation problems: (1) You have to know costs. • A baby sleep suit company made a loss despite engaging in cost-plus pricing, because they did not realize how much their packaging cost. • For example, Diamond Deliveries in Philadelphia. The bicycle divi­sion, which management thought of as Diamond’s core business, gen­erated just 10% of total revenues and barely covered its own direct labor and insurance costs. Diamond was
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