When pricing a new product the entrepreneur should try to satisfy three objectives:

1. Get the product accepted in the market
2. Maintain market share as competition grows.
3. Earn a profit

Entrepreneurs have three basic strategies to choose from in establishing a new product’s price:

1. Penetration
2. Skimming
3. Sliding down the demand curve

Penetration

Penetration is used to introduce relatively low-priced merchandise into a market where no elite segment and little opportunity for differentiation exists.  The introduction is usually accompanied by heavy advertising and promotional techniques, special sales and discounts.

Skimming

A skimming pricing strategy is often used when a company introduces a new product into a market with little or no competition.  This can also be used to introduce new product into a competitive market that contains an elite group of buyers that is able to pay a premium price.  This tactic often reinforces the unique, prestigious image of a store and conveys a quality picture of the product.

Sliding down the demand curve

Sliding down the demand curve is a variation of the skimming pricing strategy.  This occurs where the small company introduces a product at a high price.  Technological advancements enable the firm to lower its costs and reduce the product’s price sooner than the competition can.  By beating the competition in a price decline the small company discourages competitors and over time becomes a high-volume producer.

What company(s) utilizes the sliding down the demand curve?

What company(s) utilizes penetration pricing?

What company(s) utilizes a skimming strategy?

What factors need to be taken into account throughout the pricing process?  

• Product or service costs
• Market factors such as supply and demand
• Competitors’ prices and behaviors
• Sales volume
• The company’s competitive advantage
• Economic conditions
• Seasonal fluctuations
• Consumer price sensitivity
• Psychological factors
• Credit terms and price discounts
• Desired image

Perceived Value

The difference between the actual cost of an item and the price that the consumer will pay.

How do you think that Louis Vuitton’s pricing is maintained?

Two factors are important in studying the effects of competition on a new firm’s pricing...

Location of the business and the nature of the competing goods

Do you feel that the country in which a product is made is important in terms of perceived value?  Does it matter that Coach manufactures in China or is it totally irrelevant? 

Describe fashion and substitutes.  Are there substitutes for a fashion brand like Louis Vuitton?  Why or why not?

Odd pricing 

Setting up pricing that ends in odd numbers (5,7,9) because they believe that a item selling for $12.95 will sell better than one that is priced at $13.00.

Does fashion ever use price lining?  If so, name a brand that does this.

Leader pricing

The retailer marks down the customary price of a popular item in an attempt to attract more customers.

When is Geographic Pricing practiced?

Small businesses whose pricing decisions are greatly affected by the costs of shipping merchandise to customers across a wide range of geographic regions.

Is zone pricing a strategy that is relevant in today’s environment?  Why or why not?

The internet has minimized much of the geographical pricing issues simply because the customer does not have to leave the security of their home computer.  At this stage of the game, furniture is one of the few remaining areas where geography matters.

Uniform-delivered pricing

A technique in which the firm charges all of its customers the same price regardless of their location. 

Opportunistic pricing

when products or services are in short supply and customers are willing to pay more – or a premium – for products they need.

Markdowns and Discounts

Reductions from normal list prices to move stale, outdated, damaged or slow-moving merchandise.

Multiple pricing

Occurs when a company offers a discount to a retailer in exchange for a large order.

Bundling

The grouping together of several products or services, or both into a package that offers customers extra value at a special price.

By-product priding

A technique where the revenues from the sale of by-products allow a firm to be more competitive in its pricing of the main product.  This allows the firm to recycle residual materials as well as sell the by-products

MSRP

Manufacturers Suggest Retail Price

Follow-the-leader pricing

Occurs when a new or existing firm establishes the pricing based upon what their competitors’ offer.

When did adjustable or dynamic pricing gain in popularity and why?

At the end of the 20^th century.  At that time businesses profited by having an established “fixed” price for goods or services while overlooking the identity of their customers.  This is what is commonly considered to be a mass market mentality.  The pricing democratization of the internet has spurred growth in this sort of pricing.

Three formulas for computing markup:

1. Dollar Markup = Retail Price – COGS
2. Percentage (of retail price) markup = dollar markup/retail price
3. Percentage (of cost) markup = dollar markup/cost of unit

Initial markup

The average markup required on all merchandise to cover the cost of the items, all incidental expenses, and a reasonable profit.  

 initial dollar markup=(operating expenses + reductions + profits)/(Net sales + reductions).

Operating expenses

The cost of doing business and include such items as rent, utilities, markdowns, etc.

Manufacturer - Cost-Plus Pricing 

The most commonly used pricing technique

A manufacturer establishes a price composed of direct materials, direct labor, factory overhead, selling and administrative costs plus the desired profit margin.

Absorption costing (aka product costing)

Absorption costing includes direct materials and direct labor as well as a portion of fixed and variable factory overhead costs in each unit manufactured.  This is traditionally not used in fashion or the gift and home industries.

Variable (or direct) costing (aka SKU-based accounting)

Only those costs that vary directly with the quantity produced

The contribution margin as a percentage of total revenue yields the company’s contribution percentage.  The formula for computing this is...

Contribution percentage = 1 – (Variable expenses/Revenues)

Manufacturing Contribution Percentage

 Time Value of Money

The value of the money he has today is more valuable than the amount will be tomorrow.

Differentiation

One of the types of competitive advantage a company may possess.  A company differentiates itself if it can be unique at something that is valuable to its buyers. 

How does differentiation grow?

Out of the firm’s value chain.

A brand can differentiate itself through the breadth of its activities or its competitive scope and produce the following differentiating factors:

ASSS

• Ability to serve buyers’ needs anywhere
• Simplified maintenance for the buyer if spare parts and design philosophies are common for a wide line
• Single point at which the buyer can purchase
• Superior compatibility among products

Companies can also enhance the role of channels in differentiation through actions such as:

• Channel selection to achieve consistency in facilities, capabilities or image
• Establishing standards and policies for how channels must operate
• Provision of advertising and training materials for use by channels
• Providing funding so that channels can offer credit

How is a firm's uniqueness determined?

A firm’s uniqueness is determined by a set of basic drivers – the underlying reasons why an activity is unique.

What are Uniqueness drivers?

Policy choices, linkages, timing, location, interrelationships, learning and spillovers, integration, scale and institutional factors.

What are examples of policy choices?

• Product features and performance offered
• Services provided
• Intensity of an activity adopted
• Content of an activity
• Technology employed in performing an activity
• Quality of inputs procured for an activity
• Procedures governing the actions of personnel in an activity
• Skill and experience level of personnel employed in an activity and training provided
• Information employed to control an activity

Linkages

Connect within the value chain or with suppliers and channels that a company interacts with.

• Linkages within the value chain – for example, delivery times that are determined by outbound logistics as well as speed of order processing and coordination within the sales force
• Supplier linkages – development time can be minimized by coordinating production
• Channel linkages – working with a sales team to incorporate product knowledge and assist in selling or subsidizing activities that improve delivery

What retailers have strong linkages built up and why?

Are these supplier or channel linkages?

Buyer’s costs can be lowered by:

• Lower delivery, installation or finance cost
• Lower the required rate of usage of the product
• Lower the direct cost of using the product
• Lower the indirect cost of using the product or the impact of the product on other value activities
• Lower the buyer cost in other value activities unconnected with the product
• Lower the risk of product failure and the buyer’s expected cost of failure

Purchase Criteria

Attributes of a brand that create actual or perceived value for the buyer 

What are the two (2) types of purchase criteria?

Define...

What are the four different stages that industries typically go through?

1. Fragmented
2. Emerging
3. Mature
4. Declining

A fragmented industries are found in many areas of the global economy but are most prevalent in the following industries:

• Services
• Retail
• Distribution
• Wood and metal fabrication
• Agricultural products
• Creative businesses
• Fashion

Industries are fragmented for a number of reasons but the underlying economic causes are:

• Low barriers to entry – it does not take much capital or expertise to start a small business
• Absence of economies of scale or learning curve – mostly simple, unsophisticated fabrication
• High transportation costs – this is especially true with products that are heavy like cement or milk
• High inventory costs or erratic sales fluctuations – inventory carrying costs or erratic sales fluctuations – inventory carrying costs are high and sales are not consistent over a 12 month period but vary within the twelve months considerably
• No advantages of size in dealing with buyers or suppliers – the structure of the buying groups is such that there is no significant buying power in dealing with adjacent businesses
• Diseconomies of scale in some important aspect – rapid product changes or style changes demand quick response and large companies are less effective than small companies.  Low overhead is crucial to success, a highly diverse product line is imperative, heavy creative content is a strong component and local image and contacts are also important.
• Diverse market needs – buyers tastes are fragmented
• High product differentiation, especially if based on image – large size is inconsistent with images of exclusivity
• Exit barriers – certain businesses have an exciting and romantic appeal – like fashion!
• Local regulation – probably more germane to service industries
• Government prohibition of concentration – anti-trust plays a role here
• Newness – the whole industry is new and no firms have developed the skills and resources to command a significant market share

Fragmentation can be overcome by consolidation because the costs of entry are low and competitors seem to be weak and ineffective.  

Approaches to consolidation include:

C N A R

• Create economies of scale or learning curve – television advertising of toys has consolidated the toy market periodically
• Standardize diverse market needs – this can only be accomplished in industries that have very little creative drive behind them
• Neutralize or split off aspects most responsible for fragmentation – franchising retail chains can neutralize the fragmented buyer tastes
• Make acquisitions for a critical mass – acquiring local related businesses in a wider geographical area can serve to position the business as a netweek (Liz Claiborne and their acquisition of Kate Spade and Juicy Couture)
• Recognize industry trends early –fragmented industries can become mature ones

Additional solutions to cope with fragmentation include:

• Tightly managed decentralization
• Formula facilities – low cost facilities at different locations
• Increase value added – this works especially for commodities where value is added to an everyday product.  Forward integration can also add value from manufacturing, distribution or retailing.
• Specialization by product type or product segment – narrow the line to focus on the most profitable components of the business.  Product mix is an inexpensive way to differentiate.  Editing the line from both a buyer and a seller’s perspective is highly underrated.
• Specialization by customer type: catering to a smaller target audience
• Specialization by type or order: or example, doing a monogramming business although this method will not equate to more volume
• Specialize within a focused geographical area
• Bare bones/no frills – low overhead, low skilled employee, low price
• Backward integration

What are the 5 basic Steps of formulating a competitive strategy?

A, I, E, A

1. Conduct a full industry and competitor analysis to identify the sources of competitive forces in the industry and the position of significant customers
2. Identify causes of fragmentation in the industry –if there are no underlying causes, then that too is significant
3. Examine the causes of industry fragmentation one by one in the context of the industry and competitive analysis
4. If fragmentation can be overcome the firm must assess whether or not the implied future structure of the industry will yield attractive returns
5. If fragmentation is inevitable, what is the best coping strategy

Define: Emerging industries

Newly-formed or re-formed industries that have been created by technological innovations, shifts in relative cost relationships, emergence of new consumer needs or other economic and sociological changes that elevate a new product or service to the level of a potentially viable business opportunity.

Common structural characteristics of emerging markets include:

• Technological uncertainty
• Strategic uncertainty
• High initial costs but steep cost reduction
• Embryonic companies and spin-offs
• First-time buyers
• Short time horizon
• Subsidy

Early mobility barriers are:

• Proprietary technology 
• Access to distribution channels
• Access to raw materials and other inputs of appropriate cost and quality
• Cost advantages due to experience
• Risk which raises the effective opportunity cost of capital and thereby effective capital barriers

The problems facing emerging industry development are:

(maybe 3 to 5 examples??)

• Inability to obtain raw materials and components
• Period of rapid escalation of raw materials and prices
• Absence of infrastructure
• Absence of product or technological standardization
• Perceived likelihood of obsolescence
• Customers’ confusion
• Erratic product quality
• Image and credibility with the financial community
• Regulatory approval
• High costs
• Response of threatened entities

What are the pitfalls that face companies in a mature environment?

(3-5?)

• Companies will often overvalue their self-perceptions relative to their competitors.  What worked before does not work now.
• Companies get caught in the middle.  They lack the market share, capital investment, and resolve to play the low-cost game, the differentiation game or the focus game
• The cash trap – reinvestment in the company will not yield positive gains
• Giving up market share for short-run profits.  Nobody wants to cut their margin but in a mature industry the company will need to modify its margin expectations.
• Unwillingness to react to price competition.  Price has become a driving factor and yours will also have to go down.
• Resentment and reactions to changes in industry practices.  A good example of a sector that had to readjust their expectations were the independent booksellers who watched most of their business go out of the door to Amazon.
• Overemphasis on creating new products rather than improving and aggressively selling existing ones.
• Clinging to higher quality control as an excuse for not aggressively reacting to pricing moves of competitors
• Overhanging excess capacity.