Pricing Strategies

Slides: Chapter 01, Introduction to pricing strategies and practices · Book: Hanna and Dodge, Chapter 1 · plus Kotler on value-based pricing and Smith on who sets price

Three questions. What is a price, and who decides it? What five things must you know before setting one? And what are the three basic ways to arrive at a number?

Why pricing matters

The book opens with McKinsey's Marn and Rosiello: "The fastest and most effective way for a company to realize its maximum profit is to get its pricing right." The right price raises profit faster than selling more units. The wrong price shrinks it just as fast. Many managers leave money "on the table" without knowing it.

Getting it wrong in either direction costs money. Too high, and demand falls. Worse, as IBM found, a high price creates a price umbrellaWhen a leader's high price leaves room underneath it for competitors to come in cheaper and take customers.IBM is the book's example. A price that is too high does not just lose sales; it invites competition.: room underneath it for competitors to come in cheaper and take share. Too low, and you have an opportunity costMoney you could have had but gave up. In pricing: the gap between what the market would have paid and the lower price you actually charged.Setting a price too low does not show up as a loss on any statement, which is why the book calls it money 'left on the table'.: the gap between what the market would have paid and what you charged. That money never appears in any account.

Both extremes have worked. Fort Howard Paper, Dell and MCI built a positional advantageA position in the market that competitors find hard to copy, won either by low price or by being different.Dell and MCI won it with low prices; Maytag, John Deere and Federal Express won it with differentiation and charge a premium. Both routes work. on low prices. Maytag, John Deere and Federal Express built one on being different, and charge a premium. Good pricing "bridges the gap between internal costs and external market demand." A firm's options are set by four things: its cost structure, its competitive status, its marketing strategies and its organizational capabilities.

Price from the customer's side: the 4 A's

The slides open with a table that reads the marketing mix three ways: what the seller sees, what the customer sees, and the value test each one implies. The value column is from Sheth and Sisodia's The 4 A's of Marketing.

The point: price is only one of the costs a customer weighs. The real comparison is price against value. A product wins when what the customer gets is worth more than everything they give up.

Who is responsible for setting price

Pricing is a cross-functionalInvolving several departments at once.Pricing is cross-functional because finance, operations and marketing all have a stake, and each is biased by how its performance is measured. That is why many CEOs now employ pricing professionals. task. Three departments have a stake, and each sees price through the way its own performance is measured. From Tim Smith's Pricing Strategy:

Because each function is biased, many firms make pricing a CEO-level decision. To help, CEOs have built what Smith calls "a new organizational capability": the pricing professional, who understands both what customers will pay and what the firm needs to earn.

Critical factors in the pricing decision

Five things a marketer must understand before setting a price. The slides list the same five.

1 · Effective cost information

Know where costs come from and how they are shared out. Not only manufacturing costs: marketing, distribution, design and technology too. Many firms still spread overhead on the basis of direct labour, which distorts costs now that support, marketing and design cost far more than labour. Two better approaches. Treat every activity as support for making and delivering products, so all costs are product costs. Or separate scale-related costsCosts that fall as you make more of the same thing.The book's rule of thumb: they drop 15 to 25 percent per unit every time volume doubles. Contrast with variety-related costs, which rise 20 to 25 percent each time variety doubles., which fall as you make more (15 to 25 percent per unit each time volume doubles), from variety-related costsCosts that rise as you offer more different versions, models or options.Every time variety doubles, these rise 20 to 25 percent. Old accounting systems hide this by spreading overhead on direct labour, so a busy product line looks cheaper than it is., which rise as you offer more versions (20 to 25 percent each time variety doubles). A firm that does not separate them thinks its crowded product line is cheaper than it is.

2 · Customer valuation

Do not compete on price alone. Think in terms of total valueEverything the customer gets for the price, not just the physical product: installation, delivery, support, after-sale service, and symbolic things like prestige.The book's point: customers pay for the whole package, so a marketer should compete on total value rather than on price alone. as the customer sees it: the whole package. That includes installation, delivery, technical support and after-sale service, and symbolic features such as prestige and status. Different market targetsThe customer groups a company chooses to serve. Also called segments.Different groups value the product differently and will pay different prices, which is where the profit from pricing separately comes from. weigh the pieces differently. Measuring perceived value is hard: competing offers are hard to compare objectively, product qualities keep changing, and customers distort features into their own idea of value. So accept the criteria customers actually use, and monitor them continuously.

3 · Market targets

Groups of customers differ, so the market can be split into segments, and segments can get different products at different prices. That is where extra profit comes from: some segments will pay more for a version of the package. The book's example is the San Luis Sourdough Company, which sells bread to stores on three tiers: 97 cents wholesale for plain delivery; $1.02 if the store may return unsold day-old bread; another 3 cents if the company also stocks the shelf, bar-codes each bag and accepts returns.

The limit is the Robinson-Patman ActA U.S. law that makes it illegal to charge different buyers different prices for the same product, unless the difference can be justified.The three defences: the products are different, the costs of serving the buyers are different, or the buyers do not compete with each other. It comes up again with quantity, seasonal and promotional discounts in Chapter 7., which makes it unlawful to charge different buyers different prices for the same product. Three defences: the products are different; the same product costs different amounts to sell to different groups; or the customers do not compete with each other.

4 · Competitive dynamics

Competitors' reactions can stop a price change altogether. Cut your price and competitors follow: a price warA cycle in which one firm cuts its price, competitors match, and everyone keeps cutting.The most common competitor reaction the book warns about. Nobody wins except the customer, and only for a while.. Raise your price and you need to know whether they will follow. If they do, the increase sticks. If they hold, you have a competitive differentialA gap between your price and competitors' prices, created when you raise your price and they do not follow.The risk is losing market share if customers are price sensitive. The formula for X tells you how much of a rise the lost volume can absorb. and may lose share, especially if customers are price sensitive.

So you also need competitors' cost structures and their capacity utilizationHow much of a factory's possible output is actually being used.A competitor with spare capacity can absorb the customers you lose when you raise prices. A competitor running flat out cannot. That is why the formula uses competitors' excess capacity.. A competitor with spare capacity can absorb the customers you lose; one running flat out cannot. From this you can work out how large a price increase makes up for the volume you expect to lose. The book's formula, assuming product and market size do not change:

5 · Pricing strategies

Price serves the marketing objectives, which come from the firm's objectives. Which strategy fits? The book offers six questions:

Two rules go with the list. Short-run tactics give way to long-run relationships: raising prices on goods in short supply is replaced by pricing that keeps customers loyal, because replacing a customer costs about five times keeping one. And price must fit the rest of the mix. The book names three kinds of fit: the elements are synergisticWorking together so that the combined effect is bigger than the sum of the parts.The book says the marketing mix is synergistic: price, product, promotion and distribution reinforce each other when they fit, and undercut each other when they do not. (a premium price on a top-quality product), integrated (front-end loadingCharging a higher initial price that includes things the customer will get later, like several years of 'free' servicing.An example of integration in the marketing mix: price and customer service designed together.: a higher initial price that includes five years of "free" servicing), and leveraged (spend on whichever element returns most, treating a price cut as an expense like advertising). The slides call these consistency, integration and leveragePutting your money into whichever marketing element gives the biggest return per dollar.A price cut costs the firm money just as advertising does, so compare them on equal terms. Beer and soft drinks are examples where price is the element that gets leveraged.; Chapter 2 develops them.

Three major pricing approaches

The slides group all pricing methods into three families. Cost-based comes from the book; the other two are from Kotler.

Cost-based pricing

Cost-based pricingSetting price by adding a desired profit to what the product costs to make and sell.Simple and common with small firms and regulated utilities, but it ignores what customers will pay, so the price can end up too high or too low. starts from what the product costs and adds the profit you want. Three cost ideas: fixed costA cost that stays the same no matter how much you produce, such as rent or salaries. Also called overhead.Spread over more units it gets smaller per unit, which is why volume matters so much to cost-based prices., or overhead, does not change with output (rent, salaries); variable costA cost that rises and falls directly with how much you produce, such as materials.Fixed plus variable equals total cost. changes with output (materials, packaging); total cost is the two together. Spread fixed cost over more units and cost per unit falls, so the volume you assume matters a lot.

The book's warning: this ignores the market. Cost plus a return can land too high (volume falls, customers drift to substitutes) or too low (the firm earns less than it could). Either way the firm never asked how the market would respond. It survives where it fits: small firms; regulated industries such as utilities and car insurance, where a government body approves prices and stands in for the market; and price-inelastic markets such as petrol, where a rise in crude oil is simply passed through at the pump.

Value-based pricing

Value-based pricingSetting price from what the buyer thinks the product is worth, not from what it cost to make.From the Kotler slides. It comes in two forms: good-value pricing (fair price for good quality) and value-added pricing (add features so you can charge more). reverses the order. It starts from what the buyer thinks the product is worth, not what it cost, and sets a price that captures that value. Two versions:

Competition-based pricing

Competition-based pricing starts from what competitors charge for similar products and positions at, above or below them. Chapter 7 covers it as the "meeting competition" objective: price is a given and the firm manages its costs to fit.

Defining price: the book's own version book only

From the marketplace, price is what the customer pays for quality, features and benefits, compared with other products. The book writes it as$$\text{Price}=\frac{\text{Quality}}{\text{Value}}$$Psychologically, a price is an image of the benefits a product offers, which is why prices act as reference points. The bundle being valued includes performance, reliability, convenience and appearance, plus service and symbolic features like prestige. That is why a Lexus or a Mercedes carries a high price tag without complaint.

From the standpoint of costs, management ignores the market and covers cost plus a return. The book also names administrative pricesPrices set by a company's own decision, with little regard for supply and demand.An old term. It was once used as an accusation against big business for squeezing out smaller rivals., set by company decision with no regard for the market, an old accusation against big business. And governments step in when price does not reflect value or a product must be controlled for the public good: directly through ownership and subsidies (state liquor distribution, farm subsidies), indirectly through regulators and public policy.

Price structures book only

A price structureA set of related price levels for one product, varying by model, type of customer, quantity bought and so on.Almost nothing is sold at one price to everyone any more. Airlines are the extreme case: price depends on route, time, class, length of stay and when you booked. is a set of price levels for one product: by model, by customer type (wholesale, retail, commercial), by quantity. Almost nothing is sold at one price to everyone any more; the book's rare exception is a fixed-price dinner. Airlines are the extreme, pricing by route, time, class, length of stay and booking date. Benefits: flexibility, fast response to competitors, better segmentation. Cost: structures can hide the true price, which is why repeated calls to a travel agent produce different fares for the same trip.

Three reasons to adopt one. Responding to competition: a list priceThe published or quoted price before any discounts.Discounts are taken off it in a chain. In the book's example a $10 list price with discounts of 40-20-10-10-5 ends at $3.69. is quoted with a chain of discountsA series of percentage discounts applied one after another, each to the price left by the previous one.40 percent off $10 gives $6; 20 percent off $6 gives $4.80; and so on. The percentages do not simply add up., each taken off the price left by the last. A $10 list with discounts of 40-20-10-10-5 gives five prices: $6.00, $4.80, $4.32, $3.89, $3.69. (Meeting a competitor's price is legal; pricing below it is often judged discrimination.) Charging segments what they value the product at: a covered concert seat costs more than one in the open. And rewarding customers for saving the seller money: a lower price for buying by the case, for collecting instead of delivery, or for buying car options as a package.

Constraints on pricing practices

Beyond costs and customer valuations, four things limit pricing: the industry, the structure of the market, the economy, and the law. A surprising rule: the more competitive the industry, the easier the pricing decision, because the market sets the price. So firms in competitive industries turn to nonprice competitionCompeting on anything other than price: advertising, positioning, customer satisfaction, selection.The book's observation: the more competitive an industry, the more firms turn to this, because competing on price alone leads nowhere.: advertising, positioning, customer satisfaction. Category-bustingA retailer offering so huge a selection in one category that customers stop comparing on price.Selection and availability take the pressure off price. Think of a store with 200 kinds of running shoe. is the retail version: offer so wide a selection that choice takes the pressure off price.

Economic conditions amplify choices. It is hard not to raise prices in good times and cut them in a recession, but doing either weakens the firm's relationship with the market. Global firms face several economies at once. And the law now reaches beyond competition into foreign trade, public policy and national interests.

Ethics in pricing

Pricing can conflict with social values because the seller wants the best long-run return, which may be above or below what the market would set today. High prices draw more comment, since they suggest excess profit. Low prices are questioned too, since they suggest less value or a trick. The dispute is really about the gap between cost and price, and critics quote profits in absolute rather than relative terms. Four practices the book says the public questions:

What the four share: the customer sees a gap between cost and price but no matching gap in value. Whether each is actually wrong is debatable. The exam point is that the book says the public questions them.

Two practices are simply deceptive. A false referenceQuoting an 'original price' or 'comparable value' that misleads, or was never real, to make the current price look like a bargain.Unlike arguments about profit, this one is clear cut: it is deceptive and often illegal. uses "original price," "previously priced at" or "comparable value" to mislead; the reference may be invented. Bait and switchAdvertising a low price to bring customers in, then pushing them toward a more expensive product.Illegal when that is the purpose. The book's answer to both this and false reference is that customers can stop buying from firms that do it. advertises a low price to bring customers in, then steers them to something dearer; illegal when that is the purpose. The book's remedy: customers can stop buying from firms that do it, and firms can publish a statement of pricing principles.

Slides: Chapter 2 · Book: Hanna and Dodge, Chapter 2. The slides follow the book section by section.

Chapter 1 looked at price from the company's side. This chapter looks at it from the customer's side: what a price tells people, and how they use it to judge quality, sort products and spot bargains. One idea runs through it all: price is information, not just a cost.

Two roles of price: allocation and information

The chapter opens with a sports economist: there is "no relationship whatsoever between ticket prices and owners' costs." Tickets are priced at what the market will bear. Owners cannot pass on star salaries until fans value the game more. Price is set by perception, and it does two jobs.

Price as part of the marketing mix

Price is the only element of the mix that brings money in; product, promotion and distribution all cost money. (Pricing below competitors is an implicit expense too, since it gives up profit.) Effective pricing is judged by positioning and by total profit over the product's life.

The book's Table 2.1 shows how quality and price combine to affect return on investmentProfit as a percentage of the money invested.Finance executives judge prices by it. Target return pricing in Chapter 7 is built around hitting a set ROI.. High quality at a low price earns the highest return. High quality at a high price is a close second at 34 percent, more than twice the 15 percent of low quality at a low price. Worst is medium quality at a medium price: 2 percent. Quality is what pays, and quality with a competitive price pays most.

The elements are synergistic: together they produce more than the sum of the parts, if each supports the others. Three kinds of fit:

Price as purchasing information

A price looks like the one hard fact about a product. To the customer it is interpreted, and subjective. Customers use it in three ways: to signal quality, value and status; to sort products into categories; and to form impressions, especially the impression of a bargain.

The value a customer sees can be written as a formula, and it is on the slides:

Price carries information only if the customer believes price and quality are reliably linked. A customer who trusts that link ignores other information and makes a price-seeking choiceChoosing the higher-priced option on purpose because you assume the higher price means higher quality.The customer ignores other information and lets price do the judging.: picks the dearer option to get the best expected quality. Three reasons customers infer quality from price: past experience has taught them so; they reason that higher prices come from spending more on quality; and they trust the market, assuming others would not pay more unless it were better.

How strong the link is depends on the type of product (Figure 2.1):

Price as a marketing stimulus

Price cuts raise sales, and so do new products launched at low prices. Promotional pricing is a major competitive tool: short-term cuts, cash-back and rebates, value pricing, premiums and contests. It works best on homogeneous shopping goodsProducts that are much the same from brand to brand, like frozen food or plain underwear.Customers judge them on use, not price. Price is a poor quality signal. advertised as loss leadersProducts sold at a loss to draw customers into the store, where they buy other things at full price.Usually homogeneous shopping goods like coffee or soft drinks.. It serves two purposes. The retailer discounts coffee or soft drinks to build store traffic, expecting shoppers to buy other things too. The manufacturer discounts to build share, expecting some brand-switchers not to switch back when the price goes back up.

Response to price cuts is also a way to segment a market: the customers who react are the price-sensitive segment, and resources can be allocated by how each group responds. Take-home soft drinks are price sensitive; off-price retailersStores that sell brand-name goods at deep discounts.They succeed because their prices fall inside customers' acceptable ranges, which lag behind the real prices in the market. built their business on price-sensitive shoppers.

Consumer interpretations of price

People's Express and MCI changed their industries with deeply discounted, no-frills service. Competitors answered not with lower prices but by packaging price with quality and customer service. People's Express went out of business; MCI had to change repeatedly to match AT&T. Both forgot that price is only one of several differences customers see, and that it has more than economic meaning. Competing only on low price is rarely sustainable.

Time implications

Customers treat delay as a time cost, so products that are readily available command a premium. Atlas Door delivers industrial doors in weeks against an industry norm of four months, and gets a premium for it. Norwalk Furniture cut delivery to three weeks against two to three months and grew sales and dealers. Industrial buyers running just-in-timeA system where a customer keeps almost no stock and relies on suppliers delivering exactly when needed.It makes fast, reliable delivery worth more than a low price to industrial buyers. (JIT) systems rank on-time delivery above price. Shortening delivery time can beat cutting price.

Psychological implications

Because customers judge quality by price, a genuinely better product must cost more than lesser ones, or it will be read as lesser. Wilson's Sting tennis racket looked and played like the Prince Graphite but was priced $100 lower thanks to a manufacturing innovation. The low price told buyers it was worse, and it sold poorly until Wilson repositioned it for people who wanted graphite but thought they could only afford aluminium.

Some pay more for quality; others pay more as insurance against a cheap brand turning out badly, since they cannot judge quality themselves. Firms known for high service can charge more for the same reason. Customers also sort brands into price linesGroups of prices that customers sort products into, such as economy, mid-range and premium.Chapter 2 gives four: economy, moderate, prestigious, luxurious. and hold a range they consider "fair" for a product; a price pushed outside it works less well than expected. Even the form matters: $9.95 says bargain, $10 says quality.

The price-quality relationship

More products, and more complex ones, make choosing hard, and customers lack full information about quality. Where quality can be measured, the quality gap can be compared with the price gap. That is comparative valueA ratio comparing how much more quality you get against how much more you pay when you choose the dearer of two products.Above 1 the dearer product is the better deal; below 1 you are paying more than the extra quality is worth.:

Because the price-quality link is hard to see directly, customers shop for "value for the money" and use price as a clue. The link is stronger for expensive, infrequent purchases (cars, major appliances) than for cheap frequent ones (hosiery, towels, cleaners). Most customers accept that quality costs more, though not proportionately more. A 1985 Gallup survey found people willing to pay about a third more for a better car, half more for a better dishwasher, two-thirds more for a better sofa and twice as much for good shoes.

The link is clearest in major appliances, where customers use the terms top-of-the-lineThe single brand or model that occupies the highest price position in its category.Only one brand can hold it. Pricing above the dividing line signals it; the book's examples are KitchenAid, Pella and Haagen-Dazs., competitive and economy. Contrast bedding, where retailers' special orders make comparison almost impossible. Appliance leaders protect their position with above-average quality at less than the price the market would allow. The book's rule: the price-quality relationship is strongest when the item is expensive and a poor choice is risky, when customers link price, product and place of purchase, and when familiar links are carried over to unfamiliar products. Price and specifications alone no longer win, even for technical products.

Acceptable price levels and price ranges

An acceptable price levelThe price a customer expects to pay for a certain quality of product: the minimum that still signals real value.Below it the customer suspects something is wrong. is what a customer expects to pay for a given quality: the minimum that still signals value. An acceptable price rangeThe band between the lowest and highest prices a customer is willing to pay for a product.Below the range signals defects or old stock; above it feels overpriced. Within it, the customer barely thinks about price. is the band between the lowest and highest price the customer will accept. Willingness to buy is higher inside the band than outside it. It narrows the seller's options but simplifies the customer's decision.

The book's example is men's dress shirts, with a range of $35 to $60. A shirt under $35 is not a bargain; it is a warning that something is wrong, a defect or an old style. A shirt over $60 is expensive without matching quality; most customers feel no shirt is worth it, and the seller's market shrinks. Off-price retailers succeed by discounting national brands from above the range back into it.

Ranges apply to convenience and shopping goods, not speciality or luxury items. Some products once had a single customary priceA single price that people have come to expect for a product, like the old five-cent candy bar.When costs force a change, sellers often change size or quality to distract from the price.: five cents, then ten, for a candy bar or a phone call. For brands the marker is a dividing priceA price threshold for brands rather than a range: above it means top of the line, below it means something less.The sports car example: European cars priced above it, American and Japanese below, and crossing the line in either direction confuses buyers.: above it means top of the line, below it means less, and only one brand can hold the top (KitchenAid, Pella, Del Monte, Godiva, Haagen-Dazs). Sports cars show how rigid this is: European cars sit above the line, American and Japanese below. Price an American car above it and buyers say "for that money I would buy a European car." Price a European car below it and they ask "what did they leave off?" Acceptable ranges lag behind real prices, which is why candy bars changed size and quality on the way from five cents to a dollar, and why off-price stores feel like bargains.

Price lines

Price liningSetting a few fixed price levels for a product type and pricing each brand or item into one of them.It lets a seller reach several segments and invites customers to trade up. The risk is inconsistency that damages the image. sets a few price levels for a product type and prices each brand into one of them. Men's neckties: $15 to 20, $25 to 30, $40 to 50, $60 and up. J. Crew prices into the lower two, Countess Mara and Neiman-Marcus into the upper two, Saks only the top. Men's fragrances split the same way, from department-store brands at $30 to 75 down to Brut and Aqua Velva under $7 in drug stores.

More than one line reaches more segments and invites trading upPersuading a customer to buy from the next higher price line.One of the reasons for having more than one price line.. The risk is inconsistency that damages the image. A convenient scheme is four levels: economy, moderate, prestigious and luxurious; in the book's example market the moderate line is by far the largest.

Related is price resistanceA psychological ceiling above which customers refuse to pay for a type of product.Haircuts hit it at $5, then $10. The fix was to rename the service hair styling.: a ceiling in customers' minds for a type of service. Haircuts met it at $5, then $10. The way past was to rename the service "hair styling": barbers now charge $7 or $8 for a haircut and over $10 for styling. Push through the ceiling without a new label and customers find another way to meet the need, which is how rising cinema prices pushed people to video rentals. One more point: retail customers with different valuations all see one price; industrial buyers usually see several, reached by negotiation. Multiple prices can confuse, as when Levitz quoted different furniture prices depending on delivery and payment options.

Reference prices

A reference priceThe price a customer remembers and compares the current price against.Sellers show the 'original' price next to the sale price to create a sense of savings. It works even when the reference price is inaccurate. is the price a customer remembers and compares a new price against. Whether a customer has one depends on how much attention they pay to prices, how memorable the price was, and whether they use price to decide. Sellers show the original price beside the discounted one so the saving is visible. The bigger the dollar gap, the stronger the sense of a bargain. It works whether the reference is accurate or not, which is why false references are an ethics problem in Chapter 1. Used well, reference pricing raises perceived value and stimulates sales.

Odd-even pricing

Odd-even pricingEnding prices in odd numbers like $9.99 to seem cheaper, or in round numbers like $100 to seem premium.Rule of thumb: end in 5 or 9 below $50; in 5, 6, 7, 8 or 9 above $50. assumes prices ending in odd numbers read as bargains: $3.99 feels like "about $3," although the real difference is tiny. Rule of thumb: below $50, end in 5 or 9 ($24.95, $19.99); above $50, end in 5, 6, 7, 8 or 9 ($495, $2,499). The effect varies by product and situation. Even prices ($100, $500) read as quality and prestige. So use odd prices to stress value and discounts, even prices to reinforce a premium image.

Slides: Lecture 03, Manufacturers' Pricing · Book: Hanna and Dodge, Chapter 7. The slides follow the book closely.

The manufacturer makes the product and sells it to distributors and retailers. Three questions: where does a product's price sit among the company's other products? What is the company trying to achieve with price? And what are the six named strategies and five named discounts?

The pricing environment

The chapter opens with Jack Welch of General Electric: globalization is a fact of life, growth is slower, "value buying is everywhere," and to have the lowest cost and highest quality "you've got to engage every mind that you have." Industry has changed: global competition, sharper focus on customers, more flexible operations, new kinds of customers and markets.

A manufacturer's prices affect everyone: consumers, government, labour, distributors, financial markets. Oil prices moved world economies; the pricing of Procter & Gamble, DuPont, Unilever, Mitsubishi and Nestlé signals economic expectations to the rest of the economy. Pricing and product decisions go together. Companies now carve out niches, small segments served with a unique strategy, and price becomes a positioning tool that differs by segment.

The lower limit of a product's price range is set by costs, the upper limit by what the market will bear. Where the product sits between them is decided product by product, and two things decide it: the segment served, and the product's position in the company's portfolioAll of a company's products seen together, each playing a different role.Not every product has to earn the same profit. Some generate cash, some use it..

Pricing and segmentation strategy

Customers differ in what they need and in what they are willing and able to pay, so a manufacturer may serve several segments. Market segmentationDividing customers into groups that respond differently, so each group can be served, and priced, differently.The two purposes: focus effort and build an advantage that lasts. sorts customers, products or markets into groups that respond differently. Two purposes: focus effort, and build an advantage that lasts. Segments can be defined by customer characteristics (location, lifestyle, firm size, demographics, industry) or by product-related ones (benefits sought, how the product is used). Each segment's price structure must fit the rest of the mix and sustain the firm's original advantage, which means knowing how each segment values the product and watching for change.

Pricing and the product portfolio

Products play different roles. Planning no longer expects each one to "carry its own weight." Products differ in life-cycle stage, market share and market growth, so some produce cash and others use it: a portfolio. The Boston Consulting Group's growth-share matrixThe Boston Consulting Group's grid that sorts products by market growth and market share into cash cows, stars, problem children and dogs.The slides call problem children 'question marks'. Same box. gives each product a role from market growth and relative share, and the slides attach a pricing strategy to each:

Two questions place any product: is the market growing fast or slowly, and is our share big or small? The box suggests the pricing objective.

Texas Instruments runs a related system, design-to-costTexas Instruments' method of planning a product around a target cost, relying on cost savings from learning and volume.A pricing system built on high volume for a small product line.: high volume on a limited product line, with costs planned around learning. More broadly, in the 1970s flexible pricingAdjusting prices across products in the short run, raising some and lowering others, to get the best overall mix of sales and profit.It replaced long-run target-return pricing in the 1970s when competition and unused capacity made fixed targets unworkable. Chapter 14 brings it back for inflation. began replacing target-return pricing. Fixed long-run targets suited the steady growth after World War II. When competition intensified, capacity sat idle and costs and demand became unpredictable, companies had to raise some prices and lower others to get the best total mix of sales and profit.

Pricing objectives

A pricing objective is what the company wants its prices to do for it. You would expect every company to have one written down. Most do not. Ask an executive and they will say "profit," but look at what the company actually does and you often find other goals at work: keeping market share, keeping the factory busy. Even firms that claim to maximize profit usually settle for a profit that is "good enough." A famous study of twenty large American companies (Lanzillotti) found that their prices were really aimed at one of five goals.

A quick way to hold the five: two are about money (target return, maximize profit), two are about position (market share, meet competition), one is about reputation (stabilize prices).

Pricing strategies

A pricing strategy is the firm's price position relative to competitors. A high-price strategy differentiates the product and builds a quality image. A low-price strategy aims for market share by penetrating markets. Either shapes the rest of the mix. Six named strategies: two high-price, then four low-price in rising order of aggression.

Discounts and allowances

A manufacturer depends on its distributors, who negotiate hard for terms. To pay them for their services and keep their cooperation, manufacturers offer discounts off list price. Five kinds: quantity, trade (functional), seasonal, promotional and cash. Each has its own purpose, and a buyer who qualifies can receive all five in one transaction.

Quantity discounts

A quantity discountA lower price for buying more, based on units or on dollar value.Saves the seller shipping, billing and handling costs. Legal only if it can be justified by those cost savings. is the simplest idea in the chapter: buy more, pay less per unit. It can be measured in units or in dollars, and given as a percentage off, as free extra units, or as a fixed amount off. Both sides gain. The seller ships one big order instead of many small ones, so it saves on shipping, order processing and billing, runs the factory more evenly, and ties up less money in stock. The buyer gets a lower price per unit.

There are two kinds, and the exam likes the difference. The question to ask is: what is the discount measured on?

Now the legal part. Charging different buyers different prices for the same product is exactly what the Robinson-Patman Act forbids, and a quantity discount does exactly that. So when is a discount allowed? Think of it as three rules for a seller.

Set the two kinds of quantity discount against Rule 1 and the caution about cumulative discountsA discount based on total purchases over a period, such as a year.Its purpose is loyalty and repeat business. Harder to defend legally because many small orders save the seller little. explains itself. A noncumulativeA discount based on the size of one single order.Its purpose is bigger orders. Easier to defend legally because the cost savings from one large shipment are measurable. discount is easy to defend: one big shipment really does cost less, and the paperwork proves it. A cumulative discount is hard to defend: the buyer may have placed fifty small orders during the year, each costing you as much to handle as anyone else's, so there is no saving to point to. That is why the book says cumulative discounts are "more in jeopardy" and firms use them cautiously.

Trade discounts

Trade discountsA discount given to wholesalers and retailers for the marketing jobs they do: selling, storing, delivering, serving customers. Also called a functional discount.Stated as a chain, for example 40 and 20 percent. Modern retailers do several channel jobs at once, so trade discounts are giving way to stocking and slotting allowances., or functional discounts, go to each class of reseller for the marketing functions it performs: selling, warehousing, distribution, customer service. Stated as a chain. A calculator with a $10 suggested retail price and discounts of 40 and 20 percent to retailers and wholesalers: the retailer pays $6.00 and keeps $4.00; the wholesaler pays $4.80 and keeps $1.20; the manufacturer receives $4.80. The traditional basis, trade classification, is breaking down: big retailers buy direct and warehouse themselves, Walmart has Procter & Gamble manage its inventory, distributors own retail outlets. So manufacturers increasingly use stocking allowances and slotting allowancesA payment a manufacturer makes to a retailer for shelf space.Along with stocking allowances, the modern replacement for traditional trade discounts. instead: payments for carrying the product and for shelf space.

Seasonal discounts

Seasonal discountsA lower price for buying early or out of season.Keeps the factory running all year and shifts the cost of holding stock onto the reseller. Bigger the earlier you buy. reward ordering early or out of season. Toys, air conditioners, snow tyres and lawn mowers have slack months, but the factory cannot shut, so the manufacturer discounts to resellers and shifts the cost of holding inventory to them. The discount must cover the dealer's storage for months and the money tied up. The earlier the order, the bigger the discount, falling as the season approaches. Robinson-Patman allows it if the same discount goes to comparable buyers, meaning those ordering in the same time frame, and does not exceed the seller's cost savings.

Promotional discounts

A promotional discountA price reduction or allowance given to dealers who promote the manufacturer's product locally.Implicit: a straight price cut or extra goods. Explicit: paying back actual advertising costs, as in cooperative advertising. pays dealers for promoting the manufacturer's product locally, since national advertising cannot say where to buy and local rates are cheaper. It may be a percentage off, a money amount per case, or extra units. Two forms:

Robinson-Patman requires promotional discounts on proportionately equal termsThe Robinson-Patman rule that promotional discounts must be offered to all competing dealers in proportion to how much they buy.The law did not define 'proportionately'; the courts tied it to units or dollars purchased.. The Act never defined the word; courts decided it means in proportion to the volume each dealer buys, applied uniformly to all competing buyers.

Cash discounts

A cash discountA small discount for paying an invoice early.Written as 2/10, n/30: 2 percent off if paid within 10 days, full amount due in 30. Giving up that 2 percent to keep the money 20 more days works out to about 36 percent a year. rewards prompt payment. Three elements: a rate, a period in which it applies, and a deadline for the full bill. 2/10, n/30 means 2 percent off if paid within 10 days, full amount due in 30. The amount follows industry practice; where discounts are customary, a manufacturer that refuses them loses business.

Slides: Lecture 04 · Book: Hanna and Dodge, Chapter 13. The slides follow the book closely.

Services are priced differently because they are different: you cannot see one before you buy, store one for later, or make two exactly alike. This chapter covers the six characteristics that cause the trouble, how to cost a service, and five strategies and five tactics for pricing one.

Characteristics of services

The chapter opens with Marshall McLuhan: "We say airline when we mean air transportation... services are processes, not objects." A service cannot be grasped or pointed at; it has to be experienced. It is sold first, then produced and consumed. Goods and services mix: goods give tangibility to services (a souvenir from a show), services augment goods (customer service with a car). Six differences create special problems:

Complexity and divergence

Any service can be written out as a list of steps. A haircut is a short list: sit down, discuss, cut, finish, pay. A hospital stay is a long one with many branches. The book uses two words for the shape of that list.

Complexity is how many steps, options and sequences the service contains. Medical care is highly complex. Lawn care is simple. The more a service does, the more complex it is.

Divergence is how much the steps vary from one customer to the next, because the person delivering the service uses judgment and adapts. A hair stylist decides something different for every head, so styling is highly divergent. An airline check-in is the same for everyone, so it has low divergence. A service can be complex but not divergent (a standard blood test panel, many steps but always the same ones) or simple but divergent (a personal shopper).

Why a pricing chapter cares: a firm can choose to move either dial up or down, and each move points to a different price.

The short version to remember: adding steps means bundling them cheaply, removing steps means charging for expertise, adding variation means charging for customization, and removing variation means charging less and selling more.

The book's Table 13.1 shows what pricing by package looks like once a service has been broken into options:

Each item can be bought alone, and every package costs well below the sum of its parts, so customers are pulled toward buying more. This is mixed bundling, covered again under strategies.

Pricing decisions in services

Service marketers must deliver features and benefits at an attractive price. Attractive means either a competitive price, lower than competitors' for the same service, or a premium price more than offset by added value. Whatever the service, customers judge three things: quality (does it achieve the promised result?), consistency (is it the same every time?) and reliability (does the provider always deliver what was promised?). An attractive price is not a low one; it is strong value against those three.

Cost considerations

Service pricing has traditionally been cost-based. Because ordinary accounting does not value the people who deliver a service, service firms invented human-resource costing. The job-jacketA costing method that charges each client for the time actually spent on their account, plus a share of overhead and idle time.Common in law and consulting. The weakness: time is a poor measure of skill, since a better lawyer may take fewer hours. method charges each account for the time spent on it, plus a share of overhead and unused time in proportion to that time.

Two difficulties. Is time a fair measure of effort? A more competent person finishes faster and so charges less than a slower, less competent one; time standards, as in car repair, help only a little. And fixed costs are hard to allocate when volume swings. Many firms sidestep both by charging a multiple of direct time costs. The deeper problem: a cost-based price may not match what the customer thinks the service is worth. Too high loses sales; too low loses profit, and perhaps sales, because customers expected more. Even equipment-intensive services, where allocation is easier, get supply and demand wrong: buying the wrong capacity (airlines and jumbo jets), not adding capacity, unbalancing primary and support activities at a resort, or undercutting themselves with cheaper services that parallel dearer ones.

Market considerations

Because service costs are hard to tie to units, and because price strongly affects how often a service is used, service prices are more often based on perceived value than on cost. Successful service firms innovate constantly: each new feature adds value, and adding associated goods adds tangibility (Walt Disney does both). Value pricing estimates what the market thinks the service is worth, so innovations must match the target market's concerns. ServiceMaster keeps enhancing its contract housekeeping for cost-conscious hospitals without cutting quality. Rural/Metro, a fire-protection and ambulance provider, competes on price and service level with remote-controlled equipment, non-union firefighters and prevention. Where possible, break the service into parts: which are essential, which can go, which additions would add value. Holiday Inns kept quality, dropped the extras of expensive hotels, and improved quality through consistency.

Service pricing strategies

Price is "undoubtedly the most troublesome aspect" of marketing services, because both value and cost are hard to pin down. So service firms often just follow their major competitors, matching or slightly undercutting, which produces price tiers: an upscale restaurant and an economy one. Beyond following, five strategies.

Cost-based pricing

Cost-plus pricing charges the cost of the service plus a set percentage. Common in law, consulting and medicine, where the firm assumes it delivers distinctly better quality and that clients choose it for that. Costs also dominate when the service has high material content, which makes it more tangible (repair, installation and maintenance are priced labour plus materials), and when it is equipment-intensive, since equipment brings economies of scale (multi-screen cinemas, jumbo jets, 24-hour data processing). Entry barriersThings that make it hard for new competitors to enter a market, such as heavy equipment costs or technology.Where barriers are high, costs matter more than the market in setting service prices. push the same way: heavy equipment (excavation), many locations (airport car rental) or technology (data processing) keep competitors out, so cost matters more than the market. A data-processing firm uses cost-plus; a dry cleaner does not. The limitation is the usual one: it ignores what customers will pay.

Demand fluctuation pricing

Demand for services swings outside the firm's control. Differential pricingCharging different prices to different customers or at different times for the same service.For services it appears twice: lower off-peak prices to shift demand, and different prices by willingness to pay as a tactic. charges less in non-peak periods to shift demand out of the peaks and perhaps raise total demand: matinees, weekend phone and hotel rates, off-peak electricity. The risk is that the lower price cuts total profit. Creating off-peak demand can produce incremental losses if handling the shifted demand costs more than it earns, as with airlines' cheaper Sunday fares.

Developmental pricingA special low-priced version of a service created for off-peak periods to bring in extra demand.Market-oriented, not cost-oriented. Only the extra costs of serving the extra guests need to be covered. The risk is that peak business just moves to the cheap period. creates a special version of the service for off-peak times, such as a resort's off-season package. Its purpose is to increase demand. Basic costs are already covered by peak-season prices, so the off-season price need only cover the incremental cost of the package. The added profit can raise profitability or be used to lower peak prices. The risk is a flip-flop: if the conventions that filled July and August move to the cheap season, the resort does the same business for much less revenue. The slides' rule: off-peak pricing must create or shift demand, and the extra contribution must exceed the incremental cost.

Capacity pricing

This one is for services that run on expensive equipment: airlines, hotels, data centres, resorts. The problem is that the equipment costs the same whether it is busy or idle, so the cost of serving one customer depends entirely on how many others turn up. The book's numbers make it concrete. A data-processing centre needs its equipment to earn $1,000 a day. On a slow day it handles 4,000 transactions, so each one has to carry 25 cents of equipment cost. On a busy day it handles 20,000, so each one carries only 5 cents. Same machine, same day rate, a fivefold difference in cost per transaction. An airline flying 30 passengers in 120 seats has the same problem.

So what price do you charge? If you price for the slow day you are far above competitors on every other day. If you price for the busy day you lose money whenever it is quiet. Capacity pricingSetting a price for an equipment-based service that earns the desired return on the equipment while staying competitive, given how much of the capacity gets used.Steps: find the competitive price, split costs into equipment return and people costs, then work out how many units you need to sell at that price. is the book's way out: instead of asking "what does a transaction cost?", ask "at the price the market will accept, how many transactions do we need to earn our return?" Three steps.

Now management knows something useful: with competitive prices, the centre must handle between 12,000 and 16,000 transactions a day to be worth running. If demand is usually above that, price at the market rate and relax. If it is usually below, the answer is not a higher price, which the market would refuse, but more volume: off-peak discounts, longer hours, productivity improvements, or extra capacity. The book's Table 13.2 shows the same thinking at a resort whose golf course is full every July afternoon: rather than build a second course that would lose money the rest of the year, it opens earlier, leases a nearby course, runs a shuttle and discounts morning play.

Benefit pricing

Every method so far has started from cost, at least in part. Benefit pricingPricing a service by what its benefits are worth to the customer, with no link to what it costs to provide.If the benefit price is too low to pay, add features that justify more. Customers judge benefits through two things they can see: the physical setting and the contact staff. throws cost out. Its starting assumption is that what a customer is willing to pay for a service has nothing to do with what it costs to provide. The price comes from the benefits the customer perceives, full stop.

That sounds like it could go wrong, and the book says what to do when it does. If the price customers will pay does not cover your costs or your desired return, you do not raise the price, because they will not pay it. You add benefits until the service is worth more to them. One financial-information firm did exactly that: its data service alone would not command the price it needed, so it added free consultations and guaranteed a high level of accuracy, and the price followed.

How do you work out what the benefits are worth? The book gives a sequence.

The difference between the two methods in one line: capacity pricing takes the market price as given and asks how many customers you need; benefit pricing takes the customer's valuation as given and asks what you must add to earn the price you want.

Price bundling

Price bundlingSelling two or more services together at a price below what they would cost separately.Pure bundling: only sold as a package. Mixed bundling: buy separately or as a package with a discount. sells two or more services together for less than they cost separately: travel packages, banking packages, software packages, convention packages. Objectives: raise perceived value, cross-sellGetting a customer who buys one service to buy another from you.The main reason for bundling. If one segment is much larger, put the discount on the service that segment buys., increase spending and demand. Two types:

The pricing rule, from Guiltinan: the discount should make customers who buy one service buy the other, and convert non-customers into customers of the bundle. If the two single-service groups are about equal, discount the total. If one is much larger, put the discount on the service that group buys, conditional on buying the other: a photo lab with more prints-only customers than enlargements-only customers discounts prints when bought with enlargements.

Pricing tactics for services

Tactics are the same for services as for goods. Five are named:

Slides: Module 05, Bangladesh context · Book: Hanna and Dodge, Chapter 14. The slides follow the book and add Bangladesh examples.

Everything so far assumed stable costs. This chapter asks what a manager does when costs rise fast and inputs are scarce. The answer is not just "raise prices." It is a programme: better information, honest accounting, a deliberate decision about who absorbs the cost, protection in contracts, cost cutting, and careful handling of government, customers and dealers.

Why inflation and shortages are a marketing problem

The chapter opens with Kotler and Levy on demarketingMarketing designed to reduce demand, used when a firm cannot supply everyone.Kotler and Levy's term, in the chapter's opening quote: excess demand is as much a marketing problem as excess supply.: "excess demand is as much a marketing problem as excess supply." When there is not enough to go round, a company still has to decide which customers to serve and how. Inflation and scarcity are permanent features of business, the book says: world demand for raw materials keeps growing, commodity prices spiral, and developed countries depend on developing ones for basics like oil. The main worry is the push on inflation.

Two explanations. Cost-push inflationPrices rise because the cost of materials, labour or capital rises and gets passed on.One of the two explanations of inflation. The other is demand-pull.: rising costs of capital, materials or labour push prices up, and those prices raise other costs in a cycle. Demand-pull inflationPrices rise because total demand is bigger than what the economy can supply.Too much money chasing too few goods.: total demand exceeds what existing resources can supply. Either way inflation cuts real incomeWhat your money can actually buy after allowing for inflation.Inflation cuts real income, so sales fall, which is why the book says inflation is a major cause of recession., what money actually buys, so sales fall and recession follows.

For pricing, inflation is a trap. Wages and materials rise, so firms pass the increases into prices, then find volume falls. If competitors delay their increases, the firm loses customers. If everyone raises prices together, customers switch to substitutes. Shortages add uncertainty about future costs and supply. Pricing based on stable historical costs stops working. Survival depends on recognizing the changes quickly and adapting. The rest of the chapter is the list of responses.

Cost and information management

The first response is better information, not higher prices.

Continuous monitoring of costs

A costing system built for stable times fails when costs move fast; extrapolating historical costs distorts profit. The firm needs to see cost changes for each product, product group, market, key customer and operation, tracked by cost centreA part of the business whose costs are tracked separately.Under inflation you need to see costs move in each centre, not rely on old averages.. A manufacturer should watch material usage, output, direct wages, labour productivity and machine utilization regularly. The slides' Bangladesh example: a food manufacturer tracks packaging, edible inputs, transport and production costs separately before revising a price.

Dynamic costing and rolling budgets

Computer systems can compare the current purchase price of every component with its last price, daily or monthly. The result is either a revised price list or a decision to accept lower margins for a while. Some firms build a multiplier factorA number built into the base price that can be adjusted regularly as costs change.A simple price-protection device. Change the multiplier, not the whole price list. into the base price and adjust it periodically. Others use rolling or progressive budgets, extended every month so new cost and demand data is always in. In Bangladesh, monthly or shorter rolling reviews beat an annual budget in volatile periods.

Information systems to monitor the environment

Management needs to know where the economy is heading, to decide whether to expand, cut back or diversify, and what materials, labour and energy will cost and whether to substitute. It must also watch customers: demands for more quality, greater price consciousness, preference for energy-saving products, interest in safety. Flexible manufacturing, shorter runs, just-in-time inventory and close monitoring of competitors' prices, discounts and promotions all matter more; the book cites car rebates, airline fare changes and grocery's shift from promotional to price discounts. The slides add a Bangladesh checklist with five sides: input (supplier quotes, import costs, exchange rate, fuel, wages), market (demand, purchasing power, substitution, basket size), competition (prices, promotions, pack sizes, channel margins), operations (capacity utilization, wastage, productivity, inventory, lead times), and decision (price change, cost reduction, product change, or nothing?).

Accounting and profitability

Inflation makes reported profit look better than reality. Firms adjust depreciation, inventory costing and budget periods, and look harder at tax credits and the tax benefits of acquisitions. Under inflation the replacement costWhat it would cost to buy an asset again today.Traditional depreciation assumes the replacement will cost what the original did. Under inflation it costs far more, so the firm is not setting enough aside. of an asset can be far above its historical cost, so management must separate accounting profit from the firm's real ability to replace its resources.

Inventory costing and paper profits

FIFOFirst in, first out: the oldest stock is treated as sold first.Logical, but under inflation it charges old, cheap costs against today's high prices, so profit looks bigger than it really is. (first in, first out) matches the physical movement of stock, but under inflation it charges old, cheap costs against today's high prices, so profit is overstated. LIFOLast in, first out: the newest stock is treated as sold first.It charges production with costs close to today's, so it removes the paper profits that FIFO creates. (last in, first out) charges production with near-current costs, which removes the paper profitsProfit that appears in the accounts only because inventory was bought cheaply before prices rose, not because the business did better.The book's teaching point: the question is not which method is best but how inventory costing changes how profitable the firm looks. of selling at today's prices while charging yesterday's costs. The slides' point: the question is not which method is best, but how inventory costing changes how profitable the firm appears. Ask what happens to apparent profit when stock bought at an old price is sold after the replacement cost has jumped.

Inflationary accounting and asset valuation

Inflationary accountingAdjusting the accounts so that assets, liabilities and profit reflect today's prices, not what things cost years ago.Without it, assets are understated and return on capital looks unrealistically high. aims for realistic, current values for assets, liabilities, stocks and work in progress. Traditional depreciation assumes a new asset will cost what the old one did; under inflation it costs much more, so unless assets are revalued, profitability and return on capital look unrealistically high. Long budget periods go stale, which is why shorter rolling budgetsA budget that is extended by a month every month, so it always looks the same distance ahead. Also called a progressive budget.Annual budgets go stale fast under inflation. Shorter, rolling ones stay accurate. forecast better.

Absorb costs or pass them on?

The central decision. Absorb the increase and accept a lower gross marginThe difference between the selling price and the cost of the goods sold.Absorbing a cost increase means accepting a thinner gross margin to protect price and volume., protecting price and volume. Or pass it on as higher prices, protecting margin but risking demand and share. Three dangers of passing it on: competitors may not follow; if the whole industry raises prices, customers leave for substitutes; and raising prices to keep up with inflation feeds inflation, as when rising health-care costs raise insurance costs, which raise business costs, which raise prices charged back to health care. The book's judgment: under inflation it may be best to absorb at least part of the increase to hold market position.

Industries with heavy fixed overheads may use flexible pricing: cutting prices aggressively to hold share. Unlike pricing for a long-run target return, it is a short-run system based on complete current information about the market and the firm. When an increase is considered, competition and unused capacity matter most. The Bangladesh example: a manufacturer with idle capacity protects key accounts with selective temporary adjustments instead of a blanket increase.

Price protection systems

When there is a long gap between quoting and delivering, as in construction and aircraft, costs change in between. Several systems protect profit:

Bangladesh applications from the slides: construction, with long gaps between quotation and completion; industrial equipment with imported components; business-to-business contracts, where escalation clausesA contract clause that lets the price rise if specified costs rise before delivery.Vital when there is a long gap between sale and delivery, as in construction or aircraft. allocate defined input-cost risks; and large orders, where a formula is more transparent than a surprise revision. Any mechanism should state the trigger, the reference index and the adjustment method.

Cost reduction

Normally profit is kept up through higher prices, lower costs, more volume, or a mix. Under inflation, increases cannot be fully passed on and prices cannot rise fast enough, so cost reduction becomes the main pricing strategy, especially to hold price and protect volume. The book's list:

• Shorten the product line. Drop the "losers" so their materials go into profitable items. Weak products earn a little but eat a disproportionate share of resources and management time. General Electric competes only where its position allows a given level of profit.
• Find lower-cost substitutes, as long as quality reputation is protected. Car makers replaced steel with aluminium, plastics and rubber.
• Simplify the product. Redesign around standard components and reduce model changes. The Bangladesh example: a furniture producer redesigning around standard local components when imports get expensive. The aim is lower total cost while protecting customer value, not the cheapest possible product.
• Keep customers rather than chase new ones. About $1 to keep a customer against $6, mostly advertising, to win one. Reduce personal selling and become selective, keeping only customers with the highest long-term potential (selective sellingConcentrating sales effort on the customers with the best long-term potential and dropping the rest.Part of cost reduction under inflation. It rests on the rule that keeping a customer costs about a sixth of winning a new one.).
• Improve quality. Contrary to belief, quality lowers cost. Motorola found better quality gave the lowest manufacturing cost by shrinking the hidden plantThe people, floor space and equipment tied up in fixing things that should have been done right the first time.Motorola estimated it at 25 to 35 percent of total production cost. Improving quality shrinks it, which is why quality lowers cost.: the people, space and equipment devoted to fixing what should have been right first time, 25 to 35 percent of production cost. Quality also cuts the cost of lost customers. So never cut quality indiscriminately; fewer defects and returns protect margin better.
• Review packaging and sales aids critically.

Government, communication and channel relationships

Pricing during inflation is also about institutions and relationships.

Government policies and regulations

Price controlsGovernment limits on how much prices may rise.They can stop a firm passing on the full cost increase, for example allowing only the rise in certain approved costs. or guidelines can stop a firm pricing above the rate of cost inflation, for example allowing increases only for approved costs. Allocation of strategic commodities and quantity restrictions hit operations directly; export controls shrink the market, import controls may open domestic opportunities, environmental controls raise costs. Monetary and fiscal policy affect demand indirectly. Know the rules, anticipate changes, prepare contingency plans.

Centralizing pricing decisions

Centralizing pricingMaking pricing decisions at head office rather than leaving them to individual salespeople or regions.Gives control and speed, which flexible pricing needs. A price response to a competitor may have to be made in days. gives control, consistency and speed. It matters most under flexible pricing: a decision to cut prices in response to a competitor must be made promptly or share is lost. The Bangladesh version: central pricing rules, with field teams given limited, defined authority for local conditions.

Public information and customer communication

Customers resist changes they do not understand, especially in price. Explain actions promptly and give advance notice; this builds the image of a concerned participant in the economy. Advertising can show customers how to get more use from the product and how to use scarce materials well, which reduces resistance to higher prices. Explain rather than let rumours do it; in Bangladesh, communicate price and pack changes consistently through retailers and official channels.

Closer relationships with resellers

Monitor goods through the channel and tell dealers about policy changes promptly. The salesperson carries the price change: explaining why costs rose, how the company cut its own costs to limit the increase, and what cheaper substitutes it offers. Helping resellers with their own problems turns shortages into goodwill. Review cooperative advertising, credit terms, discounts, freight and service policies; inflation may be the moment to negotiate longer contracts and fewer discounts. And listen to what dealers report about customer and competitor reactions.

Avoiding scarcity tactics

Some manufacturers exploit the psychology of scarcityThe way buyers change behaviour when they believe a product is running short: hoarding, panic buying, paying more.Using it deliberately can create a real shortage and damage inventories, sales and trust. The book says avoid it.: when buyers think a product is running short they hoard and panic-buy, which can create a real shortage and push prices above normal. Doing this deliberately damages inventories, production, sales and profit in the long run. The slides pose the discussion: is a higher price always unethical in a shortage, and when does cost recovery become exploitation?

A need for a pricing strategy during inflation

A firm without a deliberate inflation and shortage pricing policy is "at the mercy of every shortage." Without one, firms scramble for scarce materials at any price and hope to charge more, and the result is lost volume, or government legislation to curb the trend. It is hard to resist "demanding what the traffic will bear," but the cumulative effect can endanger the economic system itself. So every company needs an inflation pricing plan, and producers of essential materials may need industry-wide cooperation on pricing that serves the economy's social needs. The slides' final principle: a deliberate policy, not opportunistic reaction to each shortage.

The lists you must be able to write out from memory

Cover the answer, say the list out loud, then open it to check. Everything expands when printed.

Every formula and worked example in the five chapters, in one place

The exam can ask you to reproduce any of these. Each entry gives the formula, the book's own numbers, and what the answer means in words.