定价策略 课件 Chpt 02 - Profit's Sensitivity to Price

TimJ.SmithPricingStrategy:SettingPriceLevels,ManagingPriceDiscounts,&EstablishingPriceStructuresPowerPointbyTimJ.Smith,PhDManagingPrincipal,WiglafPricingAdjunctProfessorofMarketing&Economics,DePaulUniversity©2012CengageLearning.AllRightsReserved.Maynotbescanned,copiedorduplicated,orpostedtoapubliclyaccessiblewebsite,inwholeorinpart.Chapter2Profit’sSensitivitytoPriceConductingaProfitSensitivityAnalysistoIdentifyvolumeHurdlesandtheChallengesInherentinEconomicPriceOptimization©2012CengageLearning.AllRightsReserved.Maynotbescanned,copiedorduplicated,orpostedtoapubliclyaccessiblewebsite,inwholeorinpart.AgendaHowdopricechangesinfluencetheabilitytocapturecustomers?Howsensitiveareprofitstopricechangeswhenweincludetheinfluenceofpricechangestosalesvolumes?Whenconsideringapricecut,whatisthenecessaryincreaseinsalevolumestoimprovethefirm’sprofits?Whenconsideringapriceincrease,whatistheallowabledecreaseinsalevolumesthatwillleavethefirmmoreprofitable?Howdoeselasticityofdemandenableexecutivestooptimizeprices?Whatarethelimitationstousingelasticitymetricsaloneforguidingpricesettingdecisions?StretchQuestion:Howiselasticityofdemandrelatedtoexchangevaluemodelsfordifferentcustomers?©2012CengageLearning.AllRightsReserved.Maynotbescanned,copiedorduplicated,orpostedtoapubliclyaccessiblewebsite,inwholeorinpart.ProfitSensitivityAnalysisIfweknowthatthebestpricelieswithinarange,whatistheeffectofasmallchangeinprice?ProfitEquation

p=Q(P–V)–Fp–ProfitQ–QuantitySold(Volume)P–PriceV–VariableCostsF–FixedCosts©2012CengageLearning.AllRightsReserved.Maynotbescanned,copiedorduplicated,orpostedtoapubliclyaccessiblewebsite,inwholeorinpart.ProfitSensitivityAnalysis

p=Q(P–V)–FEffectsofapricechangeDirecteffectonprofitthroughpriceIndirecteffectonprofitsbymoderatingthequantitysoldNoeffectoncosts,variablenorfixedLawsofeconomicsimpliesthatforanormalgood,aspriceincreases,volumedecreases,fewerpurchasesaremadePriceSensitivityAnalysis

analyzesthesensitivityofprofitstopricechangesVolumeHurdlesareidentifiedthroughtheprofitsensitivityanalysis.Theydefinetherequiredchangesinvolumetojustifyapricechange.©2012CengageLearning.AllRightsReserved.Maynotbescanned,copiedorduplicated,orpostedtoapubliclyaccessiblewebsite,inwholeorinpart.VolumeHurdleConsideraPriceChangeHowwouldvolumeneedtochangeinordertoimproveprofitability?CallthistheVolumeHurdleLettheinitialpriceandquantitybedenotedbythesubscripti,andthefinalpriceandquantitybedenotedbythesubscriptf pi=Qi(Pi-V)-F pf=Qf(Pf-V)-FCondition:anypricechangemustimproveprofitability pf

>pi

Usealgebratorearrangetheequationsandsimplifytoidentifythevolumehurdle.©2012CengageLearning.AllRightsReserved.Maynotbescanned,copiedorduplicated,orpostedtoapubliclyaccessiblewebsite,inwholeorinpart.VolumeHurdleWhere%DQ≥–%DP

%CMi+%DP

%DQ≡Qf–Qi

Qi

%DP≡Pf–Pi

Pi

%CMi

≡Pi–Vi

Pi

PercentChangeinVolumePercentChangeinPriceInitialContributionMarginasapercentageoftheoriginalpriceThechangeinvolumemustbegreaterthanthisratioforthepricechangetoyieldhigherprofits©2012CengageLearning.AllRightsReserved.Maynotbescanned,copiedorduplicated,orpostedtoapubliclyaccessiblewebsite,inwholeorinpart.FixedCostsDon’tMatter,VariableCostsDo.NoticeFixedCostshavenoeffectonamarginalpricechangedecisionYouroverheadisyourproblem,notthecustomers.Fromavalueperspective,customersnevercareaboutyourcoststructure.Onlyyoudo.Theyonlycareaboutvalue–howmuchvaluedotheygetforhowhighaprice.Fixedcostsarekeyinthedecisiontoenterorstayintheindustry.Onceintheindustry,theymakenodifferencetomarginalprofitabilitydecisions.Fixedcostsmoreofaninvestmentorstrategyissuethanapricingissue.%DQ≥–%DP

%CMi+%DP

WhatVariableCostsshouldbeconsideredfordefiningtheVolumeHurdle?©2012CengageLearning.AllRightsReserved.Maynotbescanned,copiedorduplicated,orpostedtoapubliclyaccessiblewebsite,inwholeorinpart.VolumeHurdleforaPriceCutPricecut,where%DPisnegative,requiresapositiveincreaseinvolumetoimproveprofitabilityTheamountoftherequiredvolumeincreaseisdependentonthesizeofthesizeofthecontributionmargin.LargeCMimpliesasmallDQisrequired.SmallCMimpliesalargerDQisrequiredStrongimplicationswithrespecttotacticalpricecutsDiscountsShorttermsalesCreatesavolumehurdleforthetacticalpricecuttomakesensetothefirmStrategicpricecuts,wherearesettingoftheindustrypricelevellower,createsasimilarvolumehurdle,whichshouldbeinformedbytheassurancethatalargermarketisavailableatthenewlowerprice.%DQ≥–%DP

%CMi+%DP

©2012CengageLearning.AllRightsReserved.Maynotbescanned,copiedorduplicated,orpostedtoapubliclyaccessiblewebsite,inwholeorinpart.VolumeHurdleforaPriceHikePriceRise,where%DPispositive,willallowforareductioninvolume,uptoapoint.Theamountofforfeitedvolumeisdependentonthecontributionmargin.SmallCMcanhandlealargeDQdecreaseLargeCMneedsasmallerDQdecreaseEnteranewmarketornewdistributionchannel,changeincompetitiveenvironment,orvariablecostshavebeencreepingupindustrywideandapriceriseisseenaspossible.%DQ≥–%DP

%CMi+%DP

©2012CengageLearning.AllRightsReserved.Maynotbescanned,copiedorduplicated,orpostedtoapubliclyaccessiblewebsite,inwholeorinpart.ProfitSensitivitytowardsPriceCutsManufacturer25%ContributionMargin5%PriceCut25%VolumeGrowthRequiredtoBreakEvenontheDecisionBroker1%ContributionMargin0.1%PriceCut(10bp)11.1%VolumeGrowthRequiredtoBreakEvenontheDecisionRetailer50%ContributionMargin15%PriceCut43%VolumeGrowthRequiredtoBreakEvenontheDecision©2012CengageLearning.AllRightsReserved.Maynotbescanned,copiedorduplicated,orpostedtoapubliclyaccessiblewebsite,inwholeorinpart.ProfitSensitivitytowardsPriceIncreasesManufacturer25%ContributionMargin5%PriceRise14%VolumeLossorLessDecreaseWouldLeavetheFirmMoreProfitableBroker1%ContributionMargin0.1%PriceRise(10bp)9.1%VolumeLossorLessDecreaseWouldLeavetheFirmMoreProfitableRetailer50%ContributionMargin15%PriceRise23%VolumeLossorLessDecreaseWouldLeavetheFirmMoreProfitable©2012CengageLearning.AllRightsReserved.Maynotbescanned,copiedorduplicated,orpostedtoapubliclyaccessiblewebsite,inwholeorinpart.PriceIncreasesandDecreaseshaveNon-SymmetricalEffectsonProfitPriceCutsrequireLargerChangesinVolumethanPriceRisestoleavethefirmequallywelloff.50%ContributionMargin15%PriceRise23%VolumeLossorLessDecreaseWouldLeavetheFirmMoreProfitable50%ContributionMargin15%PriceCut43%VolumeGrowthRequiredtoBreakEvenontheDecision©2012CengageLearning.AllRightsReserved.Maynotbescanned,copiedorduplicated,orpostedtoapubliclyaccessiblewebsite,inwholeorinpart.VolumeHurdleasaFunctionofDPGivena25%CMStickingwiththeconventionofeconomistsofusingvolumeasthehorizontalaxis,wehaveplottedthevolumehurdleforvaryingpricechangesIncreasingProfitsDecreasingProfitsZoneofNotEconomicallyPossibleResultsforNormalGoods©2012CengageLearning.AllRightsReserved.Maynotbescanned,copiedorduplicated,orpostedtoapubliclyaccessiblewebsite,inwholeorinpart.ElasticityofDemandElasticityofDemandistheratiooftheobservedpercentchangeinvolumetoanexecutedpercentchangeinpriceStickingwitheconomicconventions,wehaveusede(pronouncedepsilon)isusedtodenotetheelasticityofdemandwithrespecttopriceNumerically,elasticityofdemandisusuallynegative,implyingatahigherprice,fewerunitsaresoldByconvention,economistsusuallydropthesigninspeakingofpriceelasticity,thusalargepriceelasticityhasalargeabsolutevalueyetisnegative,whilealowelasticityofdemandhasasmallabsolutevalueandisalsonegative.©2012CengageLearning.AllRightsReserved.Maynotbescanned,copiedorduplicated,orpostedtoapubliclyaccessiblewebsite,inwholeorinpart.HighlyElasticMarketsFavorPriceCutsElasticmarketsmeanasmallpricechangeinducesalargevolumechange|e|>1MostbrandsfaceelasticmarketsIncreasingProfitsDecreasingProfitsMarketDemandVolumeHurdle©2012CengageLearning.AllRightsReserved.Maynotbescanned,copiedorduplicated,orpostedtoapubliclyaccessiblewebsite,inwholeorinpart.InelasticMarketsFavorPriceIncreaseInelasticmarketsmeanthatalargepricechangeisrequiredtoinduceanoticeablevolumechange|e|<1ManyindustriesfaceinelasticmarketsIncreasingProfitsDecreasingProfitsMarketDemandVolumeHurdle©2012CengageLearning.AllRightsReserved.Maynotbescanned,copiedorduplicated,orpostedtoapubliclyaccessiblewebsite,inwholeorinpart.RelevantElasticitiesThereisadifferencebetweenstrategicpricechangesandtacticalpricechangesShortterm,lock-inmayenableapricerisetogothroughlockincanformfromthepurchaseofcomplimentaryproducts(autosandsuburbs,orsoftwareandOS)Longrun,marketschangeintheirmakeup.Newentrants,newsubstitutes.(switchtofuelefficientcars,switchtomasstransitandbicycles.)Formanyconsumerproducts,thecategoryleveldemandisinelastic,butthebrandleveldemandiselastic.Implying,thatwhileindustrywidepriceincreaseswouldhelptheprofitabilityofthecategory,individualsuppliersfaceelasticdemandasconsumersdemonstrateawillingnesstoswitchbrands.©2012CengageLearning.AllRightsReserved.Maynotbescanned,copiedorduplicated,orpostedtoapubliclyaccessiblewebsite,inwholeorinpart.MeasuredElasticitiesCategoryBrandChoiceCategoryBacon-1.25-0.32Margarine-2.22-0.12Butter-1.24-0.74IceCream-1.89-0.68PaperTowels-4.00-0.74Sugar-4.03-0.57LiquidDetergents-3.95-1.70Coffee-1.65-1.42SoftDrinks-2.66-0.42BathTissue-3.85-0.80PotatoChips-2.50-0.88DryerSofteners-4.08-1.19Yogurt-1.57-0.35©2012CengageLearning.AllRightsReserved.Maynotbescanned,copiedorduplicated,orpostedtoapubliclyaccessiblewebsite,inwholeorinpart.PriceOptimizationTheaboveanalysisimpliesthatoptimalpricingcanbefound,onewhereinincreaseordecreaseinpriceleadstolessprofitthanotherwisewouldbefound.Assumingaconstantelasticityofdemandoverawiderangeofprice,throughintegralcalculuswefindtheOptimalPriceforelasticmarketsat: Attheoptimalprice,thequantitysoldisWhereQiandPithecurrentdemandandpriceNote…thisisaheroic,andknowntobefalse,assumption,©2012CengageLearning.AllRightsReserved.Maynotbescanned,copiedorduplicated,orpostedtoapubliclyaccessiblewebsite,inwholeorinpart.OptimalPriceMeasureVariableCostV$5FixedCostF$750,000ElasticityofDemande-1.8Demandat$1Qo10,000,000Undertheconditions,findOptimalPriceP*$11.25ContributionMarginCM$6.25ResultantDemandQ128,211ResultantProfitp$51,319©2012CengageLearning.AllRightsReserved.Maynotbescanned,copiedorduplicated,orpostedtoapubliclyaccessiblewebsite,inwholeorinpart.ProfitOptimizationp=Q(P–V)–F©2012CengageLearning.AllRightsReserved.Maynotbescanned,copiedorduplicated,orpostedtoapubliclyaccessiblewebsite,inwholeorinpart.KeyChallengeofPriceOptimization

WhatistherelevantElasticityofDemand?Alwaysa“historic”number,notforwardlookingnumber.Dependentupontheeconomicconditions,competingalternatives,tastesofthemarket,andothermarketfactors,allofwhichareconstantlychanging.Canbeinfluencedbythefirm’sactions:Brandingenableshigherprices,discountingcanresetpriceexpectationslowerloweringt