1. Three main objectives when setting prices:
1. Cost + Profit
Prices must cover costs and generate a profit.  

2. Three main objectives when setting prices:
2. Market Positioning
Develop a marketing mix to influence potential customers overall perception of the organization, brand or product line.
Lexus vs Fiat … Harvard vs UNLV … In-N-Out vs McDonalds

5. Three main objectives when setting prices:
3. Market Share
Percentage of sales within the entire market. Pricing affects the rate at which a product penetrates a market. 
In general, low pricing creates less buyer resistance during the sale process and promotes faster product adoption and growth. 

6. Dodge
Toyota
Ford GM

12. Pricing Strategies
The blend of tradeoffs between the price objectives (cost & profit; market position; market share). 
Common price strategies are:

13. Pricing Strategies Predatory Pricing:
Company prices its product at very low margin, or even at cost in order to gain entry into a new market.
Over time, it increases prices to be more in line with its target brand position. 

14. Pricing Strategies Skimming:
The company prices at a premium to capture the high end segments first (electronics … first adopters). 
As it saturates a buyer segment, it drops prices to appeal to new buyer segments. 

15. Pricing Strategies Bundling:
Offering two or more goods or services together as a package deal. Bundled items are sold at a price lower than the total of their individual selling prices.
Ex: CSN Accounting Textbook with WileyPlus
Ex: auto … by bundling desirable (costly) options (auto-trans) with less desirable but more profitable options (“desert pkg), the overall profitability of the car can be maximized.

16. Pricing Strategies Multi-tier:
The company offers distinct product categories at different price segments to appeal to different buyers. 
Ex: auto industry:
Honda Fit, Civic, Accord
Hyundai Elantra ($17,500) vs Hyundai Equus ($60,000)

18. Pricing Goods for External Sales
The price of a good or service is affected by many factors.
IF - products are not easily differentiated from competitors … price is set by “the market”.
“Generic” items light bulb, batteries, ???
“The Market” dictates my sale price to compete.
BUT – can I make a profit at that price ?

19. Pricing Goods for External Sales
Target Costing
Cost that provides the desired profit … when the market determines a product’s price.
Target Costing … works “backwards”.
Determine selling price and then work backwards
to determine the target cost.

20. Can the company make this new cover for $18.75 ?
FL phones considering a fashion cover for its phones. Research indicates that 200,000 units can be sold if price is $20 max.
If FL makes items, it must invest $1,000,000 in new equipment.
FL requires a 25% profit (return). What is “target cost” per unit.
The desired profit in $$ $1,000,000 x 25% = $250,000
Each unit must result in profit of $250,000 ÷ 200,000 units = $1.25
Market price Desired profit Target cost per unit
$20 $ $18.75 per unit - =
Can the company make this new cover for $18.75 ?

21. Pricing Goods for External Sales
The price of a good or service is affected by many factors.
IF - products are unique or clearly distinguishable from competitors … prices are set by the company.
iPhone, iPad, MacPro, In-N-Out, Coach, Jimmy Choo ???

22. Pricing Goods for External Sales
Cost-Plus Pricing
Requires establishing a cost base and adding a markup to determine a target selling price.

23. Ex: JCo. has a new video “button camera”
Ex: JCo. has a new video “button camera”. It records up to 2 hours of audio-video. Per unit variable cost estimates are:
JCo also has fixed costs per unit at a sales of 10,000 units.

24. Cost-Plus Pricing
JCo must invest in new equipment costing $1,000,000 to make the product. Jco needs to earn a 20% Return On Investment.
Per unit markup = 20% ROI of $1,000, Expected ROI = $200,000 ÷ 10,000 units = $20

25. Limitations of Cost-Plus Pricing
Advantage of cost-plus pricing: Easy to compute.
Disadvantages:
Does not consider demand side:
Will the customer pay the price?
Fixed cost per unit changes with in sales volume:
At lower sales, company must charge higher price to meet desired ROI.

26. Pricing Goods for External Sales
Variable-Cost Pricing
Alternative to “Cost-Plus” pricing approach:
Add a markup to variable costs.
Avoids problem of bad cost info related to fixed-cost-per-unit.
Helpful in pricing special orders or when excess capacity exists.
Major disadvantage is that managers may set the price too low and fail to cover fixed costs.

28. Pricing Services
Time-and-material pricing … an approach to cost-plus pricing in which the company uses two pricing rates:
One for labor used on a job - includes direct labor time AND benefits costs as well as other employee costs.
One for parts (or material) - includes cost of direct materials and a “material loading charge” for related overhead (such as ordering, shipping, receiving, inventorying).
Widely used in the “trades” and service industries, (auto repair) AND professional services like: public accounting, law etc.

29. Pricing Services
Ex: Assume the following data for Lake Holiday Marina, a boat and motor repair shop.

30. Pricing Services calculate the per hour labor charge,
Using time-and-material pricing involves three steps:
calculate the per hour labor charge,
calculate the charge for obtaining and holding materials, and
calculate the charges for a particular job.

31. Pricing Services Step 1: Calculate the labor charge.
Express as a rate per hour of labor … to include:
Direct labor cost (includes fringe benefits).
Selling, administrative, and similar overhead costs.
Allowance for desired profit (ROI) per hour.
Labor rate for Lake Holiday Marina for 2011 based on:
5,000 hours of repair time.
Desired profit margin of $8 per hour.

32. Pricing Services Step 1: Calculate the labor charge.
Multiply the rate of $ x # labor hours used on a job to determine the labor charges for the job.

33. ( ) + Pricing Services Step 2: Calculate the material loading charge.
Material loading charge added to invoice cost of materials.
Covers the costs of purchasing, receiving, handling, storing + desired profit margin on materials. ( )
Estimated purchasing, receiving, handling, storing costs
Desired profit margin % on materials +
Estimated costs of parts & materials

34. Pricing Services Step 2: Calculate the material loading charge.
The marina estimates that the total invoice cost of parts and materials used in 2011 will be $120,000. The marina desires a 20% profit margin on the invoice cost of parts and materials.

35. Pricing Services Labor Charges
Step 3: Calculate charges for a particular job.
Labor Charges
+ Material Charges (often includes material loading charge)
Total Charge to Customer
* Often used as an “estimate” (or a bid) to get a job – such as: building you a new fence, installing sink, car brake job, dental work, new tires – balanced, installed with warranty,

36. Pricing Services Step 3: Calculate charges for a particular job.
Marina prepares a “quote” (estimate) of the cost to refurbish a 28-foot boat. Marina estimates that the job will require 50 hours labor and $3,600 in parts and materials.

37. Below are data for Repair Shop for next year
Below are data for Repair Shop for next year. Desired profit margin per labor hour is $10. Material loading charge is 40% of invoice cost. Shop estimates that 8,000 labor hours will be worked next year. Compute the rate charged per hour of labor.

38. If Harmon repairs a TV that takes 4 hours to repair and uses parts of $50, compute the bill for this job.

40. Multinational Corporations
A multinational corporation (MNC) has facilities and other assets in at least one country other than its home country. Very large MNC’s have budgets that exceed those of many small countries.
Nearly all major multinationals are either American, Japanese or Western European, such as Nike, Coca-Cola, Wal-Mart, AOL, Toshiba, Honda and BMW.
Advocates say … they create high-paying jobs and technologically advanced goods in countries that otherwise would not have access to such opportunities or goods.
Critics say … multinationals have undue political influence over governments, exploit developing nations and create job losses in their own home countries.

41. Largest Multinationals
The largest multinational corporations in the world, as of 2015 revenue, is Wal-Mart ($ billion)
Wal-Mart has operations in 28 countries, including over 11,500 retail stores that employ over 2.3 million people internationally.
Why Multi-National … Operating in a ountry such as India allows a corporation to meet Indian demand for its product without the transaction costs associated with long-distance shipping.
Corporations tend to establish operations in markets where their capital is most efficient or wages are lowest.
By producing the same quality of goods at lower costs, multinationals reduce prices and increase the purchasing power of consumers worldwide.

42. Conglomerate
A conglomerate is a corporation that is made up of a number of different, seemingly unrelated businesses.
In a conglomerate, one company owns a controlling stake in a number of smaller companies, which conduct business separately. Each of a conglomerate's subsidiary businesses runs independently of the other business divisions, but the subsidiaries' management reports to senior management at the parent company.
The largest conglomerates diversify business risk by participating in a number of different markets, although some conglomerates elect to participate in a single industry – for example, mining.

46. Transfer Between Divisions in Different Countries
Companies “globalize” their operations
Going global increases transfers between divisions located in different countries.
60% of trade between countries is estimated to be transfers between divisions.
Different tax rates make determining appropriate transfer price more difficult.

47. Transfer Pricing for Internal Sales
Vertically integrated companies
Grow in either direction of its suppliers or its customers.
Frequently sells (transfers) goods to other divisions as well as outside customers.
How do you price goods “sold” within the company?

48. Transfer Pricing for Internal Sales
Transfer price: price used to record the transfer between two divisions of the same company or corporation.
Ways to determine a transfer price:
Negotiated transfer prices.
Cost-based transfer prices.
Market-based transfer prices.
Conceptually - a negotiated transfer price is best.
Due to practical considerations, companies often use the other two methods.

49. You are marketing manager for “Disney Cruises”
To offer a 7 day vacation package including:
4 - day Disney cruise,
3 - days at Disney-World with a
3 - nights stay in Disney-World hotel
you must:
Negotiate a transfer price (your “cost”) with
????

50. You are marketing manager for “Disney Cruises”
To offer a 7-day vacation package including:
4-day Disney cruise,
3-days at Disney-World with a
3-night stay in Disney-World hotel
you must:
Negotiate a transfer price (your “cost”) with
* Disney Cruises (your own employer)
* Disney “Parks” Division (3-day park-hopper pass)
* Disney “Hotel” Division (3-night hotel stay)
* Plus “others” (busses for transport from ship to hotel)
to offer the vacation package