Pricing

What’s it all about?

Techniques for determining the price we should charge for our products/services.

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Worked Examples.

 

 

Take a look at these two. Do them, then turn your computer upside down to see if you got the right answer.

Download the PDF file .

Watch this.

(Remember, videos like these that are produced to cover whole topics may include material that isn’t relevant to your own exam at your institution. don’t get hung up on it).

Useful introduction to the major topics in pricing, a good overview.

 

Further Reading

Deliberately confusing pricing?

There are often complaints about supermarkets and what appears to be a deliberate policy of confusing customers so that they can charge more: http://www.bbc.co.uk/news/business-33541412

We don’t like businesses that use misleading pricing either… http://www.lasvegasnow.com/news/8-on-your-side-99-cents-only-store-pricing-policy

How they get more money out of us by playing with our minds!

http://money.aol.co.uk/2015/10/13/pricing-tricks-that-make-you-spend-more/

Price elasticity and inelasticity?

Interesting to think whether tickets for football matches are actually price inelastic. Theoretically avid football fans will continue to pay more to see their beloved football team. At least that’s what the owners of Liverpool FC thought.

Fan resistance to a £77 ticket perhaps indicated a maximum ticket price that people were prepared to pay. Mind you, I am sure the owners would have found people to buy tickets at that price for some matches.

Football tickets might be inelastic to a certain extent because of the non-existence of alternatives. Theoretically a Liverpool fan could go and see another team’s game at another ground, the alternatives do actually exist. But that’s not the way customers always work.

I am a season ticket holder at Dover Athletic FC, a 130 mile round trip for a home game for me driving past five other teams I could go and see instead. No thanks. There may be an upper limit to what I am prepared to pay, but there isn’t an alternative.

http://www.independent.co.uk/voices/the-business-model-that-would-give-football-clubs-back-to-their-fans-a6867911.html

Setting minimum prices.

Ensuring that you get a good return by agreeing minimum prices with your competitors may sound like a good idea, but it is illegal. An example of a current investigation into a cartel.

Agencies face allegations of collusion to fix the prices they charge for models to major high street retailers and brands.

http://www.independent.co.uk/news/uk/crime/leading-model-agencies-raided-over-allegations-they-work-as-a-secret-pricefixing-cartel-10458260.html

‘Surge Pricing’

An analysis of surge pricing as used by Uber cabs. A system when prices go up s demand increases – we are used to that idea – but here on an hour by hour basis.

It has critics who accuse uber of profiteering, but its advocates say that the increased fares bring out more taxis to meet the demand.

http://www.valuewalk.com/2015/09/uber-surge-pricing/?utm_source=mailchimp&utm_medium=email&utm_campaign=EMAIL_DAILY&utm_content=quick_link

Dynamic Pricing – not quite the same as surge pricing as it doesn’t increase availability of the resource.

 

Dynamic pricing, the concept of using technology to enable you to charge more when there is greater demand, is catching on.

It reflects the supply/demand relationship that we are aware of and applies it to changes in the much shorter term than would otherwise be possible.

An example using parking meters which will generate more revenue and reduce city centre congestion in the US.

“At $1.25 an hour, our meters are 3 to 5 times cheaper than other cities’,” Walsh said in prepared remarks. “In busy areas, they increase congestion by creating an incentive to circle the block. So we’re going to study a plan that could give select parking meters flexible rates, based on demand.”

http://www.wbur.org/2015/09/24/walsh-parking-meter-fees-boston

Interesting graphics showing the impact on consumers of changes in prices. It’s not the straight line relationship we so often talk about and calculate in class.

http://www.ritholtz.com/blog/2015/12/science-of-pricing/

pricing graphic

How putting up prices doesn’t always lead to more profit – real world example.

Ebooks don’t have a physical cost, so will the price/demand curve happen in the same way. It seems not.

“Selling a physical book comes with marginal costs per sale: there’s the cost of printing and distributing that last book that you’ve just sold. Thus one cannot adopt a pricing policy which aims to maximise gross revenue: to do so would lead to less profit than adopting one where the marginal book sold covered its marginal cost.

With an e-book the pricing policy should, to maximise profit, be to maximise that gross revenue received. For there’s only one set of fixed costs (getting the book written, proofed and uploaded, marketed, assuming that the writer is only ever on a profit share or royalty) and any revenue gained at all from the sale of that last marginal sale is an addition to profit.”

But what actually happens?

http://www.theregister.co.uk/2015/09/09/e_books_sales_fall_harpercollins_news_corp/

Setting prices for your work.

Many companies charge a rate per hour, particularly for professional services. An alternative is to use Value Pricing. Here’s why and how.

http://www.accountingweb.com/practice/clients/what-to-consider-before-taking-the-value-pricing-plunge

Marginal Pricing.

http://www.progress.org/article/marginal-cost-pricing

Value Based Pricing 

Pricing your product or service on the basis of what it is worth to a customer, that is what value they see in that product or service.

http://study.com/academy/lesson/value-based-pricing-definition-strategies-example.html

How they manipulate us and prices.

https://www.theguardian.com/business/2016/apr/27/asda-pricing-tactics-singled-out-by-watchdog-which

Price Wars.

https://hbr.org/2000/03/how-to-fight-a-price-war

Possible Written Questions.

(No indication of marks – the more marks a question gets, the more you are expected to write – detail that is, not just words!) If you can’t answer these, you need to do some more reading. I do ‘find’ questions elsewhere, so these aren’t all questions I have used myself.

Distinguish between products which are Price Elastic and Price Inelastic. Give three examples of each.

Using examples, explain the terms price skimming and penetration pricing.

Comment on the weaknesses in using the Optimum Selling Price/Quantity method for determining selling prices.