LPC’S Pricing Supplements
DEMAND & COST
BASED QUANTITATIVE
PRICING
A Framework for Developing
and Applying a Pricing Strategy
Objectives
Consumers
Broad Pricing Policy
Pricing Strategy
Implementation of
Pricing Strategy
Costs
Government
Channel
Members
Competition
Price Adjustments
Feedback
A Framework for Developing
and Applying a Pricing Strategy
Objectives
Consumers
Broad Pricing Policy
Pricing Strategy
Implementation
NOW LET’S ADVISE SEAN
2/10 NET 30 $100m
Price Adjustments
Feedback
Costs
Government
Channel
Members
Competition
LPC Law of Demand
Demand
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The law of demand states
that consumers usually
purchase more units at a
low price than at a high
price.
When demand is high and
supply low, prices rise.
If supply is high and
demand is low, prices
fall.
$
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Consumers and Price by LPC
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Price elasticity explains consumer reaction to price changes.
It indicates the sensitivity of buyers to price changes in terms of quantities
they will purchase.
Demand may be elastic, inelastic, or unitary.
Unitary demand exists if price changes are exactly offset by changes in
quantity demanded, so total sales revenue remains constant.
Demand Elasticity Is Based on
Availability of substitutes
and the urgency of need.
 Brand loyal consumers do
not want to settle for less
than the most desirable
attributes of a particular
product.
 Price shoppers want the
best deals possible.
 What about SW Airlines?
Elastic Demand

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Occurs if relatively small
changes in price result in large
changes in the quantity
demanded.
Consumers perceive there to be
many substitutes and/or have a
low urgency of need.
With elastic demand, total
revenue goes up when prices
are decreased and goes down
when prices rise.

WHAT IS THE SOUTH WEST
AIRLINES ARC ELASTICITY?
ST. LOUIS - KC
LA - SF
WHAT ARE THEY TRYING TO STIMULATE?
(PRIMARY OR SELECTIVE DEMAND)
WHO IS THEIR PRIMARY COMPETITION?
Inelastic Demand



Occurs if price
changes have little
impact on the quantity
demanded.
Consumers perceive
there are few
substitutes and/or have
a high urgency of need.
With inelastic demand,
total revenue goes up
when prices are raised
and goes down when
prices decline.
Honda Accord Economy Car
= Elastic Demand
Price
Elastic
Demand
$12,000
$10,000
Quantity (Units)
12,000
100,000
Rolls Royce Luxury Car =
Inelastic Demand
Price
$50,000
Inelastic Demand
$40,000
Quantity (Units)
18,000
20,000
NYC Subway Pricing: Elastic Or
Inelastic?
No Monorail
Price increases in
NYC subway
fares:
 Availability of
substitutes?
 Urgency of need?
Bronx to Brooklyn ?
3 hours +
$ $ $ $ $$
Demand-Based Pricing Techniques
Demand-Minus Pricing
*Works backward from
selling price to costs
Price-Discrimination
*Sets two or more prices
to appeal to distinct
market segments
Demand-Based
Pricing
Techniques
Chain-Markup Pricing
*Extends demand-minus
pricing back through the
channel
Modified Break-Even
Analysis
*Combines traditional
break-even analysis with
demand evaluation at
different prices
Cost-Based Pricing
A firm sets prices by computing
merchandise, service, and
overhead costs and then
adding an amount to cover its
profit goal.
 It is easy to derive.
 The price floor is the lowest
acceptable price a firm can
charge and attain profit.
 Goals may be stated in terms
of ROI.
R
O
+Profit goals
(Merchandise,
service, and
overhead
costs)
I
Price
Floor
LPC Cost-Based Pricing Techniques
Traditional BreakEven Analysis
Cost-Plus Pricing
*Pre-determined
profit added to
costs
Markup Pricing
*Calculates
percentage markup
needed to cover
selling costs and
profit
*Determines sales
quantity needed to
break even at a
given price
Cost-Based
Pricing
Techniques
Price-Floor Pricing
*Determines lowest
price at which to offer
additional units for
sale
Target Pricing
*Seeks specified rate
of return at a standard
volume of production
Cost-Plus Pricing
Prices are set by adding a pre-determined
profit to costs. It is the simplest form of
cost-based pricing.
Price =
Total fixed costs + Total variable costs + Projected profit
Units produced
Markup Pricing
A firm sets prices by computing the per-unit costs of producing
(buying) goods and/or services and then determining the
markup percentages needed to cover selling costs and profit. It
is most commonly used by wholesalers and retailers.
Price =
Product cost
(100 – Markup percent)/100
Some firms use a variable markup policy,
whereby separate categories of goods and
services receive different percentage
markups.
Traditional Break-Even Analysis
Break-even =
Total fixed costs
point (units)
Price - Variable costs (per unit)
Break-even point
(sales dollars)
=
Total fixed costs
Price - Variable costs (per unit)
Price
These formulas are derived from the equation: Price X Quantity =
Total fixed costs + (Variable costs per unit X Quantity)
Break-Even Analysis Can Be Adjusted to Take
into Account the Profit Sought
Break-even = Total fixed costs + Projected
point (units)
Profit
Price - Variable costs (per unit)
Break-even
Total fixed costs + Projected Profit
point
=
(sales dollars) Price - Variable costs (per unit)
Price
Chain-Markup Pricing
Chain-markup
pricing
extends demand-minus
calculations all the way from
resellers back to suppliers. Final
selling price is determined and
the maximum acceptable costs
to each channel member are
computed.
NOW LETS PRI CE
INTERNATIONALLY
WE
WILL ALSO PRICE A
BUSINESS IN PAGEDALE
THAT MANUFACTURES
FILM PRODUCING
EQUIPMENT FOR MAJOR
MOVIE STUDIOS