Cost and Economics in Pricing Strategy

Week 1 Slides
These materials are for your personal use while participating in this course. Please do not share or distribute them.

Week 1: Pricing
Fundamentals

Three Pricing Lenses

Developed by Ron Wilcox, Darden School of Business and Jean-Manuel Izaret and Thomas Kohler, Boston Consulting Group,
for the University of Virginias Darden School of Business Coursera Pricing Strategy for Profit Maximization Specialization 1
Cost and Economics in Pricing Strategy
Week 1 Slides
These materials are for your personal use while participating in this course. Please do not share or distribute them.

Three lenses of pricing

Economics Cost

Margin

Supply/demand

Incentives

Three lenses of pricing

Value Customers
Willingness
to pay
Customer
segments
Purchase
decisions

Developed by Ron Wilcox, Darden School of Business and Jean-Manuel Izaret and Thomas Kohler, Boston Consulting Group,
for the University of Virginias Darden School of Business Coursera Pricing Strategy for Profit Maximization Specialization 2
Cost and Economics in Pricing Strategy
Week 1 Slides
These materials are for your personal use while participating in this course. Please do not share or distribute them.

Three lenses of pricing

Next best
alternative

Market prices

Market share Competitors

Industry
dynamics

Three lenses of pricing

Economics Customers

Competitors

Developed by Ron Wilcox, Darden School of Business and Jean-Manuel Izaret and Thomas Kohler, Boston Consulting Group,
for the University of Virginias Darden School of Business Coursera Pricing Strategy for Profit Maximization Specialization 3
Cost and Economics in Pricing Strategy
Week 1 Slides
These materials are for your personal use while participating in this course. Please do not share or distribute them.

Three lenses of pricing

Economics Customers
Price
elasticity

Competitors

Three lenses of pricing

Economics Customers

Price
discrimination

Competitors

Developed by Ron Wilcox, Darden School of Business and Jean-Manuel Izaret and Thomas Kohler, Boston Consulting Group,
for the University of Virginias Darden School of Business Coursera Pricing Strategy for Profit Maximization Specialization 4
Cost and Economics in Pricing Strategy
Week 1 Slides
These materials are for your personal use while participating in this course. Please do not share or distribute them.

Three lenses of pricing

Economics Customers

Game
Theory

Competitors

Three lenses of pricing

Economics
Course #1 Price
elasticity
Cost

Game
Theory

Developed by Ron Wilcox, Darden School of Business and Jean-Manuel Izaret and Thomas Kohler, Boston Consulting Group,
for the University of Virginias Darden School of Business Coursera Pricing Strategy for Profit Maximization Specialization 5
Cost and Economics in Pricing Strategy
Week 1 Slides
These materials are for your personal use while participating in this course. Please do not share or distribute them.

Three lenses of pricing

Customers
Course #2
Value

Game Price
Theory discrimination

Three lenses of pricing

Game
Theory

Market
Competitors
Course #3
Prices

Developed by Ron Wilcox, Darden School of Business and Jean-Manuel Izaret and Thomas Kohler, Boston Consulting Group,
for the University of Virginias Darden School of Business Coursera Pricing Strategy for Profit Maximization Specialization 6
Cost and Economics in Pricing Strategy
Week 1 Slides
These materials are for your personal use while participating in this course. Please do not share or distribute them.

Three lenses of pricing

Pricing strategy
optimization
Economics Customers
Course # 4 explains
how these lenses
intersect and work
together to determine
an optimal pricing
Competitors strategy

Module Introduction

Developed by Ron Wilcox, Darden School of Business and Jean-Manuel Izaret and Thomas Kohler, Boston Consulting Group,
for the University of Virginias Darden School of Business Coursera Pricing Strategy for Profit Maximization Specialization 7
Cost and Economics in Pricing Strategy
Week 1 Slides
These materials are for your personal use while participating in this course. Please do not share or distribute them.

Pricing Fundamentals
Margins
Basic economic concepts
Cost, cost variations, supply
curves
Basic pricing mechanisms
Fixed and types of discounting
Auctions: English, Dutch, Sealed
Bid & B2B

By the end of this module

youll be able to
Calculate mark-ups and
margins
Use basic economic concepts in
pricing
Describe how and when
different types of discounts are
used
Recognize fixed price and
auction type markets and the
advantages/disadvantages of
each

Developed by Ron Wilcox, Darden School of Business and Jean-Manuel Izaret and Thomas Kohler, Boston Consulting Group,
for the University of Virginias Darden School of Business Coursera Pricing Strategy for Profit Maximization Specialization 8
Cost and Economics in Pricing Strategy
Week 1 Slides
These materials are for your personal use while participating in this course. Please do not share or distribute them.

Calculating Margins and

Markups

Margins Occur Across Distribution Channels

Manufacturer Distributor Wholesaler Retailer Customer

Developed by Ron Wilcox, Darden School of Business and Jean-Manuel Izaret and Thomas Kohler, Boston Consulting Group,
for the University of Virginias Darden School of Business Coursera Pricing Strategy for Profit Maximization Specialization 9
Cost and Economics in Pricing Strategy
Week 1 Slides
These materials are for your personal use while participating in this course. Please do not share or distribute them.

Calculating Margins

Margin = Selling Price - Cost to Produce

Calculating Margins
Margin = Selling Price - Cost to Produce

Selling Price (100%)

Expressed as a percentage Cost (%)
= Margin (%)

Developed by Ron Wilcox, Darden School of Business and Jean-Manuel Izaret and Thomas Kohler, Boston Consulting Group,
for the University of Virginias Darden School of Business Coursera Pricing Strategy for Profit Maximization Specialization 10
Cost and Economics in Pricing Strategy
Week 1 Slides
These materials are for your personal use while participating in this course. Please do not share or distribute them.

Calculating Margins Example

Imagine your selling price is $100.00 and your cost
to produce is $75.00. Whats your margin?

Variations on the Cost/Price Relationship

Margin % = (Selling Price Cost) / Selling Price
Selling Price = Cost / (1 - % Margin)

Developed by Ron Wilcox, Darden School of Business and Jean-Manuel Izaret and Thomas Kohler, Boston Consulting Group,
for the University of Virginias Darden School of Business Coursera Pricing Strategy for Profit Maximization Specialization 11
Cost and Economics in Pricing Strategy
Week 1 Slides
These materials are for your personal use while participating in this course. Please do not share or distribute them.

Markups vs. Margins

When expressed in currency, they are exactly the same.
If percentages or decimals are used, a 20% markup (on
cost) is different than a 20% margin (on price).

Calculating Markups
Markup % = (Selling Price Cost) / Cost
Selling Price = Cost * (1 + Markup %)

Developed by Ron Wilcox, Darden School of Business and Jean-Manuel Izaret and Thomas Kohler, Boston Consulting Group,
for the University of Virginias Darden School of Business Coursera Pricing Strategy for Profit Maximization Specialization 12
Cost and Economics in Pricing Strategy
Week 1 Slides
These materials are for your personal use while participating in this course. Please do not share or distribute them.

Calculating Markups vs. Margins Example

Basic Metrics of Pricing:

Margins and Markups

Developed by Ron Wilcox, Darden School of Business and Jean-Manuel Izaret and Thomas Kohler, Boston Consulting Group,
for the University of Virginias Darden School of Business Coursera Pricing Strategy for Profit Maximization Specialization 13
Cost and Economics in Pricing Strategy
Week 1 Slides
These materials are for your personal use while participating in this course. Please do not share or distribute them.

Basic Pricing Mechanisms:

Auctions

Auctions and Bidding: A Primer

Explore the origins and key characteristics of the
five major auction types
Look at when and how auctions are used in many
different business settings.

Developed by Ron Wilcox, Darden School of Business and Jean-Manuel Izaret and Thomas Kohler, Boston Consulting Group,
for the University of Virginias Darden School of Business Coursera Pricing Strategy for Profit Maximization Specialization 14
Cost and Economics in Pricing Strategy
Week 1 Slides
These materials are for your personal use while participating in this course. Please do not share or distribute them.

Lets Start By Giving Away Money!

One More Time!

Developed by Ron Wilcox, Darden School of Business and Jean-Manuel Izaret and Thomas Kohler, Boston Consulting Group,
for the University of Virginias Darden School of Business Coursera Pricing Strategy for Profit Maximization Specialization 15
Cost and Economics in Pricing Strategy
Week 1 Slides
These materials are for your personal use while participating in this course. Please do not share or distribute them.

English Auctions

English Auctions
In English auctions (open
auctions), bidders publicly
announce their successive
higher bids until no higher
bid is forthcoming
Minimum bid: The price at
which an auction begins
Reserve price: Minimum
acceptable price

Developed by Ron Wilcox, Darden School of Business and Jean-Manuel Izaret and Thomas Kohler, Boston Consulting Group,
for the University of Virginias Darden School of Business Coursera Pricing Strategy for Profit Maximization Specialization 16
Cost and Economics in Pricing Strategy
Week 1 Slides
These materials are for your personal use while participating in this course. Please do not share or distribute them.

English Auctions: Advantages

For sellers
Buyers become emotionally
caught up in the moment and
make really high bids!!
For buyers
If the above does not occur the
winning bidder pays less than
their private valuation.

English Auctions: Disadvantages

For sellers
Winning bidders tend not to bid
their full private valuations
For buyers
The risk of getting caught up
emotionally in the excitement
of competitive bidding

Developed by Ron Wilcox, Darden School of Business and Jean-Manuel Izaret and Thomas Kohler, Boston Consulting Group,
for the University of Virginias Darden School of Business Coursera Pricing Strategy for Profit Maximization Specialization 17
Cost and Economics in Pricing Strategy
Week 1 Slides
These materials are for your personal use while participating in this course. Please do not share or distribute them.

The Winners Curse

The winner most likely
overvalued the item.
No one else would buy at that
price.
Applicable to prospecting, buying
companies, signing free agents,
investing in artwork, etc.
Emotions are extremely
important!

Dutch Auctions

Developed by Ron Wilcox, Darden School of Business and Jean-Manuel Izaret and Thomas Kohler, Boston Consulting Group,
for the University of Virginias Darden School of Business Coursera Pricing Strategy for Profit Maximization Specialization 18
Cost and Economics in Pricing Strategy
Week 1 Slides
These materials are for your personal use while participating in this course. Please do not share or distribute them.

Dutch Auctions
AKA descending-price auctions
Bidding starts at a high price
and drops until a bidder accepts
the price
Often better for the seller if
buyers are risk averse to losing
Fast!

Dutch Auctions: Origins

Developed by Ron Wilcox, Darden School of Business and Jean-Manuel Izaret and Thomas Kohler, Boston Consulting Group,
for the University of Virginias Darden School of Business Coursera Pricing Strategy for Profit Maximization Specialization 19
Cost and Economics in Pricing Strategy
Week 1 Slides
These materials are for your personal use while participating in this course. Please do not share or distribute them.

Dutch Auctions: Today

53

Dutch Auctions:
They Happen Everywhere

Developed by Ron Wilcox, Darden School of Business and Jean-Manuel Izaret and Thomas Kohler, Boston Consulting Group,
for the University of Virginias Darden School of Business Coursera Pricing Strategy for Profit Maximization Specialization 20
Cost and Economics in Pricing Strategy
Week 1 Slides
These materials are for your personal use while participating in this course. Please do not share or distribute them.

Dutch Auctions
Predictable over-time price
discounts
Clothing
Cars
Consumer electronics

Sealed Bid Auctions

Developed by Ron Wilcox, Darden School of Business and Jean-Manuel Izaret and Thomas Kohler, Boston Consulting Group,
for the University of Virginias Darden School of Business Coursera Pricing Strategy for Profit Maximization Specialization 21
Cost and Economics in Pricing Strategy
Week 1 Slides
These materials are for your personal use while participating in this course. Please do not share or distribute them.

Sealed-bid Auctions
Bidders submit their bids
independently and are not privy to
other bid values
First-price sealed-bid auction
Highest bidder wins
Second-price sealed-bid auction
AKA Vickrey auctions
Highest bidder wins at the price bid by the
second-highest bidder

First Price Sealed Bid

$4.00

$3.00
$3.20

$2.00 Actual Value

Bid First

$1.00

$0.00
Bob Raj Sally Nora

Developed by Ron Wilcox, Darden School of Business and Jean-Manuel Izaret and Thomas Kohler, Boston Consulting Group,
for the University of Virginias Darden School of Business Coursera Pricing Strategy for Profit Maximization Specialization 22
Cost and Economics in Pricing Strategy
Week 1 Slides
These materials are for your personal use while participating in this course. Please do not share or distribute them.

Second Price Sealed Bid

$4.00

$3.00
$3.00

$2.00 Actual Value

Bid Second

$1.00

$0.00
Bob Raj Sally Nora

First Price Sealed Bid

$3.00

$2.00 $2.08
Actual Value
Bid First
$1.00

$0.00
Bob Raj Sally Nora

Developed by Ron Wilcox, Darden School of Business and Jean-Manuel Izaret and Thomas Kohler, Boston Consulting Group,
for the University of Virginias Darden School of Business Coursera Pricing Strategy for Profit Maximization Specialization 23
Cost and Economics in Pricing Strategy
Week 1 Slides
These materials are for your personal use while participating in this course. Please do not share or distribute them.

Second Price Sealed Bid

$2.60

$2.45 $2.50
Actual Value
Second Bid
$2.30

$2.15
Bob Raj Sally Nora

First Price Versus Second Price

First price
Works well when there is a lot
of variance in private values
Second price
Gets buyers to bid their actual
valuation, instead of shading
their bid downward
Works well when there is less
variance

Developed by Ron Wilcox, Darden School of Business and Jean-Manuel Izaret and Thomas Kohler, Boston Consulting Group,
for the University of Virginias Darden School of Business Coursera Pricing Strategy for Profit Maximization Specialization 24
Cost and Economics in Pricing Strategy
Week 1 Slides
These materials are for your personal use while participating in this course. Please do not share or distribute them.

Second Price Auction

is Optimal!

Business-to-Business Auctions

Developed by Ron Wilcox, Darden School of Business and Jean-Manuel Izaret and Thomas Kohler, Boston Consulting Group,
for the University of Virginias Darden School of Business Coursera Pricing Strategy for Profit Maximization Specialization 25
Cost and Economics in Pricing Strategy
Week 1 Slides
These materials are for your personal use while participating in this course. Please do not share or distribute them.

B2B Reverse Auctions

Used by many businesses and governmental
organizations
Reduces costs for the supply a particular product (i.e.
stamped metal)
Requires careful specification of a supply contract and
suppliers who are willing to bid for that contract
Used for items that are more-or-less commoditiesor that
have easily specified engineering characteristics

B2B Reverse Auctions

Users Make Provide the

(Sellers) an offer service or
goods

Reverse
Auctions
Factory

Auctioneer Chooses Rates the seller

(Buyer) a seller according to
service level

Developed by Ron Wilcox, Darden School of Business and Jean-Manuel Izaret and Thomas Kohler, Boston Consulting Group,
for the University of Virginias Darden School of Business Coursera Pricing Strategy for Profit Maximization Specialization 26
Cost and Economics in Pricing Strategy
Week 1 Slides
These materials are for your personal use while participating in this course. Please do not share or distribute them.

B2B Reverse Auctions

$800.00
$800,000.00

$600.00
$600,000.00

$400.00
$400,000.00

$200.00
$200,000.00

$0.00
$0.00
10:00 AM 10:36 AM 11:12 AM

CUSTOMER: Clinical Center CUSTOMER: Food & Drug Administration

COMMODITY: Paper Towels & Toilet Tissue COMMODITY: Copier Paper
DATE: December 14 DATE: September 2
GOVERNMENT COST EST: $1,980,399.00 GOVERNMENT COST EST: $1,297,302.00
COST SAVING% ACHIEVED: 25% COST SAVING% ACHIEVED: 16.70%
DECREMENT USED: $500.00 DECREMENT USED: $500.00
ACTUAL COST SAVINGS: $495,099.75 ACTUAL COST SAVINGS: $216,649.43
ENABLER COST: $2,500.00 ENABLER COST: $10,000.00
ENABLER: CIS Global ENABLER: CIS Global

Developed by Ron Wilcox, Darden School of Business and Jean-Manuel Izaret and Thomas Kohler, Boston Consulting Group,
for the University of Virginias Darden School of Business Coursera Pricing Strategy for Profit Maximization Specialization 27
Cost and Economics in Pricing Strategy
Week 1 Slides
These materials are for your personal use while participating in this course. Please do not share or distribute them.

Disadvantages of B2B Reverse Auctions

Focus on price can destroy trust in the supply
relationship
Supplier customer service may be sacrificed to
achieve cost savings
Can drive suppliers margins so low that it
threatens future supply

Module Takeaways

Developed by Ron Wilcox, Darden School of Business and Jean-Manuel Izaret and Thomas Kohler, Boston Consulting Group,
for the University of Virginias Darden School of Business Coursera Pricing Strategy for Profit Maximization Specialization 28
Cost and Economics in Pricing Strategy
Week 1 Slides
These materials are for your personal use while participating in this course. Please do not share or distribute them.

Pricing Fundamentals
Margins
Basic economic concepts
Cost, cost variations, supply
curves
Basic pricing mechanisms
Fixed and types of discounting
Auctions: English, Dutch, Sealed
Bid & B2B

By the end of this module

youll be able to
Calculate mark-ups and
margins
Use basic economic concepts in
pricing
Describe how and when
different types of discounts are
used
Recognize fixed price and
auction type markets and the
advantages/disadvantages of
each

Developed by Ron Wilcox, Darden School of Business and Jean-Manuel Izaret and Thomas Kohler, Boston Consulting Group,
for the University of Virginias Darden School of Business Coursera Pricing Strategy for Profit Maximization Specialization 29