PricingPricing

The Puzzle of the Next Century

Costs + Margins = PRICE

Pricing PuzzlePricing Puzzle

“ “ A price is not merely a function of costs A price is not merely a function of costs and margins… ”and margins… ”

Costs + Margins = PRICE

Pricing PuzzlePricing Puzzle

“ “ A price is not merely a function of costs A price is not merely a function of costs and margins… ”and margins… ”

“…“…it is an expression of it is an expression of VALUEVALUE ” ”

Pricing PuzzlePricing Puzzle

Production Production costscosts Indirect Indirect costscosts AdvertisingAdvertising costs costs Distribution Distribution costscosts Manufacturer’s Manufacturer’s

marginmargin Distributor’sDistributor’s margin margin Seller’s Seller’s marginmargin

Product performanceProduct performance• Usefulness & QualityUsefulness & Quality

Image / AspirationsImage / Aspirations• Brand EquityBrand Equity

AvailabilityAvailability• Distribution StrategyDistribution Strategy

ServiceService• Before/During & After Before/During & After

salessales

Minimize Optimize Maximize

Costs + Margins = PRICE

VALUE

Pricing PuzzlePricing Puzzle

4 P’s4 P’s PRODUCTPRODUCT PRICEPRICE PLACEPLACE PROMOTIONPROMOTION

4 C’s4 C’s CUSTOMER VALUECUSTOMER VALUE COSTCOST CONVENIENCECONVENIENCE COMMUNICATIONCOMMUNICATION

Pricing PuzzlePricing Puzzle

4 P’s4 P’s PRODUCTPRODUCT PRICEPRICE PLACEPLACE PROMOTIONPROMOTION

4 C’s4 C’s CUSTOMER VALUECUSTOMER VALUE COSTCOST CONVENIENCECONVENIENCE COMMUNICATIONCOMMUNICATION

A Secret PieA Secret Pie

Impact of a 1 % price increase on profitsImpact of a 1 % price increase on profits

– Coca-ColaCoca-Cola 6,4 6,4 %%– NestléNestlé 17,517,5 %%– FordFord 26,026,0 %%– PhilipsPhilips 28,728,7 %%

Pricing PuzzlePricing Puzzle

4 P’s4 P’s PRODUCTPRODUCT PRICEPRICE PLACEPLACE PROMOTIONPROMOTION

4 C’s4 C’s CUSTOMER VALUECUSTOMER VALUE COSTCOST CONVENIENCECONVENIENCE COMMUNICATIONCOMMUNICATION

Seller’s Dilemma

Pricing PuzzlePricing Puzzle

4 P’s4 P’s PRODUCTPRODUCT PRICEPRICE PLACEPLACE PROMOTIONPROMOTION

4 C’s4 C’s CUSTOMER VALUECUSTOMER VALUE COSTCOST CONVENIENCECONVENIENCE COMMUNICATIONCOMMUNICATION

“ Tomorrow’s winner companies willbe those who offer distinct products at

comparatively low market prices ”

Physical DifferencesPhysical Differences– Features, performance, durability, conformance, design, etc…Features, performance, durability, conformance, design, etc…

Availability DifferencesAvailability Differences– Distribution channels ; Stores, mail-order, internet, etc…Distribution channels ; Stores, mail-order, internet, etc…

Service DifferencesService Differences– Delivery, installation, training, consulting, maintenance, etc…Delivery, installation, training, consulting, maintenance, etc…

Price DifferencesPrice Differences– Price positioning (Very high / High / Medium / Low / Very Low)Price positioning (Very high / High / Medium / Low / Very Low)

Image DifferencesImage Differences– Symbols, atmosphere, events, media, etc…Symbols, atmosphere, events, media, etc…

Key = DifferentiationKey = DifferentiationThe key to drive value is to offer relevant and

distinctive product differentiation

Physical DifferencesPhysical Differences– Levi’s Engineered Jeans (Ergonomic construction, durability, style)Levi’s Engineered Jeans (Ergonomic construction, durability, style)

Availability DifferencesAvailability Differences– Dell Computer’s customized production, Volkswagen “e.lupo”Dell Computer’s customized production, Volkswagen “e.lupo”

Service DifferencesService Differences– AcAcıbadem ıbadem Hospital – Mother Care Division, Nissan “5-year Hospital – Mother Care Division, Nissan “5-year

Warranty”Warranty” Image DifferencesImage Differences

– Audi vs Mercedes, DuPont (Innovation Leader)Audi vs Mercedes, DuPont (Innovation Leader)

Differentiation : Examples

Key = DifferentiationKey = Differentiation

Perdue Chicken (USA)Perdue Chicken (USA)– Guaranteed tenderness (30 % market-share, 10 % premium Guaranteed tenderness (30 % market-share, 10 % premium

pricing)pricing) Flora Drinking Water (TurkeyFlora Drinking Water (Turkey –– SabancSabancı Holdingı Holding))

– Service, packaging, attributes, operationService, packaging, attributes, operation Starbuck’s Coffee (USA)Starbuck’s Coffee (USA)

– Atmosphere, standard serviceAtmosphere, standard service

Differentiating commodities…

Key = DifferentiationKey = Differentiation

Everything can be differentiated !...

Pricing DecisionsPricing Decisions INTERNAL FACTORSINTERNAL FACTORS

– Marketing ObjectivesMarketing Objectives» PositioningPositioning» Target GroupTarget Group

– Marketing Mix StrategyMarketing Mix Strategy» 4 P’s4 P’s

– CostsCosts» Fixed & VariableFixed & Variable

– Management Management ApproachApproach» ResponsibilityResponsibility» PerspectivePerspective

EXTERNAL FACTORSEXTERNAL FACTORS– MarketMarket

» Pure CompetitionPure Competition» Monopolistic CompetitionMonopolistic Competition» Oligopolistic CompetitionOligopolistic Competition» Pure MonopolyPure Monopoly

– DemandDemand» Elastic / InelasticElastic / Inelastic

– CompetitionCompetition» Competitors’ offersCompetitors’ offers» Competitiors’ reactionsCompetitiors’ reactions

– EconomyEconomy» Buying powerBuying power

– Government InfluenceGovernment Influence» Laws & RegulationsLaws & Regulations

Pricing ApproachesPricing Approaches Cost-Based PricingCost-Based Pricing

– Cost-Plus PricingCost-Plus Pricing» Product Cost + Standard Mark-Up = PriceProduct Cost + Standard Mark-Up = Price

– BE Analysis & Target Profit PricingBE Analysis & Target Profit Pricing» A necessary survival toolA necessary survival tool

Buyer-Based PricingBuyer-Based Pricing– Perceived ValuePerceived Value

» Consider buyers’ perceptions of value Consider buyers’ perceptions of value NOTNOT the the costcost

Competition-Based PricingCompetition-Based Pricing– Basing prices on competitors’ pricesBasing prices on competitors’ prices

» Premium PricingPremium Pricing» Going-Rate PricingGoing-Rate Pricing» Discount PricingDiscount Pricing

Pricing StrategiesPricing Strategies

PRICING a SINGLE NEW PRODUCTPRICING a SINGLE NEW PRODUCT

– Market-SkimmingMarket-Skimming» Highest possible priceHighest possible price to skim small to skim small but but profitable profitable

segmentssegments

– Penetration PricingPenetration Pricing» Lowest possible priceLowest possible price to penetrate the market quickly to penetrate the market quickly

Pricing StrategiesPricing Strategies PRODUCT-MIX PRICINGPRODUCT-MIX PRICING

– Product-Line PricingProduct-Line Pricing» Establishing product lines at different price pointsEstablishing product lines at different price points

Volkswagen (Polo, Bora, Golf, Passat)Volkswagen (Polo, Bora, Golf, Passat)

– Optional-Product PricingOptional-Product Pricing» Offering to sell optional/accessory products along with the main Offering to sell optional/accessory products along with the main

productproduct BMW & MercedesBMW & Mercedes

– Captive-Product PricingCaptive-Product Pricing» Offering products, which must be used with the main productOffering products, which must be used with the main product

Gillette razor bladesGillette razor blades

– By-Product PricingBy-Product Pricing» Valued by-products positively affect pricingValued by-products positively affect pricing

Petroleum by-productsPetroleum by-products

– Product-Bundle PricingProduct-Bundle Pricing» Several products combined and offered at a reduced priceSeveral products combined and offered at a reduced price

Season tickets, New-year packages of hotelsSeason tickets, New-year packages of hotels

Adjust basic prices to account for various Adjust basic prices to account for various customer differences and changing situationscustomer differences and changing situations

– Discounts & AllowancesDiscounts & Allowances» To attract/reward certain customer responesTo attract/reward certain customer respones

– Discriminatory PricingDiscriminatory Pricing» To allow for differences in customers, products & To allow for differences in customers, products &

locationslocations

– Promotional PricingPromotional Pricing» Varying price reductions offered depending on Varying price reductions offered depending on

shopping period, item purchased, etc...shopping period, item purchased, etc...

Price AdjustmentsPrice Adjustments

Price Adjustment StrategiesPrice Adjustment Strategies

DISCOUNTS & ALLOWANCESDISCOUNTS & ALLOWANCES– Cash DiscountsCash Discounts

» Attract early paymentsAttract early payments A 15% reduction applied to those customers who buy on cashA 15% reduction applied to those customers who buy on cash

– Quantity DiscountsQuantity Discounts» Price reduction to buyers who buy large quantitiesPrice reduction to buyers who buy large quantities

– Functional DiscountsFunctional Discounts» Differentiating prices among trade channel membersDifferentiating prices among trade channel members

Different mark-ups for OLSs and cornersDifferent mark-ups for OLSs and corners

– Seasonal DiscountsSeasonal Discounts» Price reduction to buyers who buy out-of-seasonPrice reduction to buyers who buy out-of-season

– AllowancesAllowances» Trade-in AllowancesTrade-in Allowances

Bring the old, take away the new...Bring the old, take away the new...» Promotional AllowancesPromotional Allowances

Discounts provided in return for participating in special Discounts provided in return for participating in special programsprograms

Price Adjustment StrategiesPrice Adjustment Strategies DISCRIMINATORY PRICINGDISCRIMINATORY PRICING

– Customer-segment PricingCustomer-segment Pricing» Different customers pay different pricesDifferent customers pay different prices

Disneyland Adult vs Child pricingDisneyland Adult vs Child pricing

– Product-form PricingProduct-form Pricing» Different versions of the product are priced differently, Different versions of the product are priced differently,

regardless of the costregardless of the cost An additional feature with a slight cost might justify a fat price An additional feature with a slight cost might justify a fat price

premiumpremium

– Location PricingLocation Pricing» Different locations are priced differently, regardless of the costDifferent locations are priced differently, regardless of the cost

Business Class seatsBusiness Class seats

– Time PricingTime Pricing» Prices differ from month to month, day to day, even hour to Prices differ from month to month, day to day, even hour to

hourhour Prime-time/Off-prime-time pricing of advertising timePrime-time/Off-prime-time pricing of advertising time

Price Adjustment StrategiesPrice Adjustment Strategies

PROMOTIONAL PRICINGPROMOTIONAL PRICING– Loss LeadersLoss Leaders

» Attract consumers in store, sell other items as wellAttract consumers in store, sell other items as well Hyper-Markets (Carrefour, Gima, Praktiker, Migros, etc...)Hyper-Markets (Carrefour, Gima, Praktiker, Migros, etc...)

– Special-event PricingSpecial-event Pricing» Offering discounts at times of special eventsOffering discounts at times of special events

Valentine’s Day, New year, Şişli Municipality’s discount campaignValentine’s Day, New year, Şişli Municipality’s discount campaign

– Cash RebatesCash Rebates» Discounts offered to consumers for purchases made in a Discounts offered to consumers for purchases made in a

limited period of timelimited period of time Dockers campaign (20 % off)Dockers campaign (20 % off)

– Simple Cash DiscountsSimple Cash Discounts» Over-the-counter to support revenues OR to defend against Over-the-counter to support revenues OR to defend against

competitioncompetition

Consumer’s Mind-set (Black-Box)Consumer’s Mind-set (Black-Box)

– BE CAREFUL !!!BE CAREFUL !!!» Price vs Quality ImagePrice vs Quality Image

CK perfumeCK perfume Rolex watchRolex watch Pharmaceutical itemsPharmaceutical items

» PerceptionsPerceptions 30.000.000 TL vs 29.950.000 TL30.000.000 TL vs 29.950.000 TL

Psychology of PricePsychology of Price

One Final WordOne Final Word

“ A product is not a product unless it sells.Otherwise, it’s just a museum piece…”

Ted Levitt