F-05 814 Pricing Strategy
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Transcript of F-05 814 Pricing Strategy
1© 2003 Strategic Pricing Group, Inc.
The Pricing Strategy Pyramid
PriceLevel
Price setting
Pricing Policy
Negotiation Tactics &Pricing Setting Procedures
Value CreationEconomic Value, Offering Design, Segmentation
Value CommunicationCommunication, Value Selling Tools
Price StructureMetrics, Fences, Controls
2© 2003 Strategic Pricing Group, Inc.
Price Setting ProcessPrice Setting Process
Preliminary Segment Pricing
Set baseline prices based on type of value
assessment and initial differential value capture
rate
Key Questions:
How much of the differential value should be captured for each segment?
How much time and effort should I invest in assessing the value of my products?
How should I adjust segment prices to account for different price sensitivities?
Optimization
Refine preliminary prices with iterative process balancing tradeoffs
between price, cost, and market response
Key Questions:
What tradeoffs should I make between long-term strategic objectives and short-term market responses to price changes?
What types of analytical techniques are best suited to my product and market conditions?
How can I estimate customer response to potential price changes?
Implementation
Set final prices and ensure acceptance among
customers and organization through effective change management approach
Key Questions:
What tradeoffs should I make between long-term strategic objectives and short-term market responses to price changes?
What types of analytical techniques are best suited to my product and market conditions?
How can I estimate customer response to potential price changes?
3© 2003 Strategic Pricing Group, Inc.
Economic Value Estimation® FrameworkEconomic Value Estimation® Framework
PositiveDifferentiation
Value
PositiveDifferentiation
Value
Your UniqueValue
Delivery
Competitive Reference
Value
Competitive Reference
Value
Price of Next Best
CompetitiveAlternative
Negative Differentiation
Value
Negative Differentiation
Value
Total Economic
Value
Value Capture
4© 2003 Strategic Pricing Group, Inc.
Sample Differential Value Capture RatesSample Differential Value Capture Rates
Market Differential Value Capture Rate
Enterprise Software 20 - 50%
Heavy Manufacturing 10 - 30%
Process Manufacturing 10 - 20%
Computers 20 - 40%
High Technology 5 - 50%
Professional Services 10 - 40%
Distribution 5 - 20%
Pharmaceuticals 30 - 50%
5© 2003 Strategic Pricing Group, Inc.
Preliminary Price WorksheetPreliminary Price Worksheet
First, start with the value calculated from either the EVE or the WTP assessment.
Second, determine the baseline value capture rate based on similar products in the market to set a starting point for price.
Third, adjust the starting price up or down depending on the relevant price sensitivity factors.
Finally, set the preliminary price by determining determine the percentage of the economic value you will attempt to capture.
This preliminary price will be the starting point for considering strategic factors and conducting breakeven analysis.
YY%Baseline Value Split
Starting Price
Price Sensitivity Factors
Product performance risk
Preliminary Price $ NNN
$ Z Z
+
+ / = / -
Expenditure Effect --
Fairness affect -
Total adjustments (- 10% )
$ XXXEconomic Value
6© 2003 Strategic Pricing Group, Inc.
The Goal of Strategic Pricing: Align Price with Value P
rice
Pai
dP
rice
Pai
d
Missed Opportunities
Price - V
alue
UnharvestedValue
highhigh
lowlow
lowlow mediummedium highhigh
mediummedium
Value ReceivedValue Received
B
A
7© 2003 Strategic Pricing Group, Inc.
Pricing Strategies
• SKIM• SEQUENTIAL SKIM• PENETRATION• NEUTRAL
8© 2003 Strategic Pricing Group, Inc.
Pricing Strategy
SKIM PENETRATION NEUTRAL
COSTS
CUSTOMERS
COMPETITION
9© 2003 Strategic Pricing Group, Inc.
Pricing Strategy
SKIM PENETRATION NEUTRAL
COSTS
CUSTOMERS
COMPETITION
Costs similar to competitors
Sufficient CM to finance adv, etc.
Little excess capacityIncremental capacity is expensive
Customers are more sensitive to other elements of the marketing mix
Avoid threat of retaliation
Large share brands with a lot to lose
Sustainable mktg mix advantages
Oligopolies
High CMsHigh volumesChanges in volume drive profitability
Small BE Sales Changes
Excess capacity
High price sensitivity-Total Expend Effect-Large Part of End-Benefit
Little differentiation
Sustainable cost & resource advantage
Competitors not willing to retaliate
Financial strengthAggressive small share brands
Low CMsLow VolumesChanges in Unit Price Drive Profit
Large BE Sales Changes
At or near capacity
Low Price Sensitivity-Reference Price Effect
-Price Quality Effect-Difficult Comparison Effect
Limited threat of opportunism
Limited opportunity for scale economies
Sustainable differentiation
Low threat brands
10© 2003 Strategic Pricing Group, Inc.
Categorize These Pricing StrategiesCategorize These Pricing Strategies
• How would you categorize the pricing strategies for the following products and retailers? (S=skim, N=neutral, P=penetration)
Pepperidge Farm Cookies _______Almost Home Cookies _______Suave Shampoo _______ARCO Gasoline _______ Land O' Lakes Butter _______T.J. Maxx (Clothing) _______L'Oreal Hair Coloring _______
Bloomingdales _______Sears _______
11© 2003 Strategic Pricing Group, Inc.
Illustrating Setting PriceIllustrating Setting Price
Ajax Manufacturing has developed a new type of seat belt that is easier to install and more comfortable to wear than the seat belts now in use. Standard seat belts sell to automobile manufacturers for $5.00 each. The labor cost to install the belts is $3.00 each. The new belts take 10% less time to install with a resulting labor cost of $2.70 per belt. Marketing research performed by Ajax has determined that car buyers would be willing to pay $50.00 more for a car equipped with the new belts. Since car manufacturers normally earn a 50% mark-up, this equals an added profit of $25.00 per car. The cost to Ajax of the new belt is $10.00 per car and the current strategy calls for a price of $15.00 each. A typical car requires five seat belts.
(a) What is the economic value of the new seat belt to automobile manufacturers?
(b) What type of pricing strategy does Ajax appear to be following? What other options are available?
12© 2003 Strategic Pricing Group, Inc.
Analytical Approaches to Profitability AnalysisAnalytical Approaches to Profitability Analysis
Automated Price Optimization
System
Automated Price Optimization
System
Spreadsheet -based Break -even Analysis
Spreadsheet -based Break -even Analysis
Simulation Modeling / Risk
Analysis
Simulation Modeling / Risk
Analysis
Frequency of Price Changes
Num
ber
ofT
rans
actio
ns
Low
Low
High
High
Automated Price Optimization
System
Automated Price Optimization
System
Spreadsheet -based Break -even Analysis
Spreadsheet -based Break -even Analysis
Simulation Modeling / Risk
Analysis
Simulation Modeling / Risk
Analysis
Frequency of Price Changes
Num
ber
ofT
rans
actio
ns
Low
Low
High
High
Volume ofTransactions
13© 2003 Strategic Pricing Group, Inc.
Analyzing Profitability Using theBreakeven Sales Change ApproachAnalyzing Profitability Using theBreakeven Sales Change Approach
5% 10% 20% 30% 40% 50% 60% 70% 80% 90%
35% -88% -78% -64% -54% -47% -41% -37% -33% -30% -28%
25% -83% -71% -56% -45% -38% -33% -29% -26% -24% -22%
15% -75% -60% -43% -33% -27% -23% -20% -18% -16% -14%
5% -50% -33% -20% -14% -11% -9% -8% -7% -6% -5%
0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%
-5% NA 100% 33% 20% 14% 11% 9% 8% 7% 6%
-15% NA NA 300% 100% 60% 43% 33% 27% 23% 20%
-25% NA NA NA NA 167% 100% 71% 56% 45% 38%
-35% NA NA NA NA 700% 233% 140% 100% 78% 64%
% C
ha
ng
e i
n P
ric
e
Contribution Margin
14© 2003 Strategic Pricing Group, Inc.
Risk Analytic Approach to Profitability AnalysisRisk Analytic Approach to Profitability Analysis
Frequency Comparison
.000
.009
.018
.027
.036
19,000,000.00 21,500,000.00 24,000,000.00 26,500,000.00 29,000,000.00
Premium Branding Strategy
Discount Pricing Strategy
Overlay Chart
Premium Branding Strategy
Discount Pricing Strategy
Comparative Risk Profiles
15© 2003 Strategic Pricing Group, Inc.
Determinants of Price SensitivityDeterminants of Price Sensitivity
1. The Reference Price Effect2. The Difficult Comparison Effect3. The Switching Cost Effect4. The Price-Quality Effect5. The Expenditure Effect6. The End-Benefit Effect7. The Fairness Effect8. The Framing Effect9. The Shared-Cost Effect
16© 2003 Strategic Pricing Group, Inc.
Price Sensitivity IllustrationPrice Sensitivity Illustration
You are considering purchasing a personal computer. What factors would affect your price sensitivity in making that decision? How would those same factors affect the price sensitivity of some personal computer buyers differently?
17© 2003 Strategic Pricing Group, Inc.
Price Sensitivity IllustrationPrice Sensitivity Illustration
For each of the following purchase decisions, what factors are likely to affect the consumer's price sensitivity?
A diamond engagement ring Automobile repairs
Food for meals at home Which university to attend
A company car Draperies for your new home
Text books Health insurance plan
Souvenirs Vacation resort
18© 2003 Strategic Pricing Group, Inc.
Price Sensitivity Discussion QuestionsPrice Sensitivity Discussion Questions
What can a company do to decrease its customer's price sensitivity? Would all of the company's customers be likely to react in the same way?
19© 2003 Strategic Pricing Group, Inc.
Price Sensitivity Discussion QuestionsPrice Sensitivity Discussion Questions
Would a company ever want to do anything to increase its customers' price sensitivity? Why? What steps might it take?
20© 2003 Strategic Pricing Group, Inc.
Price Sensitivity Discussion QuestionsPrice Sensitivity Discussion Questions
Which of the following statements are always true, sometimes true, never true? Why?
(a) Price elasticity is generally the same for all brands in a product category.
(b) Advertising increases price sensitivity.
(c) As a product category matures, the consumers become more price sensitive.
(d) Each consumer has different price sensitivities for different products.
21© 2003 Strategic Pricing Group, Inc.
Price Sensitivity Discussion QuestionsPrice Sensitivity Discussion Questions
The gasoline service stations in Rochester, New York convinced the City Council to ban signs displaying gasoline prices. Why would they want to do this? What effect do you think this law had on gasoline prices? Why?
22© 2003 Strategic Pricing Group, Inc.
Price Sensitivity Discussion QuestionsPrice Sensitivity Discussion Questions
Despite the fact that rental rates for commercial space and labor costs are generally higher in big cities than in small towns, the prices of many products--such as stereo equipment and clothing--are higher in small towns than in large cities. Can you explain this?
23© 2003 Strategic Pricing Group, Inc.
Price Sensitivity Discussion QuestionsPrice Sensitivity Discussion Questions
Many local rental car agencies rent late model cars at substantially lower prices than national companies such as Hertz and Avis. Despite their higher prices, the national companies still retain most of the market. Explain why most renters patronize the national car rental companies despite their higher prices. How have the national companies encouraged this price insensitivity?
(a) If you were a small, local company, what factors would you look for to identify the price-sensitive segment of renters likely to be attracted to your lower price?
(b) If you were a small company trying to become national, how might you overcome the low price sensitivity of customers to induce them to try your cars and evaluate the quality of your service?
24© 2003 Strategic Pricing Group, Inc.
Breakeven Sales Analysis
Unit Sales Gain
Co
ntr
ibu
tio
nD
olla
rs (
$)
0
1mm
Price Sensitivity Factors1. The Fairness Effect
2. The Perceived Risk Effect
3. The Switching Cost Effect
4. The Difficult Comparison Effect
5. The Price-Quality Effect
6. The Expenditure Effect
7. The End-Benefit Effect
8. The Shared-Cost Effect
9. The Reference Effect
10. The Framing Effect
The Elements of the Price Setting ProcessThe Elements of the Price Setting Process
PositiveDifferentiati
on
PositiveDifferentiati
on
Competitive Reference
Competitive Reference
Negative Differentiation
Negative Differentiation
Total Economic
Value
Value Estimation
Frequency Comparison
.000
.009
.018
.027
.036
19,000,000.00 21,500,000.00 24,000,000.00 26,500,000.00 29,000,000.00
Premium Branding Strategy
Discount Pricing Strategy
Overlay Chart
Premium Branding Strategy
Discount Pricing Strategy
Comparative Risk Profiles
Risk Analysis
PriceLevels