Price It Right with Dmitry Shesterin

Price It Rightwith

Dmitry Shesterin

© 2013 Dmitry Shesterin. All Rights Reserved. 2

IntroPragmatic: Management Consultant Startup Advisor for Seed & Round A VP, Product Management VP, Marketing Large Capital Project Sales Manager

Academic Executive MBA BA, Intercultural Communications

Likes Theory of pricing Being a geek


What Is Your Price To:

Key Term: Willingness To Pay (WTP)

Definition: WTP is the maximum amount a person is willing to part with to get whatever you offer.

Ideal Setup*: Your Price = Individual WTP of every customer.*Impossible as each customer has unique WTP.

You:The amount of money you

HAVE to runyour business on

Your Customer:The amount of moneyat which she VALUES

whatever you offer


Why Bother?• You are missing 25-50% of gross revenues if you do not

know approximate WTP levels of your customers

-Quantity-

-Pri

ce-

0

P1

Q1

P2

Demand

WTP – Customer 1

WTP – Customer 2

Consumer surplus,or value you create.

Your extra profits. This is why you bother.

Minimal sales to cover costs with no profit.


Initial Price SettingMost Popular - Copy Competition• Easy and quick.• You are copying someone else’s homework on someone else’s

assignment.• If your product is different enough, do your own homework.

Cost-Based Pricing• If it cost me $1 to produce one widget and am fine with 10% margin on

top of it, I will sell at $1.10.• Your costs might increase without your ability to raise prices.• In software business by the time you have shipping code all costs are

sunk and effectively $0.

Least Popular and Most Effective - Determine Perceived Value• Identify key customer segments with differences in value perception• Although it is the most difficult to create, it yields the most profitable

results in the long run.


Pricing ObjectivesWhen Lowering Prices:• Market penetration• Deter new entrants• Force exit of weaker competitors• Increase top line revenues (with elastic demand)• Long term margin increase (with elastic demand)

When Raising Prices:• Short term margin increase• Long term margin increase• Increase top line revenues

• Note: Different customer segments can be priced uniquely to achieve different objectives.


Low Price MythNOT your competitive advantage!

• It only means you are WILLING to accept lower profit margins

• Sustainable for as long as your cost structure can afford it• Leaves profits on the table• Indicates poor revenue and value management• Compensates with efficient value chain for poor pricing

• Your true competitive advantage is the efficient internal value creation chain and superior cost structure that afford you the ability to sustain lower prices. This advantage can be lost quickly to a better organized player.

• The end result of a price-based competition is a price of 0$. Do you still want to play this game?


Pareto Proportion – 20/80

Close to 20% of your customers generate close to 80% of your revenues

• Do you know who those 20% are?

• What is important to these 20%?

• What are the Value Creating factors for these 20%?

• Invest in identifying the consistently paying 20% of your customer base

Customers Revenues


Price Discrimination• Price Discrimination is good for your business.• Allows you to set prices closer to customers’ WTP

• Examples of Price Discrimination:• Customer segment, or vertical market pricing

(You charge a library X$, and a bank Y$)• Volume (You charge X$ each for one widget, but Y$ each

for an order of 100) • Bundles• Coupons


Love / Hate Those Bundles• Bundles are often more difficult to:• Communicate to customers and own sales and partners

• Integrate with internal processes and practices

Create bundles only if individual bundle components yield greater additional value than when sold separately

• To create bundles, first survey customers who already own potential bundle elements

• Beware of unnecessary discounting and potential revenue cannibalization


Making Price Changes• Avoid sticker shock• Have perception tests internally and externally• Keep an eye on competition - price adjustments are signals (expect

retaliation when lowering, following increase if you raise prices)• Give plenty of notice• Allow for a significant grace period (2-3 average sales cycles length) to

conduct business with old prices• Notify partners first, then announce to customers, then to prospect

• Put Your Marketing Communication in High Gear• Communicate extra value created• Add new and spell out all value creating elements, some might not be

apparent• Add guarantees if possible


Price Control Policy• Limited Discounting is Healthy

• Create and Enforce a Price Control Policy• Provides price level validation• Indicates price fluctuations in the marketplace• Allows to track own price performance• Provides data for determination of own price elasticity• Allows for more precise customer segmentation


Price Control Policy Setup• Institute Discounting Responsibility Waterfall Framework• Account Managers - 10%• Sales Management - 20%• Executive Sales Management – 40%• Executive Management – 50%

• Setup Dedicated Reporting Structure• Determine discounting “champions”• Integrate with training and performance management frameworks• Identify and handle valid and invalid sales objections• Isolate individual price leakage components• Separate out partner margins and commissions for clarity


When To Review Pricing• Continuously• Make it a habit• Integrate with your operations

• Performance – based• Sales are falling• Sales are growing, but average order size is shrinking• Your cost structure changes• High discounting rate (over 25% of deals are discounted)

• Event - based• Launch a new product• Retire a product• Change in your GTM strategy• You competition changes prices


If You Lower Your Prices• Competition will retaliate

• Determine the degree of retaliation

• Analyze and predict possible outcomes

• Design strategies to counter competitive retaliation

• Asses financial stability of competitors


Price Change Rollout• DOs:• Allow for 60 to 120 days for new prices to propagate• Provide business partners with advance notice• Respect opportunities in progress• Prepare and update all internal tools• Design communication and marketing plans

• DON’Ts:• Don’t change prices multiple times a year.

Keep disruptive changes to a minimum. • Don’t increase complexity unnecessarily.

If you can simplify and reduce SKUs, do it.


Close The Loop

Price monitoring and adjustments represent a continuous business practice, not one-off events

ValueIdentification

CompetitiveResearch

AuthorityWaterfall

DiscountingReports

CostStructure

CustomerSegmentation

Price


Useful Pricing Terms - I• List Price or Price

A method to capture value you create. Usually price on your invoices, or MSRP communicated to partners.

• Price LeakageNecessary evil reality of business. Various discounts that reduce your list price represent Price Leakage.

• Pocket PriceFinally achieved price net of all possible discounts. Still does not include commissions or any marginal variable costs.

• Pricing WaterfallA representation of step-by-step price decrease with application of all possible deductions such as loyalty discounts, promotional offers, early payment bonuses et cetera.

• Price RealizationPractice of decreasing price leakage and increasing pocket price.

• Effective Price ManagementComprehensive framework that continuously reduces price leakage and increases the pocket price through price realization.


Useful Pricing Terms - II• Willingness To Pay

WTP is the maximum amount a person is willing to part with to get whatever you offer.

• Consumer SurplusAny gain obtained by consumers when getting a product for a price that is less than their WTP.

• Producer SurplusThe amount that producers benefit by selling at a price that is higher than the least that they would be willing to sell for.

• Price Elasticity of DemandA measure used to show the responsiveness, or elasticity, of the quantity demanded of a good or service to a change in its price. Elasticities greater than one are called "elastic," elasticities less than one are "inelastic," and elasticities equal to one are "unit elastic."

• Elastic or Inelastic DemandWhen demand is elastic (<1), you can generally lower prices and increase your total revenue. When demand is inelastic (>1), you can generally increase prices to increase your total revenues.

• Cross Price Elasticity of DemandA measure of the percentage change in demand for a particular good caused by a percent change in the price of another good.Goods can be complements, substitutes or unrelated.


Further Reading• Dilbert

• Implementing Value Pricing: A Radical Business Model for Professional Firms

• Managerial Economics

• Neuromarketing: Understanding the Buy Buttons in Your Customer's Brain

• Pricing and Profitability Management: A Practical Guide for Business Leaders

• Pricing and Revenue Optimization

• Pricing Segmentation and Analytics

• Professional Pricing Society

• Professional Pricing Society on LinkedIn

• Recession Storming: Thriving In Downturns Through Superior Marketing, Pricing And Product Strategies

• Smart Pricing: How Google, Priceline, and Leading Businesses Use Pricing Innovation for Profitability

• The 1% Windfall: How Successful Companies Use Price to Profit and Grow

• The Art of Pricing: How to Find the Hidden Profits to Grow Your Business

• The Strategy and Tactics of Pricing: A Guide to Growing More Profitably

Price It Right with Dmitry Shesterin

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