Pricing Strategy Considerations

for aNew Business

A Macro Overview of

Setting & Influencing Prices

Class 26 Marketing Pricing Strategies

Tuesday November 22, 2011

Supply Chain

Product Manufacturer orService Provider

Wholesaleror Middleman

Retailer

Where you are in the Supply Chain affects pricing strategies used. Consum

er

Pricing Hierarchy for a Product Manufacturer

Determining Appropriate Pricing

Pricing Strategy

Marketing Plan

Business Model [Plan]

Business Model Components

Organization

• Operations & Mgmt.

• Products/Services

Marketing

• Market Analysis

• Goals & Strategies

• Customer Service

Financial

• Needs & Sources

• Budget, P & L, Bal. Sheet, BE Analysis

Marketing Plan Components

Mark

et

An

aly

sis • Target

Market

• Competition

• Market Trends

• Market Research

Mark

eti

ng

S

trate

gy

• Pricing Strategies

• Competitive Position

• Sales, Marketing / Distribution Channel Strategies

• Branding• Advertising

& PRC

ust

om

er

Serv

ice • Customer

Service Activities

• Evaluations

Price Setting Guidelines

What Selling Price is acceptable to the market? How do you determine this?

Survey the market needs, wants and competitive situation Research published industry reports Price testing on the web Check local businesses that carry/offer product/service

What are the company objectives as far as positioning itself in the marketplace? From the Business Plan

What are the company costs that must be covered and still make a reasonable profit? How do you determine this?

From the Business Plan

Interrelated Factors Affecting Appropriate Price Setting

1) Internal Meeting Business Plan Objectives

2) Internal Covering

Product Costs

3) Internal Accounting for

any Added Product Value

6) ExternalUsing Marketing

ChannelsEffectively

5) ExternalPrice reflects

consumer demand

4) ExternalUnderstanding the

Competitive Marketplace

Managing Internal vs. External Forces Affecting

Selling Price Strategies

Internal

External

Internal - Company Objectives

and the Effect on Price & Profits

Does the Sell Price reflect intrinsic company objectives?

Is the Type of Selling Price structured to:

Maximize profits?

Generate high sales growth at the expense of profit maximization?

Strike a balance between profits and growth?

1

Example Pricing Strategies & Types

Higher Pricing

To reflect product exclusivity & higher

profits

SkimmingInitial high price, then reduce for

more market share

PremiumSelling exclusivity

Midrange Pricing

To foster a good mix of sales and profits

Lower Pricing

To increase sales and market share

Penetration

Lower price to increase sales

BundleSell a group of

products at reduced price

Competition

Match current market price range

Position Selling image & reflect consumer views

Internal – Product Cost Considerations Does the SP Cover Fixed & Variable Costs & Allow

Reasonable Profit?

Givens (from Business Plan): Breakeven AnalysisAlt. 1 Balanced Alt 2 High Sales Growth

Approach[20% SP Reduction]

Est. yearly production = 30,000 units 30,000 units

at capacity

Starting Sell Price [SP] = $14/unit $11.20/unit

Max. Revenue = $420,000 $336,000

Estimated Fixed Costs [FC] = $50,000 $50,000

Estimated Variable Costs [VC] = $9.00/unit $9.00/unit

[Materials= $4.00 Labor= $5.00

Total Costs [FC + VC] = $320,000 $320,000

Contribution [SP/unit – VC/unit] = $5.00 $2.20

Sales volume to cover costs &

initiate profit [FC / Contribution] = 10,000 units 22,727 units

Percent of capacity utilized 33% 76%

before making a profit

2

Internal - Product Value-Added Considerations Affecting Price

Adding Value to Product Features Can the product be positively modified,

and/or enhanced giving it a higher net worth in the marketplace vis-à-vis consumer perception of added benefits and comparative advantage over competing products ? Example: a commodity food item is made gourmet -

Starbucks

If yes, will the product enhancement enable: A higher SP and profit without compromising

sales growth?A wider market penetration without

compromising profit?

3

Interrelated Factors Affecting Price Setting

1) Internal Meeting Business Plan Objectives

2) Internal Covering Product

Costs

3) Internal Accounting for any added

Product Value

6) ExternalUsing Marketing

Channels Effectively

5) ExternalPrice reflects

Consumer Demand

4) ExternalUnderstanding the

Competitive Marketplace

External – Competitive Pricing Strategy Considerations

Understand your competition & their position in the marketplace Identify competitive strengths and weaknessesFairly assess your product comparative

advantages & disadvantages From that assessment, consider modifying your

SP accordingly

Compare your product & price to similar competitive products & pricing in your marketplaceHow?

Market Research (Web, call, visit, industry data, interview potential customers, trade organizations, etc.)

4

External - Market Demand Pricing Strategy Considerations

By researching what the consumer thinks of the product and what they may be prepared to pay makes using different pricing techniques possible

Conduct thorough market analysis of target market. Based on those results [in combination with other Internal & External Pricing Factors]:1) Set position price to reflect consumer’s view of

the product genre’, or;

2) Set product price based on known demand, or;

3) Set product price high to “skim” highest profits and take advantage of some customer’s desire for a new product at any price

Take into consideration where the overall economy is going, buying trends, and potential effects on product demand vis-à-vis price

5

External - Pricing Influences in the Marketing Channel

What are marketing channels? Other than selling direct, it’s the use

of intermediaries to bring and distribute products and services to market.

Why companies use marketing channels? Lower cost of doing business, better

positioning, targeted consumers, enhanced penetration, better match of product features to consumer’s needs, shared commercial risks.

6

External- Levels of Distribution

Manufacturer

Retailer

RetailerManufacturer

Manufacturer

Consumer

Consumer

Consumer

Wholesaler

1

2

3

6

Manufacturer Direct to Consumer

Pricing InfluencesPrice discountsVolume discountsBundled pricing incentivesSpecial promotions [seasonal,

economy-related, etc.]Rebates

1

Manufacturer to Retailer

GeneralBeing further from the consumer

means giving up some control on the how, to whom and at what price products are sold.

Pricing InfluencesShared or pass through costs

Promotions, advertisingIncentives Rebates

2

Manufacturer to Wholesaler or Middleman

General You are buying contacts, market knowledge

and access, experience, and scale of operation

Pricing Influences Shared and pass through costs

promotions, advertising Incentives Warranties, returns physical distribution – transportation & storage

Enhanced cash flow Better efficiency in distribution costs:

Greater sales Better profits through targeted sales

3

Summary

Setting prices initially should consider internal inherent factors including acknowledging company sales objectives, covering product costs, and adjusting prices for legitimate value-added features.

Setting prices should consider the competitive market range and reflect true demands of the target market.

Once marketing channels have been selected, consider pricing adjustments to reflect additional internal efficiencies and customer-perceived added value in getting products to the desired market with cost minimization.