Author - Ravi Lakkundi

Pricing

What is this presentation all about?

• An insight about How to price you new

product

• Focusing of practical approaches to product

management (Mainly Pricing Strategic)management (Mainly Pricing Strategic)

• Learning by Example

Product Management - Pricing

• Price you decide for your product will directly

effect your business

• Wiki says “Pricing is the process of

determining what a company will receive indetermining what a company will receive in

exchange for its products”

• Pricing is the MOST important product

management tasks

Product Manager has to and is the

right person to put a price tag on

the product or make suggestions

Remember he is the only person

close to the customers and knows

market trend

Some Fundamentals …

• Before we get into Putting a price tag on a

product we need to one key fundamental

business term – Contribution Margin (CM)

• Contribution Marin is also called as Gross• Contribution Marin is also called as Gross

Profit

• Nothing but Sales Price received minus the

variable cost

• Lost??? Lets take an example …

Get on to the Job, Sell an Apple !!

• Say Steve is selling an Apple for $10 each

Sale price $10

Purchase Price from the Farm - $3

Cleaning and washing apple - $0.50Cleaning and washing apple - $0.50

Packaging the Apple - $1.0

Shipping to Market Store - $1.50

Contribution Margin CM ($) 10 – (3+0.50+1+1.50) = $4

• CM % = (10-6)/10 = 40%

Price Build-up: Fundamentals

• Example

– Say a Company ACowStick Pvt ltd wants to importproducts in India

– They have started the India operations and wantto come up with a pricing strategy for FunTabStickto come up with a pricing strategy for FunTabStick

• Refer to Product management by Ravi Lakkundi– http://www.slideshare.net/RaviLakkundi/product-

management-quick-bite

– DB before getting into various pricing strategieshas to know the price build-up on importedproducts

FunTabStick7 is a product from ACowStick Pvt ltd

FactoryFinished packed products

Nearest Port

Sea Transfer• Factory will deliver the finished goods @ any nearest port

(Air/Rail/Sea)

• Price of finished goods delivered to nearest port is known as

India Warehouse

Unload the goods

Transfer

• Price of finished goods delivered to nearest port is known as

FOB (Free On Board)

• The additional cost that ACowStick will have to pay is the

Freight charges, Customs/Import Duty of the country

Insurance for goods

Example: FunTabStick

• Assuming the Supplier in China delivered

FunTabStick7 @ $21.4

• FOB is $21.4 and was delivered to nearest port

• ACowStick has partnered with a freight• ACowStick has partnered with a freight

forwarder and the goods will be delivered to

its warehouse in India

• ACowStick has to pay for Customs Import

Duty, Insurance and Freight charges

FOB to MRP (/MSRP) – Price BuildupExchange Value ($->INR) 51.25

FOB (USD) $21.4

FOB ( INR) INR 1,096.8

Freight, Insurance, Handling 5%

Customs Assessed Value INR 1,151.6

Customs Duty 23.90%

ACowStick Landed Cost INR 1,426.8• INR 1096 product translates to INR

ACowSticks Expected Std CM 23%

Distributor Buy Price 1853.0

Distributor Margin 8%

Dealer Buy Price 2001.2

Dealer Margin 20%

MRP/MSRP (without VAT) 2401.5

VAT 5.00%

MRP/MSRP(with VAT) 2521.57462

• INR 1096 product translates to INR

2522 Retail Price

• Key Take Away

• Observe how the price translates

at every stage

• ACowStick Std CM*is 23% •((SP-CP)/SP)

• Distributor Margin is 8%

• Dealer Margin is 20%

*Please refer to some good reference on

CM and Operating profit

Operating Profit (EBIT)

• OP is a measure of income that tells how

much of revenue will eventually become profit

for a company

• Operating profit is important because it is an• Operating profit is important because it is an

indirect measure of efficiency. The higher the

operating profit, the more profitable is a

company's core business

Price – Perception - Reality

• Perception is a wonderful thing

• Perceived value is different for different things

• As Humans we try to put a value to everything

• Lets take an example – Put a price tag for the • Lets take an example – Put a price tag for the below product

• In US customers might say 800 to 1000 USD

• In India customers might put a value of 300 to 400 USD

Price is Perception and if the price tag crosses that

perceived value, you will have to sell the product

If it matches the perceived value you may not need to

sell – It may sell for itself!

Pricing - Discussion

• Perceived value – Lot of factors may influence

the perception of value to people/customers

• Brand, Features, Competitor knowledge etc

are some factors influencing perceived valueare some factors influencing perceived value

Lets get on to actual pricing strategies …..

Decide Margin – Ignore Everything else …

• In our Price Build-up you can set a margin thatyou expect from selling FunTabStick

• Example (slide 10) shows the margin expected is30%

• Problems• Problems– Even though the margin in calculation meet your

expectation the end retail price may not work in themarket

– It may be too high for market or too low !

– It does not take into account the demand (based onthe price you just decided)

Strategy : Cost-plus pricing

50 = 10 (CM$)x4(units) + 2(CM$)*5(units) +

Jackpot

• FunTabStick is an absolutely new product inmarket

• Competitors will take some time to catch uptothis killer product by ACowStickthis killer product by ACowStick

• ACowStick can price for few months thisproduct at a very high price

• Inturn recovering some of its Research andDevelopment cost

• later correcting the retail price (Margin)

Strategy : Skimming

LossFit !!!(Loss-Profit)

• Why will a company sell a product at 0%

margin or even –ve margin?

• One reason could be it need to boost its other

profitable salesprofitable sales

• It is a very good and effective method to

expand its market share as a whole

• This needs a very careful thinking

Strategy : Loss Leader

Common Sense

• Research the market for Product,Price and Placement

• Know your competition similaroffering

Know your unique

Exchange Rate 51.25

Maximum Retail Price (MRP) 1999

VAT 5%

MRP without VAT (INR) 1903.81

Distributor Margin 8%

Distributor Landed (INR) 1762.79

Dealer/Retailer Margin 18%

Dealer/Retailer Landed (INR) 1500.24

Variable

• Know your uniquedifferentiation as compared tocompetitors (USP)

• Fix Retail Price, Fix FOB andchange Margins and reach anacceptable level

Strategy : Market Oriented

ACowSticks Expected Std CM 5%

ACowSticks Landed Cost (INR) 1425.23

Customs Duty 23.90%

Customs Assessed Value (INR) 1150.31

Freight + Insurance + Handling 5.00%

FOB (INR) 1095.53

FOB (USD) $21.4

Fixed

Get-in the market

• To initially get the market share the price of

product will be low

• Once the product starts selling in the market

and ACowStick starts gaining the market share and ACowStick starts gaining the market share

the product price can be revised

• This is just to attract customers

Strategy : Penetration

First in Class

• Set the price Artificially high, to create aPremium perception in minds of customer

• Imagine you pass-by a store and you see ahoarding – “The worlds most premium andhoarding – “The worlds most premium andcostliest icecream” – Will your heads turn andwould you buy?

• This product will gain exceptional reputationand will become a desirable product (inturnBrand)

Strategy : Premium

Consumer Psychology

• Which price will have your heads turn?• Which price will have your heads turn?

– 99 cents or 1 Dollar?

• Instead of pricing product @ ex: Rupees 300

India has something commonly known as Bata

pricing Rupees 299 !

Strategy : Psychological

Other Strategies

• Only key pricing strategies for ACowStick is

discussed here

• For other strategies please refer to good

marketing references alsomarketing references also• Contribution margin based pricing being one amongst

them

– http://en.wikipedia.org/wiki/Pricing_strategies

Other Important Reading

• http://en.wikipedia.org/wiki/Cost%E2%80%93volume%E2%80

%93profit_analysis