The Price is Right! Is it? Martin Boehm, IE Business School

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Vpogled v ozadje dinamičnega modela določanja cene. Prezentacija je bila predstavljena v okviru 19. slovenske marketinške konference 2014 v Portorožu.

Transcript of The Price is Right! Is it? Martin Boehm, IE Business School

  • 1.The Price is Right! Is it? Slovenian Marketing Conference 2014

2. The Price is Right! Is it? by Martin Boehm 2 Why is pricing so important? Pricing pressure is all around us 3. The Price is Right! Is it? by Martin Boehm 3 Why is pricing so important? In Europe companies focus on two growth drivers 9% 29% 52% 59% 75% Reduced number of competitors Price increase Innovation Cost reductions Increase in sales volume Key drivers to increase profits in the next three years (% of respondents) Does this prioritization make any sense? Source: IE Business School (2011) European Pricing Study 4. The Price is Right! Is it? by Martin Boehm 5 2,3% 3,3% 7,8% 11,1% Fixed Cost Units Variable Cost Price 1% improvement in Why is pricing so important? Price is the single most important profit lever creates Operating Profit Improvement of 5. The Price is Right! Is it? by Martin Boehm 6 Why is pricing so important? The relationship between pricing focus and profit 3,71 3,83 3,83 3,88 4,07 4,08 4,27 4,58 Strategic Priorties Strategic priorities and EBITDA >35% Source: IE Business School (2011) European Pricing Study 28% Balanced priorities 55% Cost management 17% Price management 30-35% 25-30% 20-25% 15-20% 10-15% 5-10% 120% 9. The Price is Right! Is it? by Martin Boehm 10 Why is pricing so important? How to compensate for a 10% price decrease? Contribution Margin Variable Cost 20 80 100 Price Profit Contribution 100 x 20 = 2,000 -10 10 80 90 100 x 10 = 1,000 200 x 10 = 2,000 10. The Price is Right! Is it? by Martin Boehm 11 Why is pricing so important? 9 out of 10 underestimate impact of price reduction 89% 5% 5% 0% 1% High underestimation Low underestimation Right estimation Low overestimation High overestimation Do you know the needed sales volume increase? Estimated impact of price reduction Estimated right! 83% Yes 17% No 11. The Price is Right! Is it? by Martin Boehm 12 2,5 2,9 3,0 3,4 3,5 3,8 4,3 0 1 2 3 4 5 Advertising After-Sales Service Distribution New Competitors Product Quality Prodct Differentiation Price Why is pricing so important? Pricing causes headache for marketing managers Question: What are your biggest worries? Sample: 187 12. The Price is Right! Is it? by Martin Boehm 13 Cost-based pricing? Cost-based pricing is the dominant method in industry 69% 37% 30% Cost-Based Competitor-Based Customer-Based 13. The Price is Right! Is it? by Martin Boehm 14 Cost-based pricing? What is the cost of garbage? 14. The Price is Right! Is it? by Martin Boehm 15 Cost-based pricing? Would you pay 80 for an ashtray? Weber One-Touch Silver 57cm Weber One-Touch Gold 57cm 179,90 259,90 15. The Price is Right! Is it? by Martin Boehm 16 Cost-based pricing? Cost is a matter of fact. Price a matter of policy* Internal Cost Perceived Value Source: Pratt, R, Australian Entrepreneur 16. The Price is Right! Is it? by Martin Boehm 17 The Demand Curve What are you willing to pay for these tickets? I would like to sell: Two tickets Game: Real Madrid vs. FC Barcelona Venue: Santiago Bernabeu 17. The Price is Right! Is it? by Martin Boehm 18 The Demand Curve Demand is dependent on price Price QuantityQ2 P2 P3 P4 Q3Q4 Q1 P1 18. The Price is Right! Is it? by Martin Boehm 19 The Demand Curve Value is relative! 19. The Price is Right! Is it? by Martin Boehm 20 The Demand Curve Price discrimination: extracting different prices If I have 2000 customers on a given route and 400 different prices, I am obviously short 1600 prices. Robert L. Candall Former CEO of American Airlines 20. The Price is Right! Is it? by Martin Boehm 21 150150 The Demand Curve Why price discriminate? Price Quantity 15 30 50 200 10 No price discrimination: 15 * 150 units = 2250 With price discrimination: 30 * 50 units = 1500 15 * 100 units = 1500 10 * 50 units = 500 TOTAL: ........= 3500 21. The Price is Right! Is it? by Martin Boehm 22 0,64 0,69 0,80 0,90 1,20 1,60 2,00 Supermarket Grocery Store Bakery Vending Machine Gas Station Newsstand - Street Newsstand - Airport Price Discrimination Is price discrimination already being practiced? Note: Prices for a 0.33l Coca Cola can 22. The Price is Right! Is it? by Martin Boehm 23 The Demand Curve What are the limits of price discrimination? 0.50 1.00 1.50 Source: K@W (2007) The Price is Right, but Maybe Its Not, and How Do You Know? 23. The Price is Right! Is it? by Martin Boehm 24 24. The Price is Right! Is it? by Martin Boehm 25 Summary What did we learn so far? Pricing is the most important profit driver. Dont neglect it when trying to grow the business. Pricing a managers nightmare! Cost-based pricing is overrated. Focus on value and the consumers willingness-to-pay to set prices. Value is relative! The perceived value drives the willingness-to-pay of consumers. Thus manage a consumers perceptions! Price discrimination can drive profits. However, there are limits to the pricing game. 25. Thank you very much for your attention! Martin Boehm martin.boehm@ie.edu