Session 19 20 Pricing Level
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Transcript of Session 19 20 Pricing Level
Session Session onon
Price Level
B
Agenda
• Preliminary SegmentBy
Dr. Nripendra Singh
• Preliminary Segment Pricing
•Price Optimization
•Implementing New Prices•Implementing New Prices
The Pricing Strategy PyramidPriceLevelLevel
Price setting
Pricing Policy
Negotiation Tactics &Negotiation Tactics &Pricing Setting Procedures
Value CommunicationCommunication, Value Selling Tools
Price Structure
Value Creation
Metrics, Fences, Controls
Economic Value, Offering Design, Segmentation
Price LevelSetting the Right Price for Sustainable Profit
Cos. Ste. Goals and Cost structure; Customers preferences and actual needs; Competitors pricing p ; p p gand ste. Intent.
P i i d i f fit bilit t hPricing as a driver of profitability must have coordination between sales, mktg, fin & op.
Due to complexity involved in pricing, Cos take short-cuts (reduce prices) for growth and send ashort cuts (reduce prices) for growth and send a wrong signal to customer. (Eg. Pharma Co.)
Price Setting Process
Preliminary Segment Pricing Optimization Implementationg
Set baseline prices based on type of value
Refine preliminary prices with iterative process balancing
Set final prices and ensure acceptance
among customers andassessment and initial differential value
capture rate
process balancing tradeoffs between price,
cost, and market response
Key Questions:
among customers and organization through
effective change management approach
Key Questions:
How much of the differential value should be captured
Key Questions:
What tradeoffs should I make between long-term strategic objectives and h t t k t
Key Questions:
How do I get sales force buy-in to the new prices value should be captured
for each segment?
How much time and effort should I invest in assessing the value of my products?
short-term market responses to price changes?
What types of analytical
buy to t e e p cesand empower them to execute effectively?
What is the best approach for communicating pricethe value of my products?
How should I adjust segment prices to account for different price
techniques are best suited to my product and market conditions?
How can I estimate
for communicating price changes to customers?
What is the best approach for raising prices on
sensitivities? How can I estimate customer response to potential price changes?
undervalued products?
Price Setting Process (3 Stages)
• Preliminary Segment Pricing– Value Assessment Options– Preliminary Price Rangey g– Pricing Strategy Options
• Price Optimization• Price Optimization– Profitability Analysis
E ti ti C t R– Estimating Customer Response • Implementing New Prices
– Communicating New Prices to the Sales Force
– Communicating Price Increases to Customers
Preliminary Segment Pricing
PositiveDifferenti
ti
Negative Differentiation
Key question: How much differential value ation
Competitive R f
y qshould be captured in each segment?
Reference
The answer to this question can differ substantially across segments based on strategic considerations and differences in price sensitivity
Preliminary Segment PricingPreliminary Segment PricingA) Value Assessment Options B) Preliminary Price RangeC) P i i St t O tiC) Pricing Strategy Options
OPTIONS/ PARAMETERS
PLC Degree of Cust understanding
f V l f
Market Size Time Available for Price Setting
of Value of Pro
EVE with External DataEVE with Internal DataWillingness-to-pay (Mgrl Est)C t P iCurrent Prices
Preliminary Segment PricingPreliminary Segment PricingA) Value Assessment Options
OPTIONS/ PARAMETERS
PLC Degree of Customer understanding
Market Size Time Available for Price SettingRS understanding
of Value of Product
Price Setting
EVE with New Prod Exp. Goods Sizeable with New Prod External Data
(Intro)p
(advertising) Prod. diff. with time in hand
EVE with Decline/ Exp Goods Sizeable with New ProdEVE with Internal Data
Decline/ Mature
Exp. Goods (Pharma)
Sizeable with Prod. diff.
New Prod with time in hand
Willingness Growth Search Small with When NoWillingness-to-pay (Mgrl Est)
Growth Search Goods
Small with little prod diff
When No time for EVE
C G S SCurrent Prices
Growth Search Goods
Small with little prod diff
When No time to launch prod
B) Preliminary Price RangeOnce we know Total Economic Value the question is: What price should we set? A fi h t d id t th t d li $100 th fA firm has created a new widget that delivers $100 worth of differentiation value to customers, over and above the competitor’s widget that sells for $50. Thus total economic
l ivalue is $150. What price would they set?What price would they set? This depends on how much value they want to capture –High value capture (price skimming leaves little incentive on theHigh value capture (price skimming leaves little incentive on the table for buyers), versus Low (penetration pricing leaves lots of incentive), and is a strategic decision.Say they determine to set a higher price, perhaps $100 (which captures 50% of differentiation value delivered). Should you set just one price of $100?just one price of $100?
Preliminary Price Range (contd.)No, because some buyers are more price sensitive than others.
So, you set a range of prices around $100 -- this range is indicated in the slide between the two red price boundaries. pThese boundaries now reflect the high and low prices that you will set to reflect segmentation pricing –setting different prices for different customer segmentssetting different prices for different customer segments, based first on economic value, and then on willingness to pay which is driven by customer price sensitivity.
Some buyers may be impulse buyers that call at the last minute and request priority service and Some buyers want q p y yto purchase in high volume or order quantities. What price would you set for them?
Close to the upper boundary, and Close to the lower boundary
Preliminary Price Range (contd.)How aggressively to attempt to capture the value in Price? Will the decision yield long-term & sustainable profit? 4 considerations:1) Price Sensitivity- How much impact “Value” has for the cust as purchase motivation. (Sensitivity towards Price-Value Trade-off)Eg. If expenditure is small, represents small part of l if it i h d t If t f l i i U f ilarge exp, or if it is shared cost; If cust feels price is Unfair.2) How costly or Time Consuming is it to Quantify and Communicate the Differential Value? Is it easy to Prove orCommunicate the Differential Value? Is it easy to Prove or Guarantee the value of costs savings?3) How sustainable is a price differential relative to3) How sustainable is a price differential relative to competitors? (Patent, Copyright, lock on a unique resource)4) How Imp is Vol Vs Margin as a fin Obj? Depends on Cost4) How Imp is Vol Vs Margin as a fin Obj? Depends on Cost Structure of the Co or CM.
C) Pricing Strategic OptionsSkimming: involves setting a price to capture a product'sSkimming: involves setting a price to capture a product s
economic value to relatively price-insensitive customers. It is a strategy designed to produce high margins at the expense of sales volume and is often used if consumers place exceptionally high value on the product's differentiating attributesattributes.
Sequential Skimming: Sequential skimming involves setting the price high to attract only the most lucrative segment and, once p g y gthat segment is penetrated, lowering the price to attract the next most lucrative segment.
Penetration: involves setting a price below the product'sPenetration: involves setting a price below the product's economic value to most customers, thus enabling it to attract and hold a large base of customers. It is a strategy designed to g gy gproduce sales volume, even at the expense of high margins.
Neutral: involves setting a price in the range that most buyers would deem reasonable or appropriate given its economicwould deem reasonable or appropriate given its economic value. It is a strategy that minimizes the role of price as a marketing tool
Conditions for Different Pricing Strategies
SKIM PENETRATION NEUTRAL
COSTS
CUSTOMERS(Price Sens )(Price Sens.)
COMPETITION
Conditions for Different Pricing Strategies
SKIM PENETRATION NEUTRALC t i il tHi h CML CM
COSTS
Costs similar to competitors
Sufficient CM to finance adv, etc.
Little excess capacity
High CMsHigh volumesChanges in volume drive profitability
Small BE Sales
Low CMsLow VolumesChanges in Unit Price Drive Profit
Large BE Sales p yIncremental capacity is expensive
Changes
High price sensitivity
gChanges
Low Price Sensitivity
CUSTOMERS
Customers are more sensitive to other elements of the marketing mix
g p y-Total Expend Effect-Large Part of End-Benefit
Little differentiation
Low Price Sensitivity-Reference Price Effect
-Price Quality Effect-Difficult Comparison Eff t
Avoid threat of li i
Sustainable cost & d
Effect
Limited threat of i
COMPETITION
retaliationLarge share brands with a lot to lose
Sustainable mktg mix advantages
resource advantageCompetitors not willing to retaliate
Financial strengthAggressive small
opportunismLimited opportunity for scale economies
Sustainable differentiation g
Oligopoliesgg
share brandsLow threat brands
Categorize These Pricing Strategies
How would you categorize the pricing strategies for the following products and retailers? (S=skim, N=neutral, P=penetration)P=penetration)
McDonaldsMcDonalds _______Dove soaps _______Big BazzarBig Bazzar _______Louis Phillip (Clothing) _______L'O l H i C l iL'Oreal Hair Coloring _______ Mont Blanc (Ltd Ed. Pens) _______E i M llEmporio Mall _______
PRICE OPTIMIZATIONAfter prices are set, it needs to be optimized, based on potential customer response to new prices and theon potential customer response to new prices and the economics of price-volume trade-offs. 3 steps:1) Select price points within the preliminary price1) Select price points within the preliminary price range to begin testing.2) Start the optimization process to evaluate the2) Start the optimization process to evaluate the trade-off between cust response to new prices and the lost or gained marginthe lost or gained margin.3) Set final prices in order to begin implementation
ff i h d h i iefforts with customers and the organisation.
Analytical Approaches to Profitability AnalysisAnalysis
Automated Price O ti i ti
Automated Price Optimization
HighAutomated Price
O ti i ti
Automated Price Optimization
High
Optimization System
pSystem
Spreadsheet -Spreadsheet -
mbe
r of
sact
ions
Optimization System
pSystem
Spreadsheet -Spreadsheet -
mbe
r of
sact
ions
Spreadsheetbased Break -even Analysis
based Break -even Analysis
Simulation Modeling / Risk
Analysis
Simulation Modeling / Risk
Analysis
Num
Tran
s Spreadsheetbased Break -even Analysis
based Break -even Analysis
Simulation Modeling / Risk
Analysis
Simulation Modeling / Risk
Analysis
Num
Tran
s
Analysisy
Low
Analysisy
Low
Frequency of
Low High
Frequency of
Low High
Price ChangesPrice Changes
Profitability AnalysisIt will depend upon the pricing environment i.e. No. of transactions Vs frequency of price changes
1) Incremental Break Even Analysis: appropriate for markets/cos. Where there are many transactions and prices change infrequently, can be implemented on a spreadsheet
d il bi d ith b th d t d i l j d tand easily combined with both data and managerial judgments to make price adjustments that improve profitability.
2) Simulations: expand on a breakeven analysis by estimating the RISK of loosing cust and competitive responseestimating the RISK of loosing cust and competitive response to a price change. The key issue is that whether demanding a higher price will RISK loosing the entire deal and a significant piece of business.
Analyzing Profitability Using theBreakeven Sales Change ApproachBreakeven Sales Change Approach
Contribution Margin5% 10% 20% 30% 40% 50% 60% 70% 80% 90%
35% 88% 78% 64% 54% 47% 41% 37% 33% 30% 28%
g
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%Pric
e
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%ge in
P
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%Cha
ng
-25% NA NA NA NA 167% 100% 71% 56% 45% 38%
-35% NA NA NA NA 700% 233% 140% 100% 78% 64%
%
Profitability Analysis (contd.)
3) Automated price Optimization: this is the best approach to professional analysis when a market has a High Transaction Volume, Standardized products, and Non-negotiable pricing. Also in real time These S/Ws tests price points tracks salesAlso, in real-time. These S/Ws tests price points, tracks sales, volume changes, and iterates quickly toward optimal price levels Eg Dell Wal-Mart etclevels. Eg. Dell, Wal Mart etc.
IMPLEMENTING NEW PRICES
1) Communicating New Prices to Sales Force
2) Communicating Price Increases to2) Communicating Price Increases to Customers
Determinants of Price Sensitivity• The Reference Price Effect (Our Price Vs Competitors Price /
Substitute)
• The Difficult Comparison Effect (Experience Vs Search Goods)
Th S it hi C t Eff t (Fi i l B di )• The Switching Cost Effect (Financial Bonding)
• The Price-Quality Effect (High Price - High Qlty & Vise versa)y ( g g y )
• The Expenditure Effect (Small Vs Large, small of large exp)
• The End-Benefit Effect (prod is just a part of overall benefit)
• The Fairness Effect (Fair Vs Unfair perception)
• The Framing Effect (Loss Vs forgone gain perception)• The Framing Effect (Loss Vs forgone gain perception)
• The Shared-Cost Effect (Self Vs Shared cost)
Price Sensitivity Illustration
You are considering purchasing a personal t ( C t ) d h b tcomputer (e.g. Compaq, etc) and have begun to
shop around in order to choose one for hpurchase.
What factors would affect your price sensitivity in making that decision?sensitivity in making that decision?
How would those same factors affect the price sensitivity of some personal p y pcomputer buyers differently?
Price Sensitivity Illustration
For each of the following purchase decisions, what factors are likely to affect the consumer's price sensitivity?likely to affect the consumer s price sensitivity?– A diamond engagement ring– Automobile repairsAutomobile repairs– Food for meals at home– Which university to attend– Which university to attend– A company car
Draperies for your new home– Draperies for your new home– Text books
Health insurance plan– Health insurance plan– Souvenirs
Vacation resort– Vacation resort
THANK YOUTHANK YOU