Pricing PPT Merged
Pricing PPT Merged
Pricing PPT Merged
-- Warren Buffett
Product Creates value
Promotion Place
o Base price
o Discounts, bonuses, rebates, conditions, special offers
o Differentiated prices by package size or product variant
o Differentiated prices based on customer segment (e.g. child,
senior), time of day, location, or phase of the product cycle
o Prices for complementary products (razors and blades;
smartphones and data plans)
o Prices for special or additional services
o Prices with two or more dimensions (e.g. upfront charge and a
usage fee)
o Bundles
o Prices based on personal negotiations
o Wholesale, retail, and manufacturers‘ suggested retail prices
(MSRP)
Price ….The strongest profit driver????
profit
profit increases by….
old new old new
Price 100 105 10 million 15 million 50 %
Variable unit cost 60 57 10 million 13 million 30 %
Fast applicability.
Costs
Customer
Competition
Cost-Based Pricing
• When customers are used to being in control of a firm’s pricing, they revolt at
price changes
Value
Economic Value to the Customer (EVC)
Value that a fully informed customer would or should ascribe to the product.
• Maximum price
• Customers’ needs and preferences are relevant
• Next best alternative
Economic Value to the Customer (EVC)
Forms of EVC:
- Identify the price of the competing product that the customer views as the best substitute. (this is
Reference value)
o Consider a similar quantity of the best substitute
o Should not include the prices of items that may be used along with the alternative product but
that are actually separate products
- Identify all factors that differentiate your product from this competing product. These are the
differentiating factors.
o Product-need framework
Product-Need Framework
Objective performance
needs
Performance reliability
needs
- Determine the monetary value to the customer of each of these differentiating factors. These are
the positive and negative differentiation value.
o Translate the factors into monetary terms by identifying additional expenditures/or savings
o Estimate how customers weigh money against their preferences and feelings for the factor
- Sum the reference value and the differentiation values to determine the total economic value to the
customer, i.e., the maximum that someone fully informed of the product’s benefits would be willing to
pay for the product.
EVC example
ABC Computer has developed software that allows their servers to host twice as much webspace as its
rivals. How should they price this new software-server combination?
Relative to buying two servers from ABC’s competitor, by buying one doubly efficient server from
ABC, a firm would save $4,000 in labor costs, $500 in electricity and $1,500 in software licenses.
A firm trying to sell a new product to the owner of a toy factory that requires an air filtration system. Assume the
factory owner faces two choices- this seller’s new product and a well-established, next best alternative offered by
another firm.
Perceived value
Suppose the claim of Probability of system crash of 1 % is perceived to optimistic and instead it is
believed to be 5 %.
What would be the Perceived value??
Value-Pricing Framework
Cost
50000
Economic Value to the Customer (EVC)
Situation:
SprayCo, an $800MM surface treatment and coating
manufacturer, primarily serves the automotive industry.
Auto Other
Increased revenue
Binds to sharply Effectively coats headlight (Margin of product) X (# of new units
due to expanded
curved surfaces fixtures sold to coat headlight fixtures)
product use
Decreased processing
Increased revenue (Number of new orders that require
time for non-toxic
due to rapid Non-toxic same day fulfillment) X (Premium paid
materials allows for same
fulfillment times for same day fulfillment)
day fulfillment
Measuring Customer Responses to Prices
Methods to measure customer responses
Surveys Observations
Direct Indirect
Expert Judgements
• Company employees, management consultants, Specialists from market research institutes, experts
from dealer/distribution or customer advisory panels
• Structured/Unstructured
Direct Surveys
• Direct questioning
A) At what price would the product be too expensive, so that you would not
buy it?
B) At what price would you consider the product to be expensive, but you
would still be inclined to buy it?
C) At what price would you consider to be acceptable or a bargain, so that
the product is good value for money?
D) At what price would be too cheap, so that you would doubt the quality of
the product and would not buy it?
Customer Surveys
Indirect surveys
• Conjoint measurement : Central objective is to answer what utility and as result what willingness to
pay does a customer associate with a given product???
Conjoint Analysis
Car A Car B
Maruti Hyundai
Rs. 800,000 Rs. 850,000
White Silver
22 km/ltr 20 km/ltr
1----------2-----------3---------4----------5----------6----------7---------8----------9
Observations
Experiments
Experiments
Lab experiments:
• Neuro-pricing
Observations
Experiments
The practice of charging different customers different prices for the same item.
• Possibility of arbitrage
How to create a segmented price structure?????
- Auctions
- Negotiations
Price differentiation through self-selection (second degree)
- Performance-based
- Volume-based
Order-size discount,
Cumulative discount,
Fixed charge pricing,
Two-part pricing,
Step discounts
Price Number of Supported Type of
Netflix Plan
(monthly) screens resolution device
Mobiles,
Mobile Rs 149 1 SD
tablets
Mobiles,
Basic Rs 199 1 SD tablets,
laptops, TVs
Mobiles,
Standard Rs 499 2 HD tablets,
laptops, TVs
Mobiles,
Premium Rs 649 4 4K + HDR tablets,
laptops, TVs
Price differentiation based on Customer Criteria (third degree)
- Time-based differentiation
- Peak-load pricing
- Priority pricing
- Time-of-purchase basis
- Place-based differentiation
- Delivered pricing
- Zone pricing
Offer
Configurations/Price
bundling A B
Segment 1 50 130
Segment 2 75 100
Advantages:
Customers less price sensitive to cost of bundles when bundled as a single expenditure
Special forms of Price Bundling
Explains why a
customer responds
to a price in a
particular way
What is your
Perceived Value..??
Customers feel uncertain about their price judgement – they search for
a reference point – so-called ANCHORS
The Magic of the Middle
$4 and $12
A small (350
ml) $6.10
Medium (450
Large (610 ml)
ml) $7.10
$7.50
Price Threshold Effect
9.95
Price as a Quality Indicator
Price allows immediate objective comparisons among products.
Price signal of high credibility which the seller transmits.
$ 4.44
▪ Example: Left to right comparison
Price Shading Effect
• Reflect the translation or generalization of learned relationships which influence the way
the customer interprets how the price is presented.
• Visual presentation and communication of prices important.
• Signals scarcity
OLYMPIC GAMES 2012
Responses of competitors are important because they determine how the price change will affect
the price differentials between the company that initiates the price change and its competitors
A – 360
B - 375
C- 388
Pricing game: Negative sum game
• Cooperative stance: satisfied with current situation and prefers things to remain the same
• Aggressive stance: want to improve position at the expense of price-change initiator; would like to
see things change with respect to initiator
• Dismissive stance: competitor who feels that whatever the initiator does will not substantially
affect him or her; ignore price-change initiator
Competitor’s likely response to Initiator’s
Competitor’s stance Price increase Price decrease
Cooperative matching increase matching decrease
Aggressive No change or smaller Matching or larger
increase decrease
Dismissive No change No change
How to determine the stance of your competitors??????
Four competitive dimensions
• Relative size
• Goals
Competitor characteristics associated with competitive stance
Competitive dimension
Competitor’s Relative size Differentiated Unit costs Goals
stance brand
Cooperative Equal No Equal maintain
Price signaling:
When the publicly available price-related information is intentionally managed to
have an effect on competitors
News releases,
Press conferences,
Media access to company executives,
Planting articles in major newspapers,
Blogs, Material posted on the Internet
Categories of Price Signaling
Price Fixing
Price Segmentation
“The general belief about the overall level of prices that consumers associate with a particular retailer”
• Customers use price image to generalize about the price of a specific item.
Price Image
Important:
Understand what customers value in each channel and how that affects what they are
willing to pay.
Decisions on Price Promotions
PROS CONS
Discounts - Provides incentive to price-conscious - Can create inventory problems
customers
- Encourages brand switching
Special package - Can offer several packages of same - Difficult to determine how much larger the
sizes product at a reduced total price special package has to be made
Short term and long term effects of price promotions