Why is pricing important?
- Price is Your Reward (strong brands command price premiums)
- Price and Marketing Strategy are linked (i.e. software capability vs. price and vlasic pickles)
- Most Impact on Profits ((1% improvement results in 11% profit)
Example: Lululemon
Strong Brands Commanding Price Premiums
“Seat-of-the-Pants” Pricing Approach
- prices set by looking at last year’s price and adding a percentage.
- make incremental adjustments based on personal perception of market demand
- can sacrifice profits of up to 20%
Chasing Market Share
- initiate price war, which jeopardizes entire industry
- could hurt brand image by dropping price, making it harder to secure customers in future
- 5% decrease needs a 17.5% volume increase to work
Rely on Costs for Pricing Decisions
- 70% of firms use cost-plus pricing
- do not account for customer needs or brand strategy
Why do firms set prices too low?
- Seat-of-the-pants Pricing
- Chasing Market Share
- Rely on Costs for Pricing
Product Focused Pricing Decisions
- internally focused
Product > Cost > Price > Value > Customer
Customer Focused Pricing Decisions
- externally focused, customer driven organizations are more successful
Customer > Value > Price > Cost > Offer
Example: Cirque Du Soleil
Winning Organizations Start with Customers to Arrive at a Price
- cut costly animal acts, but provide same value, resulting in enhanced profitability and brand recognition
Pricing Process
- Segment Market by assessing value of your product
- Arrive at Initial Price
- Adjust Price
- Assess impact on marketing strategy
- Manage Transaction Prices
- Analyze Returns
How to assess value of your product?
- Identify Problem Customers want to Solve
- identify current solution
- Define problems solved by your product
- Calculate financial impact (Total Cost of Ownership Analysis)
- Identify Barriers to Adoption
- Identify likely adopters
- Look for variations in the way customers value the product
- Assess customer price sensitivity
Total Cost of Ownership Analysis
price is just one component of the total cost of owning a product. If you reduce the cost of owning, customer will be less sensitive to acquisition cost
TCO = acquisition costs + possession costs + usage costs + disposal costs
TCO: Examples
FedEx > virtual warehouse eliminates need for inventory
Mercedes > depreciate at slower rate, have higher residual value
Catalogue Retailers > let you shop over the phone or cpu
Example: Good Health Multivitamins
Assessing the Value - financial impact of ill health is incalculable, increase in price would not effect, lots of competition, trusted brand etc.
Price Customers
value the cheapest priced product
- don’t care about added benefits of our product over competitors
- want basic product at basic price
Value Customers
- will consider paying for added product benefits it a case can be made
- primarily interested in product performance features
Relationship Customers
- brand loyal, actively compare alternatives
- averse to risk, don’t like to switch
- price in-sensitive
Economic Value Added (EVA)
Helps arrive at initial price
Current Solution
+ Reduced Cost
+ Additional Revenues
- Acquisition Costs (training, disposal etc.)
________________________
Current Solution + Added Value = Initial Price
Value-Based Pricing
Adjust the Price
- Price Feasibility
- think about customer mindset and psychological factors - Costs
- consider incremental costs
- consider break-even point
- target costing
target costing
- establish an initial price, set profit margin, and control costs to ensure margin is met (Cirque du Soleil employed this)
price skimming
set high initial price for product to recoup heavy invesment
- as competition increases, the price is reduced
price penetration
sets product low to capture market share and keep competitors out, and as product becomes popular, can be raised overtime
Example: IKEA
think about the long-term marketing strategy impact of its prices
(good quality at low prices)
price waterfall
- discounts, special terms, bulk pricing, salesperson negotiation, early payment etc.
