New Product Marketing: What Radiohead Knows... The Art of Pricing & Making a Profit!

Bryan Cassady Guest Professor, [email protected]

KU Leuven Master Class: New Product Marketing4/11 Pricing for value and profits

What Radiohead Knows

The Art of Pricing & Making a Profit


About this courseIt is a sad fact that most new businesses, products and service fail. Some estimate the failure rate is as high as 90%. This course is about why products fail and what you can do to increase your odds of success.

This lecture is a part of series of 12 lectures. In my classes I use a lot of videos. If you’d like to see the presentations with videos, go to: http://www.fast-bridge.net/resources/new-product-marketing/

I hope in the pages that follow you will find new ideas and inspiration… If you’d like to download the whole class go to: http://www.slideshare.net/bryancassady2/2009-course-new-product-management-by-bryan-cassady

If you have ideas on ways to improve this course or would like help with your new products, I’d love to here from you…

Bryan Cassady [email protected] +32-475-860-757

http://www.fast-bridge.net/resources/new-product-marketing/

http://www.slideshare.net/bryancassady2/2009-course-new-product-management-by-bryan-cassady


A less-than-optimal "configuration" of product or service attributes and benefits is selected.

Lack of a strong sustainable position in the market

Marketers fall in love with a product no one else loves

The marketing plan for the new product or service is not well implemented in the real world.

Marketers assess the marketing climate inadequately. The plan is too complicated

A failure to ask the right questions and a belief that everything is a big idea No Support to get things done

A questionable pricing strategy is implemented. A weak positioning strategy is used.

Cannibalization underestimatedThe advertising campaign generates an insufficient level of new product/new service awareness.

Over-optimism about the marketing plan leads to a forecast that cannot be sustained in the real world.Too focused on the internal game not enough on the marketThe Lemming effect



Unfortunately, they lost a few dollars on every customer they served.



Source: Compustat; Mckinsey analysis

100.0

19.2

68.3

12.5

101.1 13.5

Revenuees Fixed Costs Variable costs Operating profits

1 1

Price increase of 1.0%

Price increase of 8.0%


2.3

3.3

7.8

11.1%

Fixed cost

Volume

Variable cost

Price

…Create Operating Profit Improvement of1% improvement in...

*Based on average econimics of 2,463 companies in comopustat aggretate



And most importantly something you think about, not (and I repeat) not something

determined solely by your competition


Illustrating Price RelationshipPrice Vol. Rev. Cost Profit(£) Unit (m) (£m) (£m) (£m)

1 17 17 27 -102 16 32 36 63 14 42 24 184 9 36 19 175 7.5 37.5 17.5 206 5 30 13 157 3 21 13 88 2 16 13 89 1 9 11 -2

10 0 0 10 -10


-15

-10

-5

0

5

10

15

20

25

1 2 3 4 5 6 7 8 9 10



HighValue

Super Value

MildValue

Economy



The right price is not objective, but value based







How much a rational consumer would be willing to pay for your product, if he had a perfect understanding of its actual worth* …

John GourvilleHarvard Marketing Guru





$120 $108

$480$432

$100 $108

Price

Labour Costs

Servicing/Diesel

$700 - $540

- 10%

- 10%

$ 700





The problem: result = ball dependentConsumers didn’t use the ballWorse results, product died

(same idea back as Liquid compact)






High Price Low PricePrice 31 18Client 60 100Cost/ Unit 14 10Net/ unit 17 8Profit 1020 800



Our chef's thinkingHigh Price Low Price Likely Best Case

Price 31 18 24.5 54.5Clients 60 100 80 85Cost /unit 14 10 12 11.5Net/ unit 17 8 12.5 13Profit 1020 800 1000 1105

Differential PricingHigh Medium Low Total

Price 31 24.5 16 27.5Clients 55 25 10 90.0Cost /unit 11 11 11 11.0Net/ unit 20 13.5 5 16.5Profit 1100 337.5 50 1,487.5

Extra points % IncreaseVersus likely results 578 63%

Versus maybe scenario 383 26%




Before you start…Do you have a product someone wants ?If not, don’t waste your time


FactsThe new airplane will be competing against Cessna’s flagship C172 which has a list price of $300,000. This would be your logical starting price point.

ThoughtsCustomers look to substitutes for clues on what your product is worth. Even if you have a great product but competitors set their prices unrealistically low, customers will assume your product is worth less.

Substitutes

Competitors

Income

Demand

Environment


FactsYour plane will have a faster cruising speed, a longer cruising range, a faster climb rate and a revolutionary new safety system.Your research suggests these attributes should be worth about $120,000 to purchasers. Your brand, however, is less well known meaning resale value will be affected. Detract $30,000 from the new airplane’s value to allow for this.

ThoughtsHow your product measures up (in terms of attributes) by comparison with your competitors. Customers will look at brand, convenience, quality, service, style and other attributes to evaluate whether your product’s value is lower or higher. This dictates whether you can charge a premium.

Substitutes

Competitors

Income

Demand

Environment

$300,000


FactsPeople who purchase your airplanes are able to claim a $25,000 tax break on their federal taxes because this plane features an enhanced safety system.

ThoughtsThe income level of your product’s buyers, and whether they have discretionary income or watch every penny. Obviously the higher their income, the more “wriggle room” you have to increase your margins. Increases in your customer’s income will also impact their value perceptions

Substitutes

Competitors

Income

Demand

Environment

$300,000

$90,000


FactsTo cover increased operational costs, airports have recently raised their landing fees. To compensate for that, most airplane manufacturers are lowering their list prices by $20,000.

ThoughtsChanges in the price for related products. For example, the price of gasoline influences the relative value of gas guzzlers. Increases or decreases in the prices of any products which are related to yours will impact noticeably on the perceived value of your product.

Substitutes

Competitors

Income

Demand

Environment

$300,000

$90,000

$25,000


FactsThere have recently been some very positive news articles run in major newspapers talking about the benefits of private ownership of airplanes. It’s currently considered to be the “in thing” to do. This should allow you to increase your prices by about $15,000

ThoughtsThe overall market environment and whether your product’s value is going to be affected by the arrival of a fad, new information, or other external events beyond your control

Substitutes

Competitors

Income

Demand

Environment

$300,000

$90,000

$25,000

- $20,000





$5 $6 $7 $8 $9 $10 $11 $12 $13 $14 $15

Potential Price PointsToo Cheap Expensive Too Expensive Bargain

100

Van Westerndorp Output

0

80

60

40

20

“Stress Zone”

MPC (Marginal Cheap Price) OPP (“Optimal Price Point”)

IDP (Indifference Price Point)

MEP (Marginal Expensive Price)


$5 $6 $7 $8 $9 $10 $11 $12 $13 $14 $15

Potential Price Points

40%

20%

0%

Van Westerndorp Output


Brand A Brand B Brand C

I would not buy any of

these.

Brand A Picture Brand B Picture Brand C Picture No Bells and Whistles Bells and Whistles Bells, no Whistles

Regular Shipping Next Day Delivery Two Day Delivery No Money Back

Guarantee Money Back Guarantee

Money Back Guarantee

$27.00 $44.00 $35.00

A regression technique - usually multinomial logit -- is used to analyze the model. Even so, a fair amount of analysis can be done using high level data summaries.


Note: Disguised example. Attributes and measures have been altered.

Select the beverage you would be most likely to purchase at your next visit to a convenience store. If you would not choose any of these, select the “none” option.

NextNone


Price

+20%+15%+10% +5% Current-5% -10%

Share of Demand

Elasticity: Rate at which demand falls as price increases.

10% 14% 18% 22% 26% 30% 34% 36%

�𝑑𝑑 = −4%/5% = −0.8






Consumer surplusRide 1 at $ 0 price

Price willing toPay per ride

Demand

0 1 2 3 4 5 6

Number of rides


Strategic OptionsLever Segment Attribute Importance

PriceDiscount

Smart Consumer

High Income Shopper

Advance Purchase

Smart Consumer

High Income Shopper

AirlinesSmart Consumer

High Income Shopper

RestrictedTimings

Smart Consumer

High Income Shopper

Magnet

Fence

Proposed DesignDiscount Vocation

travel FareFeature Rationale

50% discount to full fare

Attract price sensitive “ Smart Consumer segment”

1 month advance purchase No ability to

specify airline carriers Weekday

department

Discharge “High income Shopper” fromswitching to low price seats







Be Found offers several flexible pricing solutions which are all based on a "no cure no pay" model. For example you may choose to pay for the

qualified visitors who enter your site, a flat fee for every new membership or a percentage of each online sale.








“One fallacy is the belief that the consumer acts ‘logically’ in his or her buying decisions.”

James P. Nault, Fairmont Foods






Source: Dickson & Sawyer (1990)


















$ 9.95 Shipping and handling = their profitQuestion: Why does it work





i

iii

ii

iv








I offered to pay €0

They then processed my order




Note Best Selling album in 20084 million copies




New Product Marketing: What Radiohead Knows... The Art of Pricing & Making a Profit!

Marketing

youbryan cassady

new products

new ideas

new businesses

price increase

service fail

service attributes

lovesthe marketing plan