Pricing Ppt

Pricing

Presented by:Dewasish GhoShal

PGDM(A)NAARM,Hyderabad

Pricing Playing Field

Economic Value

Variable Costs

Company Policies, Goals

Competition

Customer Company Competition Collaborators

PriceSensitivity

Fairness

Goals

Situation* Market Share* Costs

Situation*Market Share*Costs

CooperationDifferentiation

DistributionChannels

Managing a price decrease: P&G and EDLP

Price reductionValue pricing

Strategy Customer Competitor Costs

Demand for greater value

Promotions:Switching excuse

Customerconfusion

Superior qualityValue price

Rationalizeproduct line

Rise of thediscounter

Prisoner’sDilemma

Privatelabels

Rise of EDLP

High cost ofpromotions

Channelinefficiency

Strain onmanufacturing

Brand imagethrough

advertising

Why is Price so Critical?

• Consider a company with an 8% profit margin

• Suppose the company could raise its price by 1% without it having any impact on sales?

• What will the increase in margin be?

• Sales = X Pts

• Margin = 0.08X Pts; Cost = 0.92X Pts

• New sales = 1.01X Pts; Cost = 0.92X Pts

• Margin = 0.09X Pts

• Increase in margin = 100*(0.09X-0.08X)/0.08X

• = 12.5% !

Two Key Requirements of a Pricing Policy

• Policy should complement company’s marketing strategy

• Swatch: $40 price on basic model has not changed in 10 years

• Saturn: No negotiation pricing

• Process of price setting must be coordinated across departments

• Issue: There are many participants in the process - Accounting provides cost estimates, Marketing communicates the strategy; Sales provides customer input; Production sets supply boundaries; Finance establishes requirements for the bottom line

Coordinating the Pricing Process

• What is our pricing objective?

• Do all participants in the process understand the objective?

• Do all participants have an incentive to work in pursuit of the objective?

Profit Growth, Volume Growth, or Both?

Manager’sDream

TradeoffZone

Manager’sNightmare

TradeoffZone

Quadrant IQuadrant II

Quadrant III Quadrant IV

Volume growthnegative

Volume growthpositive

Profit growthpositive

Profit growthnegative

Pricing Goal Matrix

Volume growthnegative

Volume growthpositive

Profit growthpositive

Profit growthnegative

Profit

Volume

Profit

Volume

Profit

Volume

Profit

Volume

Reduction of too high priceIncrease of too low price

Increase of price beyond optimum Decrease of price below optimum

8 Steps to a Pricing Decision

I. Assess what value your customers place on the product or service

II. Look for variation in the way customers value the product

III. Assess Customers’ Price Sensitivities

IV . Identify an Optimal Pricing Structure

V. Consider Competitors’ Reactions

VI. Monitor Prices Realized at Transaction Level

VII. Assess Customers’ Emotional Response

VIII. Analyze Whether Returns are Worth the Cost to Serve

8 Steps to Better Pricing: STEP 1

I. Assess what value your customers place on the product or service.

• What should the appropriate process be?

• From company ...... To marketplace or

• From marketplace ...... To company?

• The trouble with “Cost+” Pricing

• Expected sales level = 100 units

• Suppose cost/unit = 10; markup = 20%

• Price = 12. Suppose you sell only 80 units

• New cost = 11; markup = 20%; price = 13.2

• How many units will be sold?

Examples of Value-Based Pricing

• Glaxo pricing of Zantac in the US market in 1983

• Competition with SK B’s Tagamet (#1 drug in the world)

• Additional value offered by Zantac

• Easier schedule of doses

• Fewer side effects

• Taken safely with other medication unlike Tagamet

• Based on greater perceived value, Glaxo charged a 50% premium over Tagamet instead of pricing at parity or below (as in Follower pricing)

• In 4 years, Zantac was the market leader.

How to assess value?

• Economic Value-In-Use

• Market research

• Conjoint Analysis

• Employees with direct customer contact

• Salesforce

Determining Economic Value-In-Use

• DuPont, Alathon 25 - polyethylene resin used in the manufacture of flexible pipe. Competes with other resins

• Failure rates of 1-3% compared to 7-8% for competition

• Economic Value=Reference Value + Differentiation Value

• Reference Value: Cost of competing product that the customer views as the best substitute for the product being evaluated

• RV = Price of Competing product adjusted for any difference in quantity used

• Differentiation Value: Value of product attributes that are different from those of the best substitute

• DV = Positive if customer likes differentiating attribute, Negative otherwise

Economic Value Analysis from 2 Perspectives

• Pipe buyers who purchase pipes made of Alathon

• Pipe extruders who purchase Alathon to make pipes

Analysis for Below-Ground Irrigation (/100ft)

Crop Loss Reduction$0.40 - $0.48

Crop Loss Reduction$0.40 - $0.48

Labor Savings$3.00 - $3.60

Labor Savings$3.00 - $3.60

ReplacementSavings: $0.31-$0.39

ReplacementSavings: $0.31-$0.39

Cost of Substitute

$6.50

Cost of Substitute

$6.50

Dif

fere

ntia

tio

nV

alue

Ref

eren

ceV

alue

Total EconomicValue

$10.21-$10.97

Cost of Substitute=$6.50

Failure Rate from 8 to 3%Value=6.5*1.08/1.03=6.81Failure Rate from 7 to 1%Value=6.5*1.07/1.01=6.89Added Value=$0.31-$0.39

Labor cost of pipe replace-ment=$60. Failure ratedrops 5-6%, Savings=$3.00to $3.60

Crop damage cost = $0-40Probability of $40 = 0.2Failure rate drops 5-6%Savings=40*0.2*0.05=0.40 =40*0.2*0.06=0.48

Analysis for Pipe Extruders (per pound)

Added Value toExtruder’s

Product$0.228-$0.275

Added Value toExtruder’s

Product$0.228-$0.275

Cost ofSubstitute

$0.280

Cost ofSubstitute

$0.280

PositiveDifferentiation

Value

ReferenceValue

Sales Decline -$0.01Sales Decline -$0.01

Risk -$0.020Risk -$0.020

Higher SalesExpense -$0.080

Higher SalesExpense -$0.080

NegativeDifferentiation

Value

Total EconomicValue $0.398-$0.445

Cost of cheapest resin = $0.28 / lb.# lbs. per 100 feet of pipe = 16.25Value of 100 feet = $10.21 (min.)Added value / lb = (10.21-6.5)/16.25=$0.228Sales decline due to lower replacementRisk due to single supplier (DuPont)

Interpreting Economic Value

• A product’s market value is determined not only by the economic value but also by the accuracy with which buyers perceive that value

• Weakness of EV:Does not indicate the appropriate price to charge. Gives the maximum price consumers will be willing to pay if they were perfectly cognizant of the economic value and were motivated by economic value to make their purchase decisions

• Strength of EV: Enables a firm to determine whether a product is selling poorly because it is overpriced relative to its true economic value or because it is under-promoted and consequently, under-appreciated by the market

• DuPont used this to increase sales by raising price and educating consumers

Other Uses of Economic Value Analysis

• Indicates which attribute improvements will result in the greatest enhancement of value

• Can be used by sales reps to highlight the benefits of the product

• Help firm identify market segments that value the product’s attributes differently

• Works well for industrial products and for consumer durable goods

• Not very useful for FPP products and for those with “fuzzy” attributes

• Use methods like Conjoint Analysis


II Look for variation in the way customers value the product

• Polaroid SX-70 instant photography camera

• Segmentation over time. Initially those placing a high value (in the photo ID card business) were sold product at a high price. Then prices reduced to accommodate others

• Segmentation and Airline fares: Business Vs. Leisure

• Magazines: Single issue Vs. Subscriptions

• Software: Upgrades (low cost) Vs. New Users

• Heavy users Vs. Light users

• Different applications: Sealed Air Corporation

• Business computers Vs. Home computers

What to do with the variation: Price Customization

• Product-line sort: develop a product line and have customers sort themselves among the various offerings based on their preferences

• Controlled availability

– Coupons

– Direct-Mail Catalogs

– Geographic Pricing

– Restriction on place of purchase (high end products at high end stores)

– Negotiating with provider (long distance telephone calls)

• Sort on Buyer Characteristics

– Eurodisney: “Kinder Gratis - vom 1.1.96 bis zum 4.4.96”

– Munich airport landing fees (747-200 DM 18600; 747-400 DM 10100)

• Sort on Transaction Characteristics

Price Customization Translates As ….

• Segmenting by Buyer Identification

• Coupons; Student Discounts; Automobile prices

• Segmenting by Purchase Location

• Hair Salons have different prices in different locations

• Large grocery stores Vs. convenience stores

• Freight absorption in industrial product markets

• Segmenting by Time of Purchase

• Theaters: Matinee Vs. Evening rates

• Restaurants: Fixed price lunches (Restaurant next door)

• Peak-Load pricing (Airlines, Electric Utilities, Telephones)

• Problem of Peak Reversal with long distance calling


III Assess Customers’ Price Sensitivities

Managers' Self-Evaluation of Price Relevant Factors

84%

81%

75%

61%

34%

29%

21%

Variable Cost

Fixed Costs

Competitive Prices

Product value to Customer

Price Response

Learning Curve Effects

Price Acceptance

Methods for Price Response Estimation

• New consumer nondurable introduced in 3 European regions. Managers for the 3 markets were selected as the best experts and asked to provide estimates of 3 points on the response curve

• Lowest realistic price and year 1 sales volume at that price

• Highest realistic price and sales volume

• Expected sales volume at a “medium” price

1. Expert Judgement


• What is the likelihood that you would buy this product at $25

• At what price would you definitely buy this product?

• How much would you be willing to pay for this product?

• How much of this product would you buy for $0.99?

• At what price differential would you switch from brand A to brand B?

2. Customer Surveysa) Direct price response surveysb) Preference-based Inference: Conjoint Analysis

a)

Price Response Estimate for a PC at Vobis

6

24

76

98100

0

20

40

60

80

100

0 2000 2500 3000 3500 4000

Price (DM)% who would buy

Purchase Intentions for Instant Cameras

Stated Price

$150 $80 $40

1. Definitely Would Buy 4% 5% 15%

2. - - 2%

3. Probably Would Buy 7% 14% 30%

4. 1% 2% 4%

5. Probably Not Buy 22% 24% 18%

6. 2% 2% 1%

7. Definitely Not Buy 65% 54% 30%

Kodak’s analysis of a next-generation instant camera - purchase intent on a 7-point scale

Price Response Curve for Instant Cameras

47

19

11

0

5

10

15

20

25

30

35

40

45

50

0 20 40 60 80 100 120 140 160

Price $% of Probable Buyers

b) Conjoint analysis

What would you prefer?Type a number from the scale below to indicate your preference

4-cup Capacity9-minute Brewing Time

$18

8-cup Capacity3-minute Brewing Time

$28

OR

Strongly Prefer Left Strongly Prefer Right

1 5 92 87643


• Laboratory; Simulated Shopping or “In-Market” Tests

• In-market tests: Prices varied across stores, accounts, geographic regions

• Direct mail catalogs are another medium for experiments

• In-market test of a German mobile phone manufacturer

– Regular price of phone = DM 1200

– At this price 24% of new car buyers bought the phone

– Company then varied prices for 3 months in 3 different regions

– The results were as follows

3. Price Experiments

Price Experiment for Mobile Phone

26 (Region A)

45 (Region C)41 (Region B)

20

25

30

35

40

45

500 600 700 800 900 1000 1100 1200

Price (DM)% of Buyers

3 month period before experiment = 24%


• Supermarket scanners are especially useful for this purpose

• If prices have naturally varied over time, one can analyze how changes in absolute or relative prices affect sales volumes and market shares

• German market for RTE desserts

• 4 main competitors at the time of analysis: Gervais-Danone, Nestle, Unilever and Dr. Oetker, togther had more than 80% share

• Dr. Oetker’s prices varied between DM 0.60 and DM 0.70. Unit sales varied between 7 million and 12 million for two-month periods.

4. Analysis of Historical Market Data

Price Response Estimate Based on Historical Data

Price DM0.60 0.63 0.65 0.68 0.70 0.73

6

7

8

9

10

11

12

100

110

120

ProfitSales Volume

Profit

Index

Volume (million units)

Evaluation of Different Methods

Expert Judgment Customer Survey Price Experiments Historical Data

Direct Conjoint

Validity Medium Low Medium-High Medium-Low High

Reliability Medium-High Uncertain Medium-High High Low

Costs Very Low Low-Medium

Medium, Medium-High Depends on DataAvailability

For NewProducts?

Yes ?? Yes Yes No

For OldProducts?

Yes Yes Yes Yes Yes

OverallEvaluation

New Products &New Markets

?? Very Useful Useful Good for OldProducts

Product Category Literature Dolan & Simon

Consumer Nondurables 1.5 - 5 Typically > 2

Consumer Durables 1.5 - 3 High variation

Pharmaceuticals ~ 0.5 Innovative 0.2~0.7Me Too 0.5~1.5Generics 0.7~2.5

OTC Drugs 0.5~1.5Industrial Products

Standard Specialty

n.a. 2 – 1000.3 – 2

Automobiles Luxury Normal

n.a. 0.7 – 1.5> 1.5

Services Airlines Rail Telecom

Air time Mobile Subscription

Computer Services

> 21.5

0.7 – 1.7n.a.n.a.

1-5< 1

0.3 – 12 – 5

0.5 – 1.5

EmpiricalEstimatesof PriceElasticities


IV Identify an Optimal Pricing Structure

• Should Quantity Discounts be offered?

Units Buyer A Buyer B

1 $70 $702 $20 $503 $20 $404 $20 $355 $20 $30

Above table gives the value of each successive unit of the product to 2 buyers A and B. What price should the company charge if producer’s cost is $20 per unit?

Pricing Structure.....• Should Bundle Pricing be offered?

• Movie distributors often sell packages of films rather than selling individual film rights because the package values vary less across buyers than do values of individual films

Buyer A Buyer B

Movie 1 $9000 $5000

Movie 2 $1000 $5000

Total $10000 $10000

• Using a la carte pricing can sell movie 1 to both buyers for $5000 each and movie 2 to buyer B for $5000. Total revenue is $15000. By bundling, both buyers will buy the bundle for $10000. So total revenue = $20000

Bundling Example: Mobile Phone Operator

CustomerSegment

Maximum Prices (DM per month)

Voice Mail Hot Line Both

1 9.0 1.5 10.5

2 8.0 5.0 13.0

3 4.5 8.5 13.0

4 2.5 9.0 11.5

Optimal Pure Components Pricing

01

23

456

78

910

0 2 4 6 8 10

Pv = 8

Ph=8.5

Group 4Group 3

Group 2

Group 1

Price for Voice Mail

Pri

ce f

or H

ot L

ine

Optimal Pure Bundling Price

01

23

456

78

910

0 2 4 6 8 10

Group 4Group 3

Group 2

Group 1


Pri

ce f

or H

ot L

ine

Optimal Mixed Bundling Price

01

23

456

78

910

0 2 4 6 8 10

Group 4Group 3

Group 2

Group 1

Pri

ce f

or H

ot L

ine

Ph=9Pv=9

Pv+h=13


8 Steps to Better Pricing: STEP 5V Consider Competitors’ Reactions

• In 1994, Kodak’s share of the US film market was 70% but was declining.

• Flagship product Kodak Gold sold at 17% premium over Fuji

• Did not because Fuji had gross margin of 55% and could have followed the price cut

• Launched Funtime film at price lower than Fuji

• Simple Competitive Reactions

• Multiple Competitive Reactions

• AA Value Pricing: AA cut prices; SouthWest responded by advertising: “We’d like to match their new fares, but we’d have to raise ours

• Game theoretic Analysis

Competitive Interaction

• Asymmetric Price Tier Competition– Superpremium

FujiColor Reala $4.69Kodak Ektar $4.27

– PremiumKodak Gold Plus $3.49Agfa Color $3.49

– EconomyFujiColor Super G $2.91Konica Super SR $2.91ScotchColor $2.69

• Prisoner’s Dilemma– Cigarettes in U.S. average price increase 10% from 1982 to 1991– Instant cameras from 1976 to 1985 declined 76% in price

• Price Signaling


VI Monitor Prices Realized at Transaction Level

• A product may have only 1 list price, but can have several final prices

• Returns, damage claims, special incentives drive revenue

• Unfortunately, most companies spend 90% of their effort in setting list prices

• Need to devote more care and attention to Quality and Logistics (manage returns / damage) and Account Analysis (where are revenues actually coming from?)


VII Assess Customers’ Emotional Response

• Manage price perceptions

• Reference prices and Prospect Theory

• Market research required to assess customer reaction in terms of both perceived fairness and purchase intention

Effect of purchase context

• You are lying on a beach on a hot day. All you have to drink is ice water. For the last hour you have been thinking about how much you would enjoy a nice cold bottle of your favorite beer. A companion gets up to make a phone call and offers to bring back a beer. He says that the beer may be expensive and asks the maximum price you are willing to pay. If the price is higher, he will not buy it.

What price will you tell him if the only nearby place where beer is sold is a fancy resort hotel?

What price will you tell him if the only nearby place where beer is sold is a small, run-down grocery store?

Odd pricing

• For which pair of prices is the lower price more of a bargain?

First pair: $0.89 $0.75

---------------------------------------------------------------------------

Second pair: $0.93 $0.79

Effect of Advertised Odd-Price Endings on Sales of Margarine:

Parkay brand: Price/lb ($) Unit sales

Regular price: 0.83 2817

Discount price 0.63 8283 (+ 194%)

Odd discount price 0.59 14,567 (+406%)

Order Effects

Reference prices when range

of prices shown in:

Product Ascending order Descending order

Electric shaver 20.18 24.00

After-shave lotion 2.28 3.56

Dress shirt 4.85 6.69

Sport coat 39.85 44.64

Hair spray 1.02 1.41

Hair dryer 21.91 21.91

Dress shoes 15.89 17.83

Blouse 7.37 9.27

Prospect Theory

Reference Price Reference Price- Actual Price

Actual Price -Reference Price

Utility

Disutility

Reference Pricing

– put low priced good next to high priced good.

– put “regular” price next to “sale” price (- “was $999, now $799”)

– order effects: reference prices influenced by what is seen first.

– endowment effect: de-couple acquisition and payment by first endowing buyers with the product. “Buy now, pay later”.

Reference Price effect of a High-end Product

Choice (%)

Microwave Oven Model: Group 1 Group 2

Panasonic II (1.1 cu ft; regular -N.A. - 13%

price $199.99; sale: 10% off)

Panasonic I (0.8 cu ft; regular 43% 60%

price: $179.99; sale: 35% off)

Emerson (0.5 cu ft; regular price57% 27%

$109.99; sale: 35% off)


VIII Analyze Whether Returns are Worth the Cost to Serve

• Create a customer grid where each customer is plotted at the intersection of the revenue she or he generates and the company’s cost to serve that customer

• Need to manage customers for profits, not just sales

• Avoid “Strategic Accounts”

STRATEGICACCOUNTS

High

Low

Price Received

Low HighCost to Serve

Equity Axis

The Pricing Audit

Our pricing process High/Med/Low Current PerformancePoor Excellent

(Qualities) Relevance 1 2 3 4 51. Complements Marketing Strategy2. Co-ordinated & Holistic

(Steps)1. Assess value to customers2. Consider variation in value3. Assess price sensitivity4. Optimal pricing structure5. Consider competitive reactions6. Monitors on transaction level7. Customer emotional response8. Analyze revenue Vs. cost to serve

Added Comments

Pricing Ppt

Business

examples of value

added value

competition economic

economic value analysis

value of product attributes

pricing objective

world additional value

greater perceived value