Productcamp toronto-2013-pricing-Alaine_Meloche

• 1. JULY 20TH TED ROGERS SCHOOL OF MANAGEMENT, RYERSON UNIVERSITY ProductCamp 2013 www.productcamptoronto.wordpress.com

2. Why Price Matters 3. Impact of Price 4. Price Orientation Versus Pricing Realization Pricing Realization: relates to how close a firm sticks to list price and avoid profit leaks in pricing tactics and in deal negotiations with customers. Includes dimensions of pricing discipline and pricing compliance. Pricing Orientation: a philosophy or a pricing practice. Decisions relating to: Price positioning Setting or changing prices. 5. Pricing Orientation Four Methods of Pricing 6. Four Methods of Pricing There are four methods that typically have been used to price a product or service. 1. Cost - Based Pricing 2. Competition - Based Pricing 4. Performance - Based Pricing 3. Value - Based Pricing 7. 1. Cost Based Pricing Cost-based pricing is perhaps the oldest form of pricing. It involves adding a fixed mark-up to a product's cost to ensure a target margin. Common when difficult to know the competitions price Relatively easy to implement and use on a day-to-day basis Effective at ensuring the product is sold at the target margin May not be effective at ensuring the product achieves other important objectives Problem when launching new products Price = ( 1 + target margin ) x ( product cost ) 8. 2. Competition Based Pricing Competition-based pricing sets a products price by adding a set premium or discount to the price of a competing product (or basket of products). Common in environments where the competitions price is very visible and/or rapidly changing Often called reference pricing Relatively easy to implement and use on a day-to-day basis Effective at ensuring the product is sold at the target premium or discount May not be effective at ensuring the product achieves other important objectives. Price = { 1 + ( target premium or discount ) } x ( competitions price) 9. 3. Value Based Pricing Ties price to the attributes that customers use when determining the benefits that a product or service may provide them. For example: use of a product or service may provide dollar savings incremental price compared to competitors would then be based on some fraction of the incremental savings relative to the best available alternative on the market. Common for new product pricing especially in the case of very innovative products Not an approach that can be implemented rapidly; requires careful consideration of alternatives and their pros and cons Not always effective at ensuring the product achieves its objectives Incremental Price = some fraction of ( savings vs. best alternative ) 10. 4. Performance-Based Pricing 10 Total cost if all savings accrue to customer Total product cost Distribution cost 5.6% Total CURRENT customer cost 8.25 8.00 7.75 7.50 7.25 Product savings New Product Cost Customer efficiency savings Total NEW Cost to customer after its share of savings Other non- guarante ed savings to customer Advanced Solution Cost to customers after guaranteed share of savings $ Millions Supplier share of savings Guaranteed savings Total cost if all savings accrue to customer Total product cost Distribution cost 5.6% Total CURRENT customer cost 8.25 8.00 7.75 7.50 7.25 Product savings New Product Cost Customer efficiency savings Total NEW Cost to customer after its share of savings Other non- guarante ed savings to customer Advanced Solution Cost to customers after guaranteed share of savings $ Millions Supplier share of savings Guaranteed savings Price = Base +some fraction of benefits( eg. savings) Useful when performance level is uncertain (eg. New product) Ensures that seller does not undercharge buyer Buyer receives insurance that will not be overpaying Buyer and seller need to agree to metrics and they must be measurable Example 11. Value by Segment 11 Value to Customers International Software applied to: External Customers Internal Users National Software applied to: External Customers Internal Users Regional Software applied to: External Customers Internal Users Enhanced customer relationships Lower transaction costs Reduce operating costs Broaden exposure to market Efficient transfer of information Maximize breadth of products/ services available 12. Value - Price Matrix High Medium Low LowMediumHigh Price Value 1. Premium 2. Penetration 3. Superb Value 4. Overcharging 5. Fair Value 6. Good Value 7. Rip-Off 8. Cream-Skimming 9. Cheap Value Price/ Value Equivalence Line (PVE) 13. Hold Strategies: Price Appropriately for Value Offered 13 High Medium Low LowMediumHigh Price Value 1. Premium 2. Penetration 3. Superb Value 4. Overcharging 5. Fair Value 6. Good Value 7. Rip-Off 8. Cream-Skimming 9. Cheap Value To be used to stabilize markets Best used when there are clear lines of demarcation among competitors Most customers tend to classify products and services in boxes 1, 5, and 9 14. Penetration Strategies: Price LOW for Value Offered 14 High Medium Low LowMediumHigh Price Value 1. Premium 2. Penetration 3. Superb Value 4. Overcharging 5. Fair Value 6. Good Value 7. Rip-Off 8. Cream-Skimming 9. Cheap Value Difficult to execute unless they can be sustained for the long term Risk of falling into box 9 15. Skim Strategies: Price HIGH for the Value Offered 15 High Medium Low LowMediumHigh Price Value 1. Premium 2. Penetration 3. Superb Value 4. Overcharging 5. Fair Value 6. Good Value 7. Rip-Off 8. Cream-Skimming 9. Cheap Value Small, opportunistic but very profitable Usually takes advantage of a captive situation 16. Depends on two Factors: Our Negotiating/ Market Power The Value of a Particular Deal Price Realization 17. Pricing Capability Grid 18. Value Based Pricing: Two Key Components The Value of a Particular Deal Value of Buyer to SellerValue of Buyer/Deal to Seller Examples Cost to serve Cost to Replace Cross-sell Opportunity Volume/Contract Length Long Term Potential Influence (Marketing opportunity) Customers Value to the seller/ supplier 19. Application to New Product Pricing 20. Setting prices- Release Prices Premium Pricing: HOW HIGH CAN YOU GO? Penetration Pricing: HOW LOW CAN YOU GO? Perceived Value Perceived Price Low High High Price-Value Equivalence Line Evolutionary Revolutionary Penetration Pricing Premium Pricing Me- Too Low