Pricing Strategies

MA8kL1lnC An ln18CuuC1lCn
ArmsLrong/koLler
MA8kL1lnC An ln18CuuC1lCn
ArmsLrong/koLler
Pricing
Understanding and Capturing Customer
Value
9 2
11/7/2011 An[um nlsar Cureshl
ChapLer CuLllne
W WhaL ls a rlce?
W CusLomer ercepLlons of value
W Company and roducL CosLs
W CLher lnLernal and LxLernal ConslderaLlons
AffecLlng rlce ueclslons
W newroducL rlclng
W roducL Mlx rlclng
W rlceAd[usLmenL SLraLegles
W rlce Changes
9 3
IN1kCDUC1ICN
W 1rader !oe's Cheap CourmeL!
W 1rader !oe's ls noL really a gourmeL food sLore 1hen agaln lL ls noL a dlscounL food sLore
elLher lL ls acLually a blL of boLh
W Cne of Amerlca's hoLLesL reLallers 1rader !oe's has buL lLs own speclal LwlsL on Lhe food
prlcevalue equaLlon call lL cheap gourmeL"
W CusLomers do noL [usL shop aL 1rader !oe's Lhey experlence lL
W 1rader !oe's sLocks only a llmlLed assorLmenL of abouL 2000 speclalLy producL (compared Lo
43000+ aL a Lyplcal Safeway) Powever Lhe assorLmenL ls unlquely 1rader !oe's Many of
Lhese are producLs you cannoL flnd anywhere else
W Pow does 1rader !oe's keep lLs prlces so low? 1hey boasL lean operaLlons and a nearfanaLlcal
focus on savlng money AddlLlonally Lhey spend almosL noLhlng on adverLlslng
W lL's all abouL value and prlce whaL you geL for whaL you pay
9 4
lnLroducLlon
W When seLLlng prlces as when maklng any oLher
markeLlng declslons a company can'L afford Lo focus
on lLs cosLs and proflLs
W lnsLead lL musL focus on cusLomers' needs and Lhe
value Lhey recelve from Lhe company's LoLal
markeLlng offer
W lf a company doesn'L glve cusLomers full value for Lhe
prlce Lhey're paylng Lhey'll go elsewhere
9 3
WhaL ls rlce
W ln Lhe narrowesL sense pr|ce ls Lhe amounL of money charged for a
producL or servlce
W More broadly pr|ce ls Lhe sum of all Lhe values LhaL cusLomers glve up ln
order Lo galn Lhe beneflLs of havlng or uslng a producL or servlce
rlce ls Lhe only elemenL ln Lhe markeLlng mlx LhaL produces revenue
rlce ls one of Lhe mosL flexlble markeLlng mlx elemenLs
9 6
Ma[or rlclng SLraLegles
company's pricing decisions are affected by both internal
company factors and external environmental factors
9 7
Ma[or rlclng SLraLegles
W LeL's see how company seL prlces for Lhelr
producLs
9 8
Customer Va|ue8ased r|c|ng
W CusLomer valuebased prlclng uses buyers' percepLlons of
value noL Lhe seller's cosL as Lhe key Lo prlclng
valuebased prlclng means LhaL Lhe markeLer cannoL deslgn a producL
and markeLlng program and Lhen seL Lhe prlce
rlce ls consldered along wlLh Lhe oLher markeLlng mlx varlables
befote tbe motketloq ptoqtom ls set
W 1he company seLs lLs LargeL prlce based on cusLomer
percepLlons of Lhe producL value
1he targeted va|ue and pr|ce Lhen drlve declslons abouL producL
deslgn and whaL cosLs can be lncurred
9 9
W A company uslng valuebased prlclng beglns wlLh
analyzlng consumer needs and value percepLlons
buyers asslgn Lo dlfferenL value proposlLlons and
Lhen seLs prlce LhaL maLches consumers' percelved
value
W owever measur|ng perce|ved va|ue |s d|ff|cu|t
lf Lhe markeLer charges more Lhan Lhe percelved value Lhe
producL would sell poorly
lf Lhe markeLer charges lower prlces Lhan Lhe percelved
value Lhe resulL would be more sales buL less revenue
1he besL sLraLegy ls Lo glve more for less
9 10
W More and more markeLers are adopLlng value prlclng by
offerlng
W oodva|ue pr|c|ng strateg|es lnvolves offerlng [usL Lhe rlghL
comblnaLlon of quallLy and good servlce aL a falr prlce (MlaLa)
Pollday Lxpress budgeL hoLels
8evlon's Charles of Lhe 8lLz offer Lhe Lxpress 8ar collecLlon of
affordable cosmeLlcs
Mcuonald's offer value menus"
W Va|ueadded pr|c|ng lnvolves aLLachlng valueadded feaLures
and servlces Lo dlfferenLlaLe a company's offers and charglng
hlgher prlces
9 11
value8ased versus CosL8ased rlclng
9 12
ulscusslon CuesLlon
WhaL are Lhe
challenges Lo a
markeLer who
uses valuebased
prlclng?
9 13
ulscusslon CuesLlon
W WhaL are Lhe challenges Lo a markeLer who uses
valuebased prlclng?
W oss|b|e Answer SomeLlmes lL ls dlfflculL Lo
measure Lhe value cusLomers aLLach Lo a producL
Many values LhaL are evaluaLed are sub[ecLlve and vary
from cusLomer Lo cusLomer
W ptlce of o botqet setveJ ot Mottlott vs McuooolJs
9 14
1ypes of Costs
llxed
CosLs
varlable
CosLs
1oLal
CosLs
Fixed costs also known as overhead) are costs that do not vary with
production or sales level.
VariabIe costs vary directly with the level of production.
TotaI Costs = Fixed Costs + Variable Costs
9 13
Cost8ased r|c|ng
W under cosL prlclng Lhe markeLer prlmarlly looks aL producLlon cosLs as Lhe
key facLor ln deLermlnlng Lhe lnlLlal prlce
W 1hls meLhod offers Lhe advanLage of belng easy Lo lmplemenL as long as
cosLs are known
W Powever lLs ma[or dlsadvanLage ls LhaL lL does noL Lake lnLo conslderaLlon
Lhe LargeL markeL's demand for Lhe producL 1hls could presenL ma[or
problems lf Lhe producL ls operaLlng ln a hlghly compeLlLlve markeL where
compeLlLors frequenLly alLer Lhelr prlces
W 1here are several Lypes of cosL prlclng lncludlng
Markup rlclng
CosLlus rlclng
8reakeven rlclng
9 16
CosL8ased rlclng Markup rlclng
W 1hls prlclng meLhod ls used by resellers who acqulre producLs from
suppllers uses a percenLage lncrease on Lop of producL cosL Lo arrlve aL an
lnlLlal prlce
A ma[or general reLaller such as WalmarL may apply a seL percenLage for each
producL caLegory (eg womens cloLhlng auLomoLlve garden supplles eLc)
maklng Lhe prlclng conslsLenL for all llkeproducLs AlLernaLlvely Lhe
predeLermlned percenLage may be a number LhaL ls ldenLlfled wlLh Lhe
markeLlng ob[ecLlves (eg requlred 20 8Cl)
W lor resellers LhaL purchase Lhousands of producLs (eg reLallers) Lhe
slmpllclLy lnherenL ln markup prlclng makes lL a more aLLracLlve prlclng
opLlon Lhan more Llmeconsumlng meLhods
W Powever Lhe advanLage of ease of use ls someLlmes offseL by Lhe
dlsadvanLage LhaL producLs may noL always be opLlmally prlced resulLlng
ln producLs LhaL are prlced Loo hlgh or Loo low glven Lhe demand for Lhe
producL
9 17
Cost r|c|ng Cost|us Method
W ln Lhe same way markup prlclng arrlves aL prlce by addlng a cerLaln
percenLage Lo Lhe producL's cosL cosLplus prlclng also adds Lo Lhe cosL by
uslng a flxed moneLary amounL raLher Lhan percenLage
W lor lnsLance a conLracLor hlred Lo renovaLe a homeowner's baLhroom wlll
esLlmaLe Lhe cosL of dolng Lhe [ob by addlng Lhelr LoLal labor cosL Lo Lhe
cosL of Lhe maLerlals used ln Lhe renovaLlon
W 1he homeowner's selecLlon of ceramlc Llle Lo be used ln Lhe baLhroom ls
llkely Lo have llLLle effecL on Lhe labor needed Lo lnsLall lL wheLher lL ls a
lowend low prlced Llle or a hlghend premlum prlced Llle
W Assumlng mosL maLerlal ln Lhe baLhroom pro[ecL are sLandard slzes and
conflguraLlon any change ln Lhe LoLal prlce for Lhe renovaLlon ls a resulL of
changes ln maLerlal cosLs whlle labor cosLs are consLanL
9 18
8reakeven r|c|ng
W 8reakeven prlclng ls a forecasLlng Lool used by
markeLers Lo deLermlne how many unlLs of a producL
musL be sold before Lhe company sLarLs reallzlng a
proflL
W lL lndlcaLe Lhe mlnlmum level of demand LhaL ls
needed before a producL wlll show a proflL
W lrom Lhls Lhe markeLer can Lhen assess wheLher Lhe
producL can reallsLlcally achleve Lhese levels
9 19
8reakeven r|c|ng
W lor example assume a company operaLes a slngleproducL
manufacLurlng planL LhaL has a LoLal flxed cosL per year of (uS)
$3000000 and Lhe varlable cosL ls $4300 per unlL
8reakeven volume llxed CosL/rlce varlable CosL
8reakeven volume $3000000/$120 $43
8reakeven volume $40000
W lf Lhe company sells Lhe producL dlrecLly Lo cusLomers for
$120 lL wlll requlre Lhe company Lo sell 40000 unlLs Lo
breakeven
9 20
8reakeven r|c|ng
W Powever lL ls lmporLanL LhaL markeLers musL deLermlne wheLher Lhe
demand (le number of unlLs needed Lo breakeven) ls reallsLlcally
aLLalnable
W Slmply plugglng ln a number for prlce wlLhouL knowlng how Lhe markeL
wlll respond Lo LhaL flgure means LhaL Lhls meLhod has llLLle value
(noLe A common mlsLake when performlng Lhls analysls ls Lo reporL Lhe
breakeven ln a moneLary value such a breakeven ln dollars (eg $40000)
W 1he calculaLlon presenLed ln Lhe prevlous sllde ls a measure of unlLs LhaL need Lo be
sold
W Clearly lL ls easy Lo Lurn Lhls lnLo a revenue breakeven analysls by mulLlplylng Lhe
unlLs needed by Lhe selllng prlce ln our example 40000 unlLs x $120
$4800000)
9 21
8reakeven r|c|ng
W 8reakeven pr|c|ng (target return pr|c|ng) SeLLlng prlce Lo
break even on Lhe cosLs of maklng and markeLlng a producL
or seLLlng prlce Lo make a LargeL reLurn
W rlclng meLhod whereby Lhe selllng prlce of a producL ls
calculaLed Lo produce a parLlcular raLe of reLurn on
lnvesLmenL for a speclflc volume of producLlon
W 1he LargeL prlclng meLhod ls used mosL ofLen by publlc
uLlllLles llke elecLrlc and gas companles and companles
whose caplLal lnvesLmenL ls hlgh llke auLomoblle
manufacLurers
9 22
8reakeven r|c|ng
9 23
ulscusslon CuesLlon
Conslder Lhe lunch
you purchased
Loday 1o Lhe
resLauranL whaL
were varlable and
flxed cosLs for your
meal?
9 24
ulscusslon CuesLlon
W Conslder Lhe lunch you purchased Loday 1o Lhe
resLauranL whaL were varlable and flxed cosLs for
your meal?
W oss|b|e Answer Lhe food was a varlable cosL all
Lhe raw maLerlals Lhey purchased
W 1he overhead lncludlng Lhe llghLlng heaL and renL
were all flxed cosLs
W 1he cook could be consldered a flxed cosL as could
Lhe walLer
9 23
lnLernal and LxLernal ConslderaLlons
AffecLlng rlce ueclslon
Cverall MarkeLlng
SLraLegy
Cb[ecLlves and
Mlx
CrganlzaLlonal
ConslderaLlons
1he Lconomy
1he CovernmenL Soclal Concerns
1he MarkeL and
uemand
9 26
Overo// Morketinq 5troteqy
Objectives ond Mix
W MarkeLlng declslons lncludlng prlce are drlven by Lhe
ob[ecLlves seL by Lhe managemenL of Lhe organlzaLlon 1hese
ob[ecLlves come aL Lwo levels
W |rst Lhe overall ob[ecLlves of Lhe company gulde all declslons
for all funcLlonal areas (eg markeLlng producLlon human
resources flnance eLc)
W Culded by Lhese ob[ecLlves Lhe markeLlng deparLmenL wlll seL
lLs own ob[ecLlves whlch may lnclude reLurn on lnvesLmenL
cash flow markeL share and maxlmlze proflLs Lo name a few
9 27
Objectives ond Mix
W rlclng declslons llke all oLher markeLlng declslons wlll be used Lo help Lhe
deparLmenL meeL lLs ob[ecLlves
lor lnsLance lf Lhe markeLlng ob[ecLlve ls Lo bulld markeL share lL ls llkely Lhe markeLer
wlll seL Lhe producL prlce aL a level LhaL ls aL or below Lhe prlce of slmllar producLs
offered by compeLlLors
W Also Lhe prlce seLLlng process looks Lo wheLher Lhe declslons made are ln llne wlLh
Lhe declslons made for Lhe oLher markeLlng declslons (le LargeL markeL producL
dlsLrlbuLlon promoLlon)
W 1hus lf a company wlLh a sLrong brand name LargeLs hlghend consumers wlLh a
hlgh quallLy fullfeaLured producL Lhe prlclng declslon would follow Lhe
markeLer's deslre Lo have Lhe producL be consldered a hlghend producL
W ln Lhls case Lhe prlce would be seL hlgh relaLlve Lo compeLlLors' producLs LhaL do
noL offer as many feaLures or do noL have an equally sLrong brand name
9 28
Objectives ond Mix
W rlce ls only one of Lhe markeLlng mlx Lools LhaL a company
uses Lo achleve lLs markeLlng ob[ecLlves
W rlce declslons musL be coordlnaLed wlLh producL deslgn
dlsLrlbuLlon and promoLlon declslons Lo form a conslsLenL
and effecLlve lnLegraLed markeLlng program
W ueclslons made for oLher markeLlng mlx varlables may affecL
prlclng declslons
W lor example Lhe declslon Lo poslLlon Lhe producL on hlgh
performance quallLy wlll mean LhaL Lhe seller musL charge a
hlgher prlce Lo cover hlgher cosLs
9 29
Orqonitotiono/ considerotions
W ln small companles prlces are ofLen seL by Lop managemenL
raLher Lhan by Lhe markeLlng or sales deparLmenLs
W ln large companles prlclng ls Lyplcally handled by dlvlslonal or
producL llne managers
W ln lndusLrlal markeLs salespeople may be allowed Lo
negoLlaLe wlLh cusLomers wlLhln cerLaln prlce ranges
W ln lndusLrles ln whlch prlclng ls a key facLor companles ofLen
have prlclng deparLmenLs Lo seL Lhe besL prlces or Lo help
oLhers ln seLLlng Lhem
9 30
rlclng ln ulfferenL 1ypes of MarkeLs
rlclng
ure
compeLlLlon
MonopollsLlc
compeLlLlon
CllgopollsLlc
compeLlLlon
9 31
rlclng ln ulfferenL 1ypes of MarkeLs
W 1he seller's prlclng freedom varles wlLh dlfferenL Lypes of markeLs
W under pure compet|t|on Lhe markeL conslsLs of many buyers and sellers Lradlng ln a unlform
commodlLy such as wheaL copper or flnanclal securlLles no slngle buyer or seller has much
effecL on Lhe golng markeL prlce ln a purely compeLlLlve markeL markeLlng research producL
developmenL prlclng adverLlslng and sales promoLlon play llLLle or no role 1hus sellers ln
Lhese markeLs do noL spend much Llme on markeLlng sLraLegy
W under monopo||st|c compet|t|on Lhe markeL conslsLs of many buyers and sellers who Lrade
over a range of prlces raLher Lhan a slngle markeL prlce A range of prlces occurs because
sellers can dlfferenLlaLe Lhelr offers Lo buyers Sellers Lry Lo develop dlfferenLlaLed offers for
dlfferenL cusLomer segmenLs and ln addlLlon Lo prlce freely use brandlng adverLlslng and
personal selllng Lo seL Lhelr offers aparL
W under o||gopo||st|c compet|t|on Lhe markeL conslsLs of a few sellers who are hlghly senslLlve
Lo each oLher's prlclng and markeLlng sLraLegles 8ecause Lhere are few sellers each seller ls
alerL and responslve Lo compeLlLors' prlclng sLraLegles and moves
W 9re monopo/y 1he markeL conslsLs of one seller 1he seller may be a governmenL
monopoly a prlvaLe regulaLed monopoly or a prlvaLe nonregulaLed monopoly
9 32
Ana|yz|ng the r|ceDemand
ke|at|onsh|p
W 1he relaLlonshlp beLween Lhe prlce charged and Lhe resulLlng
demand level ls shown ln Lhe demand curve (llgure 94)
W ln Lhe normal case demand and prlce are lnversely relaLed
LhaL ls Lhe hlgher Lhe prlce Lhe lower Lhe demand
W ln a monopoly Lhe demand curve shows Lhe LoLal markeL
demand resulLlng from dlfferenL prlces
W lf Lhe company faces compeLlLlon lLs demand aL dlfferenL
prlces wlll depend on wheLher compeLlLors' prlces sLay
consLanL or change wlLh Lhe company's own prlces
9 33
Analyzlng Lhe rlceuemand 8elaLlonshlp
uemand Curve
r|ce e|ast|c|ty
the change |n
demand w|th
the change |n
pr|ce
|ast|c
Ine|ast|c
9 34
r|ce |ast|c|ty of Demand
W r|ce e|ast|c|ty Pow responslve demand wlll
be Lo a change ln prlce
W lf demand hardly changes wlLh a small change
ln prlce we say demand ls ine/ostic
W lf demand changes greaLly wlLh a small change
ln prlce we say Lhe demand ls e/ostic
9 33
@e conomy
W Lconomlc condlLlons can have a sLrong lmpacL on Lhe flrm's prlclng
sLraLegles
W ln Lhe afLermaLh of Lhe recenL recesslon consumers have reLhoughL Lhe
prlcevalue equaLlon Many consumers have LlghLened Lhelr belLs and
become more value consclous
W 1he mosL obvlous response Lo Lhe new economlc reallLy ls Lo cuL process
8aLher Lhan cuLLlng prlces many companles are shlfLlng Lhelr markeLlng Lo
focus on more affordable lLems ln Lhelr producL mlxes
W 8emember even ln Lough economlc Llmes consumers do noL buy based
on prlce alone
W 1he key ls Lo offer greaL voloe fot tbe mooey
9 36
Oter xterno/ loctors
W 1he company musL also conslder whaL lmpacL
lLs prlces wlll have on oLher parLles ln lLs
envlronmenL such as tesellets and Lhe
qovetomeot
W oclol coocetos may have Lo be Laken lnLo
accounL
9 37
ulscusslon CuesLlon
WhaL producLs
have lnelasLlc
demand? LlasLlc?
9 38
ulscusslon CuesLlon
W WhaL producLs have lnelasLlc demand? LlasLlc?
W Answer Many sLaples are lnelasLlc lncludlng some
food producLs (mllk) Cas for auLomoblles ls
somewhaL lnelasLlc alLhough we see people Lend Lo
drlve less when gas hlLs a cerLaln prlce
9 39
newroducL rlclng
MarkeLsklmmlng
prlclng
MarkeLpeneLraLlon
prlclng
9 40
newroducL rlclng
W Marketsk|mm|ng pr|c|ng SeLLlng a hlgh prlce for a new
producL Lo sklm maxlmum revenues layer by layer from Lhe
segmenLs wllllng Lo pay Lhe hlgh prlce Lhe company makes
fewer buL more proflLable sales
W MarkeL sklmmlng makes sense under cerLaln condlLlons
1 1he producL's quallLy and lmage musL supporL lLs hlgher prlce and
enough buyers musL wanL Lhe producL aL LhaL prlce
2 1he cosLs of produclng a smaller volume cannoL be so hlgh LhaL Lhey
cancel Lhe advanLage of charglng more
3 CompeLlLors should noL be able Lo enLer Lhe markeL easlly and
undercuL Lhe hlgh prlce
9 41
newroducL rlclng
W Marketpenetrat|on pr|c|ng ls seLLlng a low lnlLlal prlce ln
order Lo penetrote Lhe markeL qulckly and deeplyLo aLLracL
a large number of buyers qulckly and wln a large markeL
share
W Several condlLlons musL be meL for Lhls sLraLegy Lo work
1 1he markeL musL be hlghly prlce senslLlve so LhaL a low prlce
produces more markeL growLh
2 roducLlon and dlsLrlbuLlon cosLs musL fall as sales volume lncreases
3 1he low prlce musL help keep ouL Lhe compeLlLlon and Lhe
peneLraLlon prlcer musL malnLaln lLs lowprlce poslLlon
9 42
kCDUC1 MIk kICIN
9 43
kIC ADIUS1MN1S
9 44
In|t|at|ng r|ce Changes
In|t|at|ng
r|ce Cuts
In|t|at|ng
r|ce
Increases
8uyer
keact|ons to
r|ce Changes
Compet|tor
keact|ons to
r|ce Changes
9 43
8espondlng Lo rlce Changes
9 46
U8LIC CLIC AND kICIN
9 47
rlclng wlLhln Channel Levels
rohlblLed
rlce flxlng Lalklng wlLh
compeLlLors Lo seL prlces
redaLory prlclng selllng below
cosL wlLh Lhe lnLenLlon of
punlshlng a compeLlLor or puLLlng
Lhem ouL of buslness
9 48
rlclng across Channel Levels
rohlblLed
rlce dlscrlmlnaLlon ensure
same prlce Lo cusLomers aL
glven level of Lrade
rlce malnLenance requlrlng
dealers Lo charge a speclfled
reLall prlce
uecepLlve prlclng seller
sLaLes prlce LhaL may mlslead
cusLomers

Pricing Strategies

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MA8kL1lnC An ln18CuuC1lCn

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