pricing strategy over the life cycle – chs. 7-8 review fire safety homework understand how price...
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Pricing Strategy over the Life Cycle – Chs. 7-8
• Review Fire Safety Homework• Understand how price sensitivity, costs, and
competition influence pricing strategy over the product life cycle.
• Introduce organizational tools and diagnostic analytics that can be used to identify and overcome implementation challenges
Incremental Quantity Breakeven % 2010-11:(5% Price Increase; ~62% CM)
Breakeven Sales as a % of 2010 Sales (1+/- Incremental Breakeven %)
Expected 2011 Sales as a % of 2010 Sales (No price change; Market Growth = 29%)
Breakeven 2011 Sales as a % of 2010 Sales (5% Price Increase; Growth = 29%)
Actual 2011 Sales as a % of 2010 Sales
Quantity % Above/Below Breakeven (2010 basis)
Quantity % Above/Below Breakeven (2011 basis)
Fire Safety: 1. Given overall market growth rate = 29%, Fire Safety’s 5% price increase in FY 2011, & 2010 CM≈62%, what was Fire Safety’s incremental % breakeven point for unit quantity and $ sales change in FY 2011? How does that compare with actual 2011 unit quantity and $ sales changes.
-P%CM% + P%
-5%62%+5%
= = -7.5%
92.5%
129%
107.8%
119.4%
-11.6%
-9.7%
Incremental Quantity Breakeven % 2011-12:(5% Price Increase; ~64% CM)
Breakeven Sales as a % of Sales (1+/- Incremental Breakeven %)
Expected 2012 Sales as a % of 2011 Sales (No price change; Growth = 44%)
Breakeven 2012 Sales as a % of 2011 Sales (5% Price Increase; Growth = 44%)
Would you recommend the 5% price increase to FSI management for FY 2012? Why (not)? What would you recommend?
Fire Safety: 2. Given the expected market growth rate of 44%, Fire Safety’s proposed 5% price increase in FY 2012, & 2011 CM ≈ 64%, what is Fire Safety’s incremental percentage breakeven point for unit quantity and $ sales change in FY 2012?
-7.2%
92.8%
144%
133.6%
-5%64%+5%
Breakeven Elasticity = -1.45
Observed Elasticity = %Q (107.8-129) -16.44% -3.29
%P 129 5.00%The Final Requires Calculating Breakeven Volumes &
Expected Volumes based on Elasticities
Elasticity Required to Breakeven
Price increase: |Elasticity| < the breakeven amount leads to contribution increase.Price decrease: |Elasticity| > the breakeven amount leads to contribution increase.
The Final Requires Calculating Breakeven Volumes & Expected Volumes based on Elasticities
Sales and Profits Over the PLC
Product Adoption CurveInnovators
3-5%Early
Adopters10-15%
EarlyMajority
34%
LateMajority
34%
Laggards orNonadopters
5-16%
90
50
20
5
0Time
Pe
rce
nt
Ad
op
tio
n
CUSTOMERS Growing customer baseEarly adoptersLittle product knowledgeModerate knowledge buyersIncreasing brand loyalty
Large segmented marketLate adopters/LaggardsHigh knowledge buyersRepeat purchasersComparison shopping
Declining customer baseHigh knowledge buyersFamiliar with all suppliers and options
COMPETITION Shakeout to stable # of competitorsHomogeneous dominant brandsMarket share defenseGains from competitors
Increased competitive entryBrand proliferation & confusionDifferentiation vs. Cost leadership
Increased price competition to fill capacityExiting of weak competitors
Declining unit variable costs through volume;Increasing contribution margins
Low variable costsHigh contribution marginsCost controlsAsset utilization
Excess capacityHigh average costs, due to low capacity utilization
Reference value effectPrice quality effectDifficult comparison effect
MORE SENSITIVITY
Switching cost effectExpenditure effectEnd benefit effectLower riskHIGH SENSITIVITY
Switching cost effectExpenditure effectEnd benefit effect
HIGH SENSITIVITY
COSTS
PRICE SENSITIVITY
Brand positioningDifferentiationBrand loyaltyDefensible competitive position
Market share defenseMarketing and production efficiencyProfitable market segmentation
Retrench, & defend strongest product linesHarvest the businessConsolidation to small # of competitors
MARKETING OBJECTIVES
Bundled pricing to simplify segmented pricing according to buyer knowledge (Hi-Mod-Lo)
Expansion of product line and price pointsMultiple pricing channelsSegmentation pricing
Price to maintain margins, but signal intent to defendPrice for max. cash flowPredatory pricing
PRICING STRATEGIES
High incremental costs of production and promotionLow contribution marginExternal sourcing
Reference value effectPrice quality effectDifficult comparison &Fairness effectLOW SENSITIVITY
Generate primary demandCustomer awarenessMarket educationBuyer frames of referenceInformation diffusion
Establish value and worth
Small customer baseInnovatorsLittle product knowledgeLow knowledge buyers
Few competitorsLow threat of competitive rivalryGains from market development are high
Market Dynamics over the PLCGROWTH MATURITY DECLINEINTRODUCTION
CUSTOMERS Moderate knowledge buyersIncreasing brand loyalty
High knowledge buyersRepeat purchasersComparison shopping
COMPETITION Homogeneous dominant brands Market share defenseGains from competitors
Brand proliferation & confusionDifferentiation vs. Cost leadership
Declining unit variable costs through volume
High contribution marginsAsset utilization
Difficult comparison &Price quality effect
MORE SENSITIVITY
Switching cost effectExpenditure effect
HIGH SENSITIVITY
COSTS
PRICE SENSITIVITY
Brand positioning & loyalty Brand differentiationDefensible competitive position
Market share defenseMarketing & production efficiencyProfitable market segmentation
MARKETING OBJECTIVES
Simplify segmented pricing according to buyer knowledge (Hi-Mod-Lo)
Expansion of product line and price pointsSegmentation pricing
PRICING STRATEGIES
High incremental costs of production and promotion
Difficult comparison & Fairness effect
LOW SENSITIVITY
Generate primary demandCustomer awarenessMarket education
Establish value and worth
Little product knowledgeLow knowledge buyers
Few competitorsGains from market development are high
Market Dynamics over the PLCGROWTH MATURITYINTRODUCTION
PLC & Brand Strategies
Brand StageLaunch
Maintenance
Retirement
Product Category Life CycleIntroduction
Price to establish, communicate & promote value of the product
N/A
N/A
GrowthBased on LT strategy, identify appropriate segment(s) before commercialization
Segment & target for LT advantage. Lower price as necessary to maintain market growth. Price compete only to gain cost advantage.
Price to clear inventory quickly while launching new models
MaturityUse aggressive pricing to dominate based on cost advantage or target underserved niches w/a service advantage.
Unbundle. Price products & services separately. Rationalize product line & distribution strategy. Price to maximize profit, not market share or growth.
Slowly price yourself out of business.
DeclineNot recommended.
Only with strong advantage. Consolidate to solidify cost or service leadership.
Withdraw cash w/incrementally higher prices.
Product differentiation strategy
Cost leadership strategy
Marketing differentiation (& product proliferation) strategy
PLC & Brand Strategies
Brand StageLaunch
Maintenance
Retirement
Product Category Life CycleIntroduction
Price to establish, communicate & promote value of the product
N/A
N/A
GrowthBased on LT strategy, identify appropriate segment(s) before commercialization
Segment & target for LT advantage. Lower price as necessary to maintain market growth. Price compete only to gain cost advantage.
Price to clear inventory quickly while launching new models
MaturityUse aggressive pricing to dominate based on cost advantage or target underserved niches w/a service advantage.
Unbundle. Price products & services separately. Rationalize product line & distribution strategy. Price to maximize profit, not market share or growth.
Slowly price yourself out of business.
Product differentiation Cost leadershipMarketing differentiation (& product proliferation)
Illustrative Customer Profitability Map
Price
High
Low
Cost to Serve
“Gold”
“Silver” “Lead”
“Platinum”
Low High
Price Banding OutputA
ctu
al P
rice
Fair Price
At Risk
Fair Price
Outlaws
Customer Lifetime Value (CLV)Useful Analysis at the Individual Customer & Segment
CLVinfinite lifetime = CM/(i* + 1 – r) – ACwhereCM = average annual contribution for the customer (segment)
i* = i (=the risk-free discount rate) × risk factorr = retention rate for the customer (segment)AC = acquisition costs
How valuable/profitable is each customer (segment) given prices & variable costs (i.e., contribution), retention rates, discount rate, risk level & acquisition costs?
How valuable/profitable is an acquisition or retention campaign given prices & variable costs (i.e., contribution), retention rates, discount rate, risk level & acquisition costs?
Customer EquityFacebook April/May 2012
At Facebook• April 2012 Unique Users: 900,000,000 • Revenue ≈ 3.7 B; CM (90%) ≈ $4; i* = .05; r = .95• CLV ≈ $40
• Customer Equity = #Users × CLV = $36 B
= # Customers × CLVCustomer Equity
External Valuation May 2012: ~$100 B
Customer EquityFacebook July/August 2012
At Facebook• July 2012 Unique Users: 955,000,000• Revenue ≈ 4.7 B; CM (90%) ≈ $4.4• CLV ≈ $44
• Customer Equity = $42 B
= # Customers × CLVCustomer Equity
External Valuation August 2012: ~$50 B
Price Waterfall Example
Price ($)
Major Opportunity
620 45
1 67
507 15 251 5 6 455
0
200
400
600
800
TransactionPrice
OrdersizeDiscount
Upcharges MCP / BidDiscounts
and WaivedUpcharges
InvoicePrice
Credits Discount /Terms
Misc.Charges /
Allowances
Rebates DebitBacks
PocketPrice
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