introduction to pricing
Post on 13-Sep-2014
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Introduction to Pricing
Sreelata Jonnalagedda
The “PRICE” difference
1c increase in price on a can of coke = $300M
A 1% increase in price leads to an increase in net income of
6.4% for Coca-Cola
17.6% for Fuji
26% for Ford Motor Company
Small Change Giant Impact
Do Exactly as I Say
• Pick a paper and pen
• Think of an offering you want to price
• Write it down
• Come up with a criterion for making that pricing decision
• Write it down
Cost
Cost + Margin
Any sale should cover costs
At least I know the formula
Easy to justify within the organization
Customer
Willingness-to-Pay
I don’t want to lose a customer
All I need to do is ask the customer
Customer is god
Competition
Rival product price
Cannot let a rival steal my customer
Looking around in the market is easy
This is what the market will bear
The margin math
How are you accounting for your costs?
What if prices affect cost structure?
What about opportunity costs?
What customers want?
“everything for nothing”
Do customers dictate your prices?
Do they reveal their true willingness to pay?
Do they understand your offering?
Competing to win
What is your unique value proposition?
Price: A fertile ground for a war?
Should market share be your goal?
The relevant C’s
Customer
Competition
Cost
Create Value
Calibrate Value
Communicate Value
Capture Value
What is Value?
Does need drive value?
What is Economic Value?
Estimating the economic value
Reference Value
Positive Differentiation Value
Negative Differentiation Value
Total Economic Value
The case of Zip Car
Car sharing company: to provide reliable and convenient access to on-demand transportation.
Existing modes of transportation: Subway/Bus, Taxi, Rental car, personal vehicle
Share Fare includes: insurance, fuel, access
Subway/Bus
1. Access 2. Availability
1. Comfort 2. Travel
Flexibility
1. Driving Hassle 2. Pre-book time
Rental Car
1. Pre-booking 2. Travel Flexibility 3. Comfort Reference Value = $5/hr(inclusive
of insurance + fuel + rental)
1. Insurance ($1/hr) 2. Convenience (time saved: $12/hr) 3. Fuel savings ($2/hr)
1. Induction cost ($1/hr)
Economic Value = $(5 + {12 + 1 + 2} – 1) = $19/hr
Value and Price
Reference Value
Positive Differentiation Value
Negative Differentiation Value
Total Economic Value
COGS
Price
Objective Value
Perceived Value
Incentive to sell
Consumer’s incentive to buy
Price and the 3 C’s
Are customers, competition and costs completely irrelevant to pricing?
Not really
Is that all then?
Distribution, Product Life Cycle, etc..
Pricing for Start-Ups
Sreelata Jonnalagedda
Economic Value
Reference Value
Positive Differentiation Value
Negative Differentiation Value
Total Economic Value
Closest Alternative
Unique Value Proposition
Cost of doing business unique to you
On the Value of a Brand
Unique Value and Costs
New Ventures Typically
Over estimate costs (of doing business)
Underestimate unique value
The Crash Diet Pricing
Price Economics 101
End-of-quarter reactions to influence stock market
Sales targets to be met for bonuses
Handy lever for the executives
Least understood by managers
Business Model
Co
sts
The Start-Up Challenge
Will do anything What is the market need?
Desperate to make a sale Flexibility/ less rules
Too much room for experimenting Start anywhere
Inexperience Nobody is watching you
Pricing Models
Transactional (Product/Service)
most Common
Subscription
used for recurrent transactions
Free/mium
popularized by the web, Ex: Dropbox
Two-sided subsidies
in exchange for the consumer info, Ex: Google
Direct Subsidies
the razor and blades model
Popular Myths: FREEly Available
х Abundance drives free pricing
х Free triggers adoption
There is no such thing a free lunch
Free has a negative effect on the psychology of consumption
Is Free Inevitable?
Businesses that thrive on communities
are communities first , businesses next
indiaparenting.in, r2i.com
In winner-take-all markets
it’s a bet on the future
every bet has risks
Commoditized markets
by definition you add no value
Price, Payment, and Consumption
To Each His Own
Value (Creation)
Calibrate (Estimate EV)
Communication of Value
Capture Value (Price)
How do I come up with a pricing model?
……………….Well… you don’t!
