Session Session onon

Price Level

B

Agenda 

• Preliminary SegmentBy

Dr. Nripendra Singh

• Preliminary Segment Pricing

•Price Optimization

•Implementing New Prices•Implementing New Prices

The Pricing Strategy PyramidPriceLevelLevel

Price setting

Pricing Policy

Negotiation Tactics &Negotiation Tactics &Pricing Setting Procedures

Value CommunicationCommunication, Value Selling Tools

Price Structure

Value Creation

Metrics, Fences, Controls

Economic Value, Offering Design, Segmentation

Price LevelSetting the Right Price for Sustainable Profit

Cos. Ste. Goals and Cost structure; Customers preferences and actual needs; Competitors pricing p ; p p gand ste. Intent.

P i i d i f fit bilit t hPricing as a driver of profitability must have coordination between sales, mktg, fin & op.

Due to complexity involved in pricing, Cos take short-cuts (reduce prices) for growth and send ashort cuts (reduce prices) for growth and send a wrong signal to customer. (Eg. Pharma Co.)

Price Setting Process

Preliminary Segment Pricing Optimization Implementationg

Set baseline prices based on type of value

Refine preliminary prices with iterative process balancing

Set final prices and ensure acceptance

among customers andassessment and initial differential value

capture rate

process balancing tradeoffs between price,

cost, and market response

Key Questions:

among customers and organization through

effective change management approach

Key Questions:

How much of the differential value should be captured

Key Questions:

What tradeoffs should I make between long-term strategic objectives and h t t k t

Key Questions:

How do I get sales force buy-in to the new prices value should be captured

for each segment?

How much time and effort should I invest in assessing the value of my products?

short-term market responses to price changes?

What types of analytical

buy to t e e p cesand empower them to execute effectively?

What is the best approach for communicating pricethe value of my products?

How should I adjust segment prices to account for different price

techniques are best suited to my product and market conditions?

How can I estimate

for communicating price changes to customers?

What is the best approach for raising prices on

sensitivities? How can I estimate customer response to potential price changes?

undervalued products?

Price Setting Process (3 Stages)

• Preliminary Segment Pricing– Value Assessment Options– Preliminary Price Rangey g– Pricing Strategy Options

• Price Optimization• Price Optimization– Profitability Analysis

E ti ti C t R– Estimating Customer Response • Implementing New Prices

– Communicating New Prices to the Sales Force

– Communicating Price Increases to Customers

Preliminary Segment Pricing

PositiveDifferenti

ti

Negative Differentiation

Key question: How much differential value ation

Competitive R f

y qshould be captured in each segment?

Reference

The answer to this question can differ substantially across segments based on strategic considerations and differences in price sensitivity

Preliminary Segment PricingPreliminary Segment PricingA) Value Assessment Options B) Preliminary Price RangeC) P i i St t O tiC) Pricing Strategy Options

OPTIONS/ PARAMETERS

PLC Degree of Cust understanding

f V l f

Market Size Time Available for Price Setting

of Value of Pro

EVE with External DataEVE with Internal DataWillingness-to-pay (Mgrl Est)C t P iCurrent Prices

Preliminary Segment PricingPreliminary Segment PricingA) Value Assessment Options

OPTIONS/ PARAMETERS

PLC Degree of Customer understanding

Market Size Time Available for Price SettingRS understanding

of Value of Product

Price Setting

EVE with New Prod Exp. Goods Sizeable with New Prod External Data

(Intro)p

(advertising) Prod. diff. with time in hand

EVE with Decline/ Exp Goods Sizeable with New ProdEVE with Internal Data

Decline/ Mature

Exp. Goods (Pharma)

Sizeable with Prod. diff.

New Prod with time in hand

Willingness Growth Search Small with When NoWillingness-to-pay (Mgrl Est)

Growth Search Goods

Small with little prod diff

When No time for EVE

C G S SCurrent Prices

Growth Search Goods

Small with little prod diff

When No time to launch prod

B) Preliminary Price RangeOnce we know Total Economic Value the question is: What price should we set? A fi h t d id t th t d li $100 th fA firm has created a new widget that delivers $100 worth of differentiation value to customers, over and above the competitor’s widget that sells for $50. Thus total economic

l ivalue is $150. What price would they set?What price would they set? This depends on how much value they want to capture –High value capture (price skimming leaves little incentive on theHigh value capture (price skimming leaves little incentive on the table for buyers), versus Low (penetration pricing leaves lots of incentive), and is a strategic decision.Say they determine to set a higher price, perhaps $100 (which captures 50% of differentiation value delivered). Should you set just one price of $100?just one price of $100?

Preliminary Price Range (contd.)No, because some buyers are more price sensitive than others.

So, you set a range of prices around $100 -- this range is indicated in the slide between the two red price boundaries. pThese boundaries now reflect the high and low prices that you will set to reflect segmentation pricing –setting different prices for different customer segmentssetting different prices for different customer segments, based first on economic value, and then on willingness to pay which is driven by customer price sensitivity.

Some buyers may be impulse buyers that call at the last minute and request priority service and Some buyers want q p y yto purchase in high volume or order quantities. What price would you set for them?

Close to the upper boundary, and Close to the lower boundary

Preliminary Price Range (contd.)How aggressively to attempt to capture the value in Price? Will the decision yield long-term & sustainable profit? 4 considerations:1) Price Sensitivity- How much impact “Value” has for the cust as purchase motivation. (Sensitivity towards Price-Value Trade-off)Eg. If expenditure is small, represents small part of l if it i h d t If t f l i i U f ilarge exp, or if it is shared cost; If cust feels price is Unfair.2) How costly or Time Consuming is it to Quantify and Communicate the Differential Value? Is it easy to Prove orCommunicate the Differential Value? Is it easy to Prove or Guarantee the value of costs savings?3) How sustainable is a price differential relative to3) How sustainable is a price differential relative to competitors? (Patent, Copyright, lock on a unique resource)4) How Imp is Vol Vs Margin as a fin Obj? Depends on Cost4) How Imp is Vol Vs Margin as a fin Obj? Depends on Cost Structure of the Co or CM.

C) Pricing Strategic OptionsSkimming: involves setting a price to capture a product'sSkimming: involves setting a price to capture a product s

economic value to relatively price-insensitive customers. It is a strategy designed to produce high margins at the expense of sales volume and is often used if consumers place exceptionally high value on the product's differentiating attributesattributes.

Sequential Skimming: Sequential skimming involves setting the price high to attract only the most lucrative segment and, once p g y gthat segment is penetrated, lowering the price to attract the next most lucrative segment.

Penetration: involves setting a price below the product'sPenetration: involves setting a price below the product's economic value to most customers, thus enabling it to attract and hold a large base of customers. It is a strategy designed to g gy gproduce sales volume, even at the expense of high margins.

Neutral: involves setting a price in the range that most buyers would deem reasonable or appropriate given its economicwould deem reasonable or appropriate given its economic value. It is a strategy that minimizes the role of price as a marketing tool

Conditions for Different Pricing Strategies

SKIM PENETRATION NEUTRAL

COSTS

CUSTOMERS(Price Sens )(Price Sens.)

COMPETITION

Conditions for Different Pricing Strategies

SKIM PENETRATION NEUTRALC t i il tHi h CML CM

COSTS

Costs similar to competitors

Sufficient CM to finance adv, etc.

Little excess capacity

High CMsHigh volumesChanges in volume drive profitability

Small BE Sales

Low CMsLow VolumesChanges in Unit Price Drive Profit

Large BE Sales p yIncremental capacity is expensive

Changes

High price sensitivity

gChanges

Low Price Sensitivity

CUSTOMERS

Customers are more sensitive to other elements of the marketing mix

g p y-Total Expend Effect-Large Part of End-Benefit

Little differentiation

Low Price Sensitivity-Reference Price Effect

-Price Quality Effect-Difficult Comparison Eff t

Avoid threat of li i

Sustainable cost & d

Effect

Limited threat of i

COMPETITION

retaliationLarge share brands with a lot to lose

Sustainable mktg mix advantages

resource advantageCompetitors not willing to retaliate

Financial strengthAggressive small

opportunismLimited opportunity for scale economies

Sustainable differentiation g

Oligopoliesgg

share brandsLow threat brands

Categorize These Pricing Strategies

How would you categorize the pricing strategies for the following products and retailers? (S=skim, N=neutral, P=penetration)P=penetration)

McDonaldsMcDonalds _______Dove soaps _______Big BazzarBig Bazzar _______Louis Phillip (Clothing) _______L'O l H i C l iL'Oreal Hair Coloring _______ Mont Blanc (Ltd Ed. Pens) _______E i M llEmporio Mall _______

PRICE OPTIMIZATIONAfter prices are set, it needs to be optimized, based on potential customer response to new prices and theon potential customer response to new prices and the economics of price-volume trade-offs. 3 steps:1) Select price points within the preliminary price1) Select price points within the preliminary price range to begin testing.2) Start the optimization process to evaluate the2) Start the optimization process to evaluate the trade-off between cust response to new prices and the lost or gained marginthe lost or gained margin.3) Set final prices in order to begin implementation

ff i h d h i iefforts with customers and the organisation.

Analytical Approaches to Profitability AnalysisAnalysis

Automated Price O ti i ti

Automated Price Optimization

HighAutomated Price

O ti i ti

Automated Price Optimization

High

Optimization System

pSystem

Spreadsheet -Spreadsheet -

mbe

r of

sact

ions

Optimization System

pSystem

Spreadsheet -Spreadsheet -

mbe

r of

sact

ions

Spreadsheetbased Break -even Analysis

based Break -even Analysis

Simulation Modeling / Risk

Analysis

Simulation Modeling / Risk

Analysis

Num

Tran

s Spreadsheetbased Break -even Analysis

based Break -even Analysis

Simulation Modeling / Risk

Analysis

Simulation Modeling / Risk

Analysis

Num

Tran

s

Analysisy

Low

Analysisy

Low

Frequency of

Low High

Frequency of

Low High

Price ChangesPrice Changes

Profitability AnalysisIt will depend upon the pricing environment i.e. No. of transactions Vs frequency of price changes

1) Incremental Break Even Analysis: appropriate for markets/cos. Where there are many transactions and prices change infrequently, can be implemented on a spreadsheet

d il bi d ith b th d t d i l j d tand easily combined with both data and managerial judgments to make price adjustments that improve profitability.

2) Simulations: expand on a breakeven analysis by estimating the RISK of loosing cust and competitive responseestimating the RISK of loosing cust and competitive response to a price change. The key issue is that whether demanding a higher price will RISK loosing the entire deal and a significant piece of business.

Analyzing Profitability Using theBreakeven Sales Change ApproachBreakeven Sales Change Approach

Contribution Margin5% 10% 20% 30% 40% 50% 60% 70% 80% 90%

35% 88% 78% 64% 54% 47% 41% 37% 33% 30% 28%

g

35% -88% -78% -64% -54% -47% -41% -37% -33% -30% -28%

25% -83% -71% -56% -45% -38% -33% -29% -26% -24% -22%

15% -75% -60% -43% -33% -27% -23% -20% -18% -16% -14%Pric

e

15% -75% -60% -43% -33% -27% -23% -20% -18% -16% -14%

5% -50% -33% -20% -14% -11% -9% -8% -7% -6% -5%

0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%ge in

P

0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

-5% NA 100% 33% 20% 14% 11% 9% 8% 7% 6%

-15% NA NA 300% 100% 60% 43% 33% 27% 23% 20%Cha

ng

-25% NA NA NA NA 167% 100% 71% 56% 45% 38%

-35% NA NA NA NA 700% 233% 140% 100% 78% 64%

%

Profitability Analysis (contd.)

3) Automated price Optimization: this is the best approach to professional analysis when a market has a High Transaction Volume, Standardized products, and Non-negotiable pricing. Also in real time These S/Ws tests price points tracks salesAlso, in real-time. These S/Ws tests price points, tracks sales, volume changes, and iterates quickly toward optimal price levels Eg Dell Wal-Mart etclevels. Eg. Dell, Wal Mart etc.

IMPLEMENTING NEW PRICES

1) Communicating New Prices to Sales Force

2) Communicating Price Increases to2) Communicating Price Increases to Customers

Determinants of Price Sensitivity• The Reference Price Effect (Our Price Vs Competitors Price /

Substitute)

• The Difficult Comparison Effect (Experience Vs Search Goods)

Th S it hi C t Eff t (Fi i l B di )• The Switching Cost Effect (Financial Bonding)

• The Price-Quality Effect (High Price - High Qlty & Vise versa)y ( g g y )

• The Expenditure Effect (Small Vs Large, small of large exp)

• The End-Benefit Effect (prod is just a part of overall benefit)

• The Fairness Effect (Fair Vs Unfair perception)

• The Framing Effect (Loss Vs forgone gain perception)• The Framing Effect (Loss Vs forgone gain perception)

• The Shared-Cost Effect (Self Vs Shared cost)

Price Sensitivity Illustration

You are considering purchasing a personal t ( C t ) d h b tcomputer (e.g. Compaq, etc) and have begun to

shop around in order to choose one for hpurchase.

What factors would affect your price sensitivity in making that decision?sensitivity in making that decision?

How would those same factors affect the price sensitivity of some personal p y pcomputer buyers differently?

Price Sensitivity Illustration

For each of the following purchase decisions, what factors are likely to affect the consumer's price sensitivity?likely to affect the consumer s price sensitivity?– A diamond engagement ring– Automobile repairsAutomobile repairs– Food for meals at home– Which university to attend– Which university to attend– A company car

Draperies for your new home– Draperies for your new home– Text books

Health insurance plan– Health insurance plan– Souvenirs

Vacation resort– Vacation resort

THANK YOUTHANK YOU