Pricing Playing Field Economic Value Variable Costs Company Policies, Goals Competition Customer Company Competition Collaborators Price Sensitivity Fairness Goals Situation * Market Share * Costs Situation *Market Share *Costs Cooperation Differentiation Distribution Channels
Managing a price decrease: P&G and EDLP Price reduction Value pricing Strategy Customer Competitor Costs Demand for greater value Promotions: Switching excuse Customer confusion Superior quality Value price Rationalize product line Rise of the discounter Prisoner’s Dilemma Private labels Rise of EDLP High cost of promotions Channel inefficiency Strain on manufacturing Brand image through advertising
Policy should complement company’s marketing strategy
Swatch: $40 price on basic model has not changed in 10 years
Saturn: No negotiation pricing
Process of price setting must be coordinated across departments
Issue: There are many participants in the process - Accounting provides cost estimates, Marketing communicates the strategy; Sales provides customer input; Production sets supply boundaries; Finance establishes requirements for the bottom line
Do all participants in the process understand the objective?
Do all participants have an incentive to work in pursuit of the objective?
Profit Growth, Volume Growth, or Both? Manager’s Dream Tradeoff Zone Manager’s Nightmare Tradeoff Zone Quadrant I Quadrant II Quadrant III Quadrant IV Volume growth negative Volume growth positive Profit growth positive Profit growth negative
Pricing Goal Matrix Volume growth negative Volume growth positive Profit growth positive Profit growth negative Profit Volume Profit Volume Profit Volume Profit Volume Reduction of too high price Increase of too low price Increase of price beyond optimum Decrease of price below optimum
Analysis for Below-Ground Irrigation (/100ft) Crop Loss Reduction $0.40 - $0.48 Labor Savings $3.00 - $3.60 Replacement Savings: $0.31-$0.39 Cost of Substitute $6.50 Differentiation Value Reference Value Total Economic Value $10.21-$10.97 Cost of Substitute=$6.50 Failure Rate from 8 to 3% Value=6.5*1.08/1.03=6.81 Failure Rate from 7 to 1% Value=6.5*1.07/1.01=6.89 Added Value=$0.31-$0.39 Labor cost of pipe replace- ment=$60. Failure rate drops 5-6%, Savings=$3.00 to $3.60 Crop damage cost = $0-40 Probability of $40 = 0.2 Failure rate drops 5-6% Savings=40*0.2*0.05=0.40 =40*0.2*0.06=0.48
Analysis for Pipe Extruders (per pound) Added Value to Extruder’s Product $0.228-$0.275 Cost of Substitute $0.280 Positive Differentiation Value Reference Value Sales Decline -$0.01 Risk -$0.020 Higher Sales Expense -$0.080 Negative Differentiation Value Total Economic Value $0.398-$0.445 Cost of cheapest resin = $0.28 / lb. # lbs. per 100 feet of pipe = 16.25 Value of 100 feet = $10.21 (min.) Added value / lb = (10.21-6.5)/16.25=$0.228 Sales decline due to lower replacement Risk due to single supplier (DuPont)
A product’s market value is determined not only by the economic value but also by the accuracy with which buyers perceive that value
Weakness of EV:Does not indicate the appropriate price to charge. Gives the maximum price consumers will be willing to pay if they were perfectly cognizant of the economic value and were motivated by economic value to make their purchase decisions
Strength of EV: Enables a firm to determine whether a product is selling poorly because it is overpriced relative to its true economic value or because it is under-promoted and consequently, under-appreciated by the market
DuPont used this to increase sales by raising price and educating consumers
b) Conjoint analysis What would you prefer? Type a number from the scale below to indicate your preference 4-cup Capacity 9-minute Brewing Time $18 8-cup Capacity 3-minute Brewing Time $28 OR Strongly Prefer Left Strongly Prefer Right 1 5 9 2 8 7 6 4 3
Units Buyer A Buyer B 1 $70 $70 2 $20 $50 3 $20 $40 4 $20 $35 5 $20 $30 Above table gives the value of each successive unit of the product to 2 buyers A and B. What price should the company charge if producer’s cost is $20 per unit?
Movie distributors often sell packages of films rather than selling individual film rights because the package values vary less across buyers than do values of individual films
Buyer A Buyer B
Movie 1 $9000 $5000
Movie 2 $1000 $5000
Total $10000 $10000
Using a la carte pricing can sell movie 1 to both buyers for $5000 each and movie 2 to buyer B for $5000. Total revenue is $15000. By bundling, both buyers will buy the bundle for $10000. So total revenue = $20000
You are lying on a beach on a hot day. All you have to drink is ice water. For the last hour you have been thinking about how much you would enjoy a nice cold bottle of your favorite beer. A companion gets up to make a phone call and offers to bring back a beer. He says that the beer may be expensive and asks the maximum price you are willing to pay. If the price is higher, he will not buy it.
What price will you tell him if the only nearby place where beer is sold is a fancy resort hotel?
What price will you tell him if the only nearby place where beer is sold is a small, run-down grocery store?