Pricing Strategy - A Focus On Profit, Not Sales

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    Pricing Strategy - A Focus On Profit, Not Sales - Presentation Transcript

    1. Pricing Strategy:
      A focus on profit, not sales
    2. Supply & Demand
      Price supply
      demand
      Quantity
    3. “Making it up on quantity”
      Required increase in sales volume (%) 100
      80
      60
      40
      20% price 20
      decrease
      20 40 60 80
      20% price 20 Variable unit cost
      increase as % of price
      40
      60
      80
      Acceptable decrease in Sales Volume (%) 100
    4. Pricing over Product Life Cycle
      Introduction Growth Maturity Decline
    5. Differences in pricing strategies
      In a “dumb industry”
      Operators fight with price
      Customers become more price sensitive
      In a “smart industry”
      Operators fight with…
      More complex pricing
      More varied pricing plans
      Greater subtlety of pricing options
      Greater use of techniques from other fields
    6. PRICINGSTRATEGY
      How companies make pricing decisions…
      “Pricing strategy always has been more of a poker game than a science.”
      William T. Moran, Admar Research
      “Successful pricing is an art, not a science.”
      John I. Leahy, Black & Decker
      “Pricing decisions are not easy to make; they are often inherently ‘soft’.”
      William E. Johnson, William E. Johnson Assoc.
    7. Pricing Strategy
      Pricing Objectives
      Pricing Concerns: 4 C’s
      Pricing Models
      Price Bundling
      Price Segmentation
      Price Plan
    8. 1. Objectives in Setting Price
      Increase profits
      Attract new customers
      Maintain current customers
      Increase profit per customer
      Introduce new product
      Generate cash
      Improve ROI
    9. Attract New Customers
      Introductory coupons / discounts
      provide incentive
      maintain reference price
      Trial offers
      increase familiarity
      reduce risk
      Problem
      perceived as unfair
    10. Maintain Current Customers
      Meet competition
      matching prices
      add to bundle (as long as customers want it!)
      Create barriers to exit
      contracts / subscriptions
      automatic billing
      phone numbers (no longer in the U.S.)
      family plans
      Provide loyalty programs
      frequent flyer
      Starbuck cards
    11. Increase Profit per Customer
      Increase prices
      reduce product? (candy bar pricing)
      justify/ notify / base on costs
      Adjust product mix
      sales incentives for more profitable business
      Adjust customer mix
      teenagers vs. seniors
      Charge for extras
      what’s valuable to customer and cheap to company
      Get money up front
      Prepaid subscriptions
    12. Introduce New Product
      Skimming: Adjusts prices down over time:
      PROS: skims off maximum profit for each segment
      establishes high reference price
      CONS: attracts competition
      difficult to administer
      Penetration: Starts at lowest possible price
      PROS: penetrates market quickly
      keeps out competition
      CONS: creates low reference price
      misses full profit potential
    13. 2. Concerns in setting price: 4C’s
      Competition Customer
      Cost Custom
    14. 3. Pricing Models
      Cost-based Pricing
      Value-based Pricing
      Flat-Rate Pricing
      Ala-Carte Pricing
      Two-Part Pricing
      Peak Load / Congestion Pricing
      Dynamic Pricing
    15. Cost-based vs. Value-based
      Cost-based
      most common pricing method
      easiest pricing method
      considered fair
      difficult to allocate fixed costs
      sub-optimal profits
      Value-based
      optimal profits
      requires research
      complicated to administer
      can be considered unfair
    16. Flat-Rate Pricing
      Single rate per time period:
      PROS:
      provides unlimited use
      increases use
      simple to explain & bill
      popular with customers / low risk
      CONS:
      difficult to predict average price
      unfair in that some people subsidize others
      fair in that charges are predictable
    17. Ala-Carte Pricing
      Variable rate depending on use:
      PROS:
      considered fair
      greater choice
      greater control
      CONS:
      more difficult to explain
      more difficult to bill
      more risk
    18. Two-part Pricing I
      Combines flat rate plus variable: e.g., monthly fee plus cost per minute (declining?)
      PROS
      spreads costs more fairly
      CONS
      perceived as hassle
      unpredictable
    19. Two-Part Pricing II
      Combines down-payment & flat rate per month:
      PROS:
      covers fixed costs immediately
      spreads customer’s costs
      fits customer’s monthly budget
      generates financing revenues
      predictable / low risk
      CONS:
      increases total cost to customer
      requires long-term billing
    20. Peak Load / Congestion Pricing
      Variable rate depending on time of day or week:
      PROS:
      spreads use
      encourages use in unpopular time
      considered fair
      easy to explain
      CONS:
      difficult to bill
    21. Dynamic Pricing
      Variable rate for each customer:
      PROS:
      maximizes profit per customer
      CONS:
      difficult to implement
      requires detailed demand schedule
      difficult to explain
      considered unfair
    22. 4. Price Bundling / Unbundling
      With own products / services
      bikini top with bottom
      seats in car
      training with purchase
      McDonalds’ Happy Meals
      season tickets
    23. With other products / services
      discount cost of buns with hot dog purchase
      “free” parking lot with grocery store
      “free” Microsoft software with computer
      include airline tickets with tour
    24. Benefits of Bundling/Unbundling
      Bundling
      provide unique assortment
      sell unpopular with popular
      provide added incentive to purchase or to stay
      hide / disguise price
      Unbundling
      competitive defense
      better serve customer
      increase revenues
      Mixed
    25. 5. Price Segmentation
      Big opportunity:
      Computer allows finer discrimination
      Customers want choice but not confusion
    26. Segments
      Consumer type
      • age
      • sex
      • income
      • education
      • geography, etc.
      Use of product
      • sports information
      • financial reports
      • information, etc.
      • Service level
      • speed
      • quality
      • 7/24/365
      • options / content
      • Urgency of need
      • immediate
      • soon
      • overnight
    27. Segments
      Volume of use:
      emergency only
      limited usage
      quantity discount
      unlimited usage
      Time of use:
      off-peak
      normal working hours
      unrestricted
      • Longevity of customer
      • special extras for longevity
      • loyalty programs
      • Length of contract
      • 1, 2, 3 year sliding scale
      • Attitudes
      • high tech (image)
      • utility
      • Finances
      • flush
      • tight
    28. 6. Pricing Plan
      Determine target market(s).
      What do those consumers want?
      What can you give them that competitors cannot? (or haven’t thought of yet)
      What are their financial impediments?
      How can you structure your pricing to solve their problems?
      How profitable will that be?
    29. Summary of Strategy
      Objectives of price vary; profit is #1
      Pricing concerns are the 4C’s
      cost / competition / customer / custom
      Pricing models can be mixed and matched
      Bundling can be with both self & others
      Segmentation should be fine tuned
      Plan should be based on each market segment
    30. Thank You!

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    A brief introduction to Pricing Strategies

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