The Price is Right! Is it?
Slovenian Marketing Conference 2014
The Price is Right! Is it? by Martin Boehm 2
Why is pricing so important?
Pricing pressure is all around us
The Price is Right! Is it? by Martin Boehm 3
Why is pricing so important?
In Europe companies focus on two growth drivers…...
The Price is Right! Is it? by Martin Boehm 5
2,3%
3,3%
7,8%
11,1%
Fixed Cost
Units
Variable Cost
Price
1% improvement in…
...
The Price is Right! Is it? by Martin Boehm 6
Why is pricing so important?
The relationship between pricing focus and profi...
The Price is Right! Is it? by Martin Boehm 7
The Price is Right! Is it? by Martin Boehm 8
Estudio Mundial de Pricing 2012
1:
3: 4:
2:
15 SMC 2015
14 € 500.000
13 € 125...
The Price is Right! Is it? by Martin Boehm 9
Estudio Mundial de Pricing 2012
With a contribution margin of 20%, by what
pe...
The Price is Right! Is it? by Martin Boehm 10
Why is pricing so important?
How to compensate for a 10% price decrease?
Con...
The Price is Right! Is it? by Martin Boehm 11
Why is pricing so important?
9 out of 10 underestimate impact of price reduc...
The Price is Right! Is it? by Martin Boehm 12
2,5
2,9
3,0
3,4
3,5
3,8
4,3
0 1 2 3 4 5
Advertising
After-Sales Service
Dist...
The Price is Right! Is it? by Martin Boehm 13
Cost-based pricing?
Cost-based pricing is the dominant method in industry
69...
The Price is Right! Is it? by Martin Boehm 14
Cost-based pricing?
What is the cost of garbage?
The Price is Right! Is it? by Martin Boehm 15
Cost-based pricing?
Would you pay 80€ for an ashtray?
Weber One-Touch Silver...
The Price is Right! Is it? by Martin Boehm 16
Cost-based pricing?
Cost is a matter of fact. Price a matter of policy*
Inte...
The Price is Right! Is it? by Martin Boehm 17
The Demand Curve
What are you willing to pay for these tickets?
I would like...
The Price is Right! Is it? by Martin Boehm 18
The Demand Curve
Demand is dependent on price
Price
QuantityQ2
P2
P3
P4
Q3Q4...
The Price is Right! Is it? by Martin Boehm 19
The Demand Curve
Value is relative!
The Price is Right! Is it? by Martin Boehm 20
The Demand Curve
Price discrimination: extracting different prices
“If I hav...
The Price is Right! Is it? by Martin Boehm 21
150150
The Demand Curve
Why price discriminate?
Price
Quantity
15€
30€
50 20...
The Price is Right! Is it? by Martin Boehm 22
0,64 € 0,69 €
0,80 €
0,90 €
1,20 €
1,60 €
2,00 €
Supermarket Grocery Store B...
The Price is Right! Is it? by Martin Boehm 23
The Demand Curve
What are the limits of price discrimination?
0.50€
1.00€
1....
The Price is Right! Is it? by Martin Boehm 24
The Price is Right! Is it? by Martin Boehm 25
Summary
What did we learn so far?
 Pricing is the most important profit dri...
Thank you very much for your attention!
Martin Boehm
martin.boehm@ie.edu
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The Price is Right! Is it? Martin Boehm, IE Business School

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Vpogled v ozadje dinamičnega modela določanja cene.

Prezentacija je bila predstavljena v okviru 19. slovenske marketinške konference 2014 v Portorožu.

Published in: Marketing, Business, Sports
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The Price is Right! Is it? Martin Boehm, IE Business School

  1. 1. The Price is Right! Is it? Slovenian Marketing Conference 2014
  2. 2. The Price is Right! Is it? by Martin Boehm 2 Why is pricing so important? Pricing pressure is all around us
  3. 3. The Price is Right! Is it? by Martin Boehm 3 Why is pricing so important? In Europe companies focus on two growth drivers… 9% 29% 52% 59% 75% Reduced number of competitors Price increase Innovation Cost reductions Increase in sales volume Key drivers to increase profits in the next three years (% of respondents) Does this prioritization make any sense? Source: IE Business School (2011) European Pricing Study
  4. 4. The Price is Right! Is it? by Martin Boehm 5 2,3% 3,3% 7,8% 11,1% Fixed Cost Units Variable Cost Price 1% improvement in… Why is pricing so important? Price is the single most important profit lever… …creates Operating Profit Improvement of
  5. 5. The Price is Right! Is it? by Martin Boehm 6 Why is pricing so important? The relationship between pricing focus and profit 3,71 3,83 3,83 3,88 4,07 4,08 4,27 4,58 Strategic Priorties Strategic priorities and EBITDA >35% Source: IE Business School (2011) European Pricing Study 28% Balanced priorities 55% Cost management 17% Price management 30-35% 25-30% 20-25% 15-20% 10-15% 5-10% <5% Cost management focus Price management focus
  6. 6. The Price is Right! Is it? by Martin Boehm 7
  7. 7. The Price is Right! Is it? by Martin Boehm 8 Estudio Mundial de Pricing 2012 1: 3: 4: 2: 15 SMC 2015 14 € 500.000 13 € 125.000 12 € 64.000 11 € 32.000 10 € 16.000 9 € 8.000 8 € 4.000 7 € 2.000 6 € 1.000 5 € 500 4 € 300 3 € 200 2 € 100 1 € 50 50:50 5: 6:- 8 -
  8. 8. The Price is Right! Is it? by Martin Boehm 9 Estudio Mundial de Pricing 2012 With a contribution margin of 20%, by what percentage would the sales volume have to increase to make a 10% price decrease still profitable? 1: 3: 4: 2: 15 SMC 2015 14 € 500.000 13 € 125.000 12 € 64.000 11 € 32.000 10 € 16.000 9 € 8.000 8 € 4.000 7 € 2.000 6 € 1.000 5 € 500 4 € 300 3 € 200 2 € 100 1 € 50 50:50 5: 6:- 9 - 0% 30-60% 0-30% 60-90% 90-120% >120%
  9. 9. The Price is Right! Is it? by Martin Boehm 10 Why is pricing so important? How to compensate for a 10% price decrease? Contribution Margin Variable Cost 20 € 80 € 100 €Price Profit Contribution 100 x 20€ = 2,000€ -10 € 10 € 80 € 90 € 100 x 10€ = 1,000€ 200 x 10€ = 2,000€
  10. 10. The Price is Right! Is it? by Martin Boehm 11 Why is pricing so important? 9 out of 10 underestimate impact of price reduction 89% 5% 5% 0% 1% High underestimation Low underestimation Right estimation Low overestimation High overestimation Do you know the needed sales volume increase? Estimated impact of price reduction Estimated right! 83% Yes 17% No
  11. 11. The Price is Right! Is it? by Martin Boehm 12 2,5 2,9 3,0 3,4 3,5 3,8 4,3 0 1 2 3 4 5 Advertising After-Sales Service Distribution New Competitors Product Quality Prodct Differentiation Price Why is pricing so important? Pricing causes headache for marketing managers Question: What are your biggest worries? Sample: 187
  12. 12. The Price is Right! Is it? by Martin Boehm 13 Cost-based pricing? Cost-based pricing is the dominant method in industry 69% 37% 30% Cost-Based Competitor-Based Customer-Based
  13. 13. The Price is Right! Is it? by Martin Boehm 14 Cost-based pricing? What is the cost of garbage?
  14. 14. The Price is Right! Is it? by Martin Boehm 15 Cost-based pricing? Would you pay 80€ for an ashtray? Weber One-Touch Silver 57cm Weber One-Touch Gold 57cm 179,90 € 259,90 €
  15. 15. The Price is Right! Is it? by Martin Boehm 16 Cost-based pricing? Cost is a matter of fact. Price a matter of policy* Internal Cost Perceived Value Source: Pratt, R, Australian Entrepreneur
  16. 16. The Price is Right! Is it? by Martin Boehm 17 The Demand Curve What are you willing to pay for these tickets? I would like to sell:  Two tickets  Game: Real Madrid vs. FC Barcelona  Venue: Santiago Bernabeu
  17. 17. The Price is Right! Is it? by Martin Boehm 18 The Demand Curve Demand is dependent on price Price QuantityQ2 P2 P3 P4 Q3Q4 Q1 P1
  18. 18. The Price is Right! Is it? by Martin Boehm 19 The Demand Curve Value is relative!
  19. 19. The Price is Right! Is it? by Martin Boehm 20 The Demand Curve Price discrimination: extracting different prices “If I have 2000 customers on a given route and 400 different prices, I am obviously short 1600 prices.” Robert L. Candall Former CEO of American Airlines
  20. 20. The Price is Right! Is it? by Martin Boehm 21 150150 The Demand Curve Why price discriminate? Price Quantity 15€ 30€ 50 200 10€ No price discrimination: 15€ * 150 units = 2250€ With price discrimination: 30€ * 50 units = 1500€ 15€ * 100 units = 1500€ 10€ * 50 units = 500€ TOTAL: …………………………………………........= 3500€
  21. 21. The Price is Right! Is it? by Martin Boehm 22 0,64 € 0,69 € 0,80 € 0,90 € 1,20 € 1,60 € 2,00 € Supermarket Grocery Store Bakery Vending Machine Gas Station Newsstand - Street Newsstand - Airport Price Discrimination Is price discrimination already being practiced? Note: Prices for a 0.33l Coca Cola can
  22. 22. The Price is Right! Is it? by Martin Boehm 23 The Demand Curve What are the limits of price discrimination? 0.50€ 1.00€ 1.50€ Source: K@W (2007) The Price is Right, but Maybe It’s Not, and How Do You Know?
  23. 23. The Price is Right! Is it? by Martin Boehm 24
  24. 24. The Price is Right! Is it? by Martin Boehm 25 Summary What did we learn so far?  Pricing is the most important profit driver. Don’t neglect it when trying to grow the business.  Pricing – a managers nightmare!  Cost-based pricing is overrated. Focus on value and the consumer’s willingness-to-pay to set prices.  Value is relative! The perceived value drives the willingness-to-pay of consumers. Thus manage a consumer’s perceptions!  Price discrimination can drive profits. However, there are limits to the pricing game.
  25. 25. Thank you very much for your attention! Martin Boehm martin.boehm@ie.edu

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