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Practically Theoretical Takeaways from the Scientifically Emotional World of Pricing
- 1. PRACTICALLY THEORETICAL TAKEAWAYS FROM THE SCIENTIFICALLY EMOTIONAL WORLD OF PRICING JD DILLON PRODUCT CAMP SILICON VALLEY MARCH 2017
- 2. BUT FIRST, A WORD FROM OUR SPONSOR "The single most important decision in evaluating a business is pricing power.” Warren Buffett
- 3. PRACTICALLY THEORETICAL TAKEAWAYS FROM THE SCIENTIFICALLY EMOTIONAL WORLD OF PRICING
- 4. PRICING IS EMOTIONAL JUST ASK MY LATE GRANDFATHER ½ Price @ Podiatrist
- 5. PRICING IS EMOTIONAL: REFERENCE PRICE COMPARISON TO PERCEIVED ALTERNATIVES Different Alternative 14X Price Increase
- 6. PRICING IS EMOTIONAL: EXPENDITURE EFFECT SIZE OF PURCHASE IMPACTS PERCEPTION OF PRICE DELTA Where does $595 Matter More?
- 7. PRICING IS EMOTIONAL: FAIRNESS EFFECT GENERAL PERCEPTION TIED TO SELLER’S MOTIVES $- $500 $1,000 $1,500 $2,000 $2,500 $3,000 $3,500 $4,000 TicketPrice 26 Different Ticket Prices (Snapshot on 13 December) United Flight from SFO to JFK (3 January 2013) Start a riot on your next flight
- 8. PRACTICALLY THEORETICAL TAKEAWAYS FROM THE SCIENTIFIC EMOTIONAL WORLD OF PRICING
- 9. PRICING IS SCIENTIFIC STRATEGIC ANALYSIS FOR A CORPORATION (APPLE) APPLE Annual Ending 9/16 % Revenue $215.6B COGS $131.4B 61% OPEX $24.2B 11% Operating Income $60.0B 28% 1.4% 2.2% 0.4% 3.6% Rev Incr COGS Decr OPEX Decr Price Incr Profit Result from 1% Changes Pricing is the #1 Profit Lever
- 10. PRICING IS SCIENTIFIC TACTICAL ANALYSIS FOR A REGION & PRODUCT SET (SSD) Regional Data Prior Year Price Change Constant Volume Constant Margin$ Revenue $1,445,786 Unit Cost $410.46 Unit Price $674.03 (20%) $539.22 $539.22 # of Units 2,145 2,145 4,375 Margin % 39% Margin$ $565,365 $276,198 $563,340 Margin$ cut in ½ [or] Unit Quota Doubled
- 11. PRACTICALLY THEORETICAL TAKEAWAYS FROM THE SCIENTIFICALLY EMOTIONAL WORLD OF PRICING
- 12. PRICING CAN BE THEORETICAL… FOUR COMPLEMENTARY PRICING THEORIES Cost Margin Financial: Return on Fixed & Variable Costs Price Customers Cust Sat: Willingness To Pay (WTP) Price Competition Market Share: Price is Tool to increase SOM% Reference Value Differentiated Value Maximize Value: Charge what it’s worth ObjectivesTheory
- 13. … BUT DON’T BE TOO THEORETICAL JC PENNY PRICING STRATEGY LAUNCHED IN FEBRUARY 2012 Became unprofitable & share price cut in ½ during Ron Johnson’s 17-month tenure as CEO of JC Penny
- 14. PRACTICAL THEORETICAL TAKEAWAYS FROM THE SCIENTIFICALLY EMOTIONAL WORLD OF PRICING
- 15. PRACTICAL TAKEAWAYS … AND CREATIVELY LOWER PRICE AS A LAST RESORT
- 16. PRACTICAL TAKEAWAYS INVERT YOUR MINDSET TO IMPROVE PRODUCT DEVELOPMENT BECOMES CostProduct Price Value Customer Customer Value Price Cost Product
- 17. PRACTICAL TAKEAWAYS PRICING REQUIRES DISCIPLINE, PROCESS, & STRUCTURE…
- 18. PRACTICALLY THEORETICAL TAKEAWAYS FROM THE SCIENTIFICALLY EMOTIONAL WORLD OF PRICING
- 19. THE SVBN SHOULD TAKE AWAY THAT PRICING… … is theoretically practical & scientifically emotional … hence demands discipline and creative management
- 20. ONE MORE TIME, FROM THE ORACLE… "The single most important decision in evaluating a business is pricing power.” Warren Buffett
- 21. PRACTICALLY THEORETICAL TAKEAWAYS FROM THE SCIENTIFICALLY EMOTIONAL WORLD OF PRICING JAMES (JD) DILLON JIM.DILLON@YMAIL.COM (408) 772-3169
- 22. PRICING IS SCIENTIFIC (APPENDIX) MATHEMATICS AROUND 1% STRATEGIC PRICE CHANGES APPLE P&L $B Rev Incr COGS Decr OPEX Decr Price Incr Revenue $215.60 $217.76 $215.60 $215.60 $217.76 COGS $131.40 61% $132.71 $130.09 $131.40 $131.40 OPEX $24.20 11% $24.20 $24.20 $23.96 $24.20 Operating Income $60.00 28% $60.84 $61.31 $60.24 $62.16 Pricing Impact 1.4% 2.2% 0.4% 3.6%
- 23. PRICING IS SCIENTIFIC (APPENDIX) MATHEMATICS AROUND 20% TACTICAL PRICE CHANGES Regional Data Prior Year Price Change Constant Volume Constant Margin$ Revenue $1,445,786 $1,156,629 $2,359,091 Unit Cost $410.46 $410.46 $410.46 Unit Price $674.03 (20%) $539.22 $539.22 # of Units 2,145 2,145 4,375 Margin % 39% 24% 24% Margin$ $565,365 $276,198 $563,340 Delta P /GM% Margin$ # of Units 20/39 -51% +104%
Editor's Notes
- Positioning Statement – I add structure, optimize for efficiency, and drive profit throughout sales & marketing organizations. Agenda for Pricing – Emotion, then Science, then Theory, and close with Practical Takeaways
- Warren Buffett brings the investor perspective Think about Porter’s Five Forces – Suppliers, Substitutes, Buyers, New Entrants, Competitors There will be a quiz at the end, too
- Explain the picture as Ryan & Grampa, Notice the Leg ½ Price Why? Reference? Expenditure? Fairness
- Ex 1 – Lamborghini @ yacht shows Ex 2 – Promotion in the service = 1 month raise Ex 3 – House payment – 35%-50% of monthly salary Ex 4 – Engagement Ring = 1 month salary
- Ex 1 – Gas, driving around the block Ex 2 – Business Outsourcing Ex 3 – BOM Pareto, Cisco HotLink situation Ex 4 – Airline Tickets
- Explain Graph Refer back to Grampa
- Apple P&L – Just under a quarter of a Trillion, Cost to Make, Cost to Develop & Sell, then what you put in your pocket 4 Ways to Impact the P&L – Price, Cost Reduce, OPEX Reduce, Sell More Pricing is the most impactful Cypress experience – detailed reviews of cost in the boardroom, whimsical price drops
- European Region for Enterprise Solid State Drives Punchline
- Cost+ Disadvantage – Don’t always know cost, plus customers don’t care WTP – “Customers don’t think how they feel. They don’t say what they think and they don’t do what they say.” David Ogilvy Competition – SKP Study in 2014 where 58% in price ware, but 90% didn’t start it Value – Downside is that it’s hard, resource intensive, training, time, people, tools (EVC at Cypress)
- Ron Johnson hired in November of 2011, came from Apple Stores (since 2000) When he began, ¾ sold @ 50%+ Discount, but did no testing before change Merchandise Upgrade as well 2011 Profit = $380M, 2012 Profit = -$150M
- Drop Price Last (courtesy of Madhavan @ SKP in the “Monetizing Innovation” book Segment, Give away goods and/or reduce services, LTO
- NPI takeaway is to invert the focus
- Discipline
- Review
- Go around room for one lesson learned
- Questions?