Introduction to Pricing


Published on

Published in: Business, Economy & Finance
  • Be the first to comment

  • Be the first to like this

No Downloads
Total views
On SlideShare
From Embeds
Number of Embeds
Embeds 0
No embeds

No notes for slide

Introduction to Pricing

  1. 1. Introduction to Pricing Sreelata Jonnalagedda
  2. 2. The “PRICE” difference1c increase in price on a can of coke = $300MA 1% increase in price leads to an increase in net income of 6.4% for Coca-Cola 17.6% for Fuji 26% for Ford Motor CompanySmall Change  Giant Impact
  3. 3. Do Exactly as I Say• Pick a paper and pen• Think of an offering youwant to price• Write it down• Come up with a criterionfor making that pricingdecision• Write it down
  4. 4. Cost Customer CompetitionCost + Margin Willingness-to-Pay Rival product price Any sale should  I don’t want to  Cannot let a rival cover costs lose a customer steal my At least I know  All I need to do is customer the formula ask the customer  Looking around Easy to justify  Customer is god in the market is within the easy organization  This is what the market will bear
  5. 5. The margin math How are you accounting for your costs? What if prices affect cost structure? What about opportunity costs?
  6. 6. What customers want? “everything for nothing” Do customers dictate your prices? Do they reveal their true willingness to pay? Do they understand your offering?
  7. 7. Competing to win What is your unique value proposition? Price: A fertile ground for a war? Should market share be your goal?
  8. 8. The relevant C’sCustomerCompetitionCost Create Value Calibrate Value Communicate Value Capture Value
  9. 9. What is Value?Does need drive value?What is Economic Value?
  10. 10. Estimating the economic value Negative Differentiation Value Positive Differentiation Value Total Economic Value Reference Value
  11. 11. The case of Zip CarCar sharing company: to provide reliable and convenient access to on-demand transportation.Existing modes of transportation: Subway/Bus, Taxi, Rental car, personal vehicleShare Fare includes: insurance, fuel, access
  12. 12. Subway/Bus Rental Car 1. Insurance ($1/hr) 1. Comfort 2. Convenience (time saved: $12/hr) 2. Travel 3. Fuel savings ($2/hr) Flexibility 1. Induction1. Driving Hassle cost2. Pre-book time ($1/hr) 1. Access 1. Pre-booking 2. Availability 2. Travel Flexibility 3. Comfort Reference Value = $5/hr(inclusive of insurance + fuel + rental) Economic Value = $(5 + {12 + 1 + 2} – 1) = $19/hr
  13. 13. Value and Price Objective Value Perceived Negative Value Differentiation Consumer’s Value incentive toPositive buyDifferentiationValue Price Total Economic Incentive to sell Value Reference COGS Value
  14. 14. Price and the 3 C’sAre customers, competition and costs completely irrelevant to pricing? Not really Is that all then?  Distribution, Product Life Cycle, etc..
  15. 15. Pricing for Start-Ups Sreelata Jonnalagedda
  16. 16. Economic Value Negative  Closest Alternative Differentiation Value  Unique Value PropositionPositiveDifferentiation  Cost of doing businessValue unique to you Total Economic Reference Value Value
  17. 17. On Reference and Frames
  18. 18. On the Value of a Brand
  19. 19. Unique Value and CostsNew Ventures Typically Over estimate costs (of doing business) Underestimate unique value
  20. 20. The Crash Diet PricingPrice Economics 101 End-of-quarter reactions to influence stock market Sales targets to be met for bonuses Handy lever for the executives Least understood by managers
  21. 21. CostsBusiness Model
  22. 22. The Start-Up ChallengeWill do anything What is the market need?Desperate to make a sale Flexibility/ less rulesToo much room for experimenting  Start anywhereInexperience Nobody is watching you
  23. 23. Pricing Models Transactional (Product/Service)  most Common Subscription  used for recurrent transactions Free/mium  popularized by the web, Ex: Dropbox Two-sided subsidies  in exchange for the consumer info, Ex: Google Direct Subsidies  the razor and blades model
  24. 24. Popular Myths: FREEly Available х Abundance drives free pricing х Free triggers adoption There is no such thing a free lunch Free has a negative effect on the psychology of consumption
  25. 25. Is Free Inevitable? Businesses that thrive on communities  are communities first , businesses next , In winner-take-all markets  it’s a bet on the future  every bet has risks Commoditized markets  by definition you add no value
  26. 26. Price, Payment, and Consumption
  27. 27. To Each His Own
  28. 28. How do I come up with a pricing model? ……………….Well… you don’t! Value (Creation) Calibrate (Estimate EV) Communication of Value Capture Value (Price)