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Author - Ravi Lakkundi

Pricing
What is this presentation all about?
• An insight about How to price you new
product
• Focusing of practical approaches to...
Product Management - Pricing
• Price you decide for your product will directly
effect your business
• Wiki says “Pricing i...
Product Manager has to and is the
right person to put a price tag on
the product or make suggestions
Remember he is the on...
Some Fundamentals …
• Before we get into Putting a price tag on a
product we need to one key fundamental
business term – C...
Get on to the Job, Sell an Apple !!
• Say Steve is selling an Apple for $10 each
Sale price

$10

Purchase Price from the ...
Price Build-up: Fundamentals
• Example
– Say a Company ACowStick Pvt ltd wants to import
products in India
– They have sta...
Nearest Port
Finished packed products
Factory

• Factory will deliver the finished goods @ any nearest port
(Air/Rail/Sea)...
Example: FunTabStick
• Assuming the Supplier in China delivered
FunTabStick7 @ $21.4
• FOB is $21.4 and was delivered to n...
FOB to MRP (/MSRP) – Price Buildup
Exchange Value ($->INR)

51.25

FOB (USD)

$21.4

FOB ( INR)

INR 1,096.8

Freight, Ins...
Operating Profit (EBIT)
• OP is a measure of income that tells how
much of revenue will eventually become profit
for a com...
Price – Perception - Reality
•
•
•
•

Perception is a wonderful thing
Perceived value is different for different things
As...
Pricing - Discussion
• Perceived value – Lot of factors may influence
the perception of value to people/customers
• Brand,...
Decide Margin – Ignore Everything else …
• In our Price Build-up you can set a margin that
you expect from selling FunTabS...
50 = 10 (CM$)x4(units) + 2(CM$)*5(units) +
Jackpot
• FunTabStick is an absolutely new product in
market
• Competitors will...
LossFit !!!(Loss-Profit)
• Why will a company sell a product at 0%
margin or even –ve margin?
• One reason could be it nee...
Common Sense

Variable

Exchange Rate

• Research the market for Product,
Price and Placement
• Know your competition simi...
Get-in the market
• To initially get the market share the price of
product will be low
• Once the product starts selling i...
First in Class
• Set the price Artificially high, to create a
Premium perception in minds of customer
• Imagine you pass-b...
Consumer Psychology

• Which price will have your heads turn?
– 99 cents or 1 Dollar?

• Instead of pricing product @ ex: ...
Other Strategies
• Only key pricing strategies for ACowStick is
discussed here
• For other strategies please refer to good...
Other Important Reading
• http://en.wikipedia.org/wiki/Cost%E2%80%93volume%E2%80
%93profit_analysis
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Product Management - Pricing

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Basics of pricing strategies - Primitive

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Product Management - Pricing

  1. 1. Author - Ravi Lakkundi Pricing
  2. 2. What is this presentation all about? • An insight about How to price you new product • Focusing of practical approaches to product management (Mainly Pricing Strategic) • Learning by Example
  3. 3. Product Management - Pricing • Price you decide for your product will directly effect your business • Wiki says “Pricing is the process of determining what a company will receive in exchange for its products” • Pricing is the MOST important product management tasks
  4. 4. Product Manager has to and is the right person to put a price tag on the product or make suggestions Remember he is the only person close to the customers and knows market trend
  5. 5. Some Fundamentals … • Before we get into Putting a price tag on a product we need to one key fundamental business term – Contribution Margin (CM) • Contribution Marin is also called as Gross Profit • Nothing but Sales Price received minus the variable cost • Lost??? Lets take an example …
  6. 6. Get on to the Job, Sell an Apple !! • Say Steve is selling an Apple for $10 each Sale price $10 Purchase Price from the Farm - $3 Cleaning and washing apple - $0.50 Packaging the Apple - $1.0 Shipping to Market Store - $1.50 Contribution Margin CM ($) 10 – (3+0.50+1+1.50) = $4 • CM % = (10-6)/10 = 40%
  7. 7. Price Build-up: Fundamentals • Example – Say a Company ACowStick Pvt ltd wants to import products in India – They have started the India operations and want to come up with a pricing strategy for FunTabStick • Refer to Product management by Ravi Lakkundi – http://www.slideshare.net/RaviLakkundi/productmanagement-quick-bite – DB before getting into various pricing strategies has to know the price build-up on imported products FunTabStick7 is a product from ACowStick Pvt ltd
  8. 8. Nearest Port Finished packed products Factory • Factory will deliver the finished goods @ any nearest port (Air/Rail/Sea) • Price of finished goods delivered to nearest port is known as FOB (Free On Board) • The additional cost that ACowStick will have to pay is the Freight charges, Customs/Import Duty of the country Insurance for goods India Warehouse Sea Transfer Transfer Unload the goods
  9. 9. Example: FunTabStick • Assuming the Supplier in China delivered FunTabStick7 @ $21.4 • FOB is $21.4 and was delivered to nearest port • ACowStick has partnered with a freight forwarder and the goods will be delivered to its warehouse in India • ACowStick has to pay for Customs Import Duty, Insurance and Freight charges
  10. 10. FOB to MRP (/MSRP) – Price Buildup Exchange Value ($->INR) 51.25 FOB (USD) $21.4 FOB ( INR) INR 1,096.8 Freight, Insurance, Handling Customs Assessed Value Customs Duty ACowStick Landed Cost 5% INR 1,151.6 23.90% INR 1,426.8 ACowSticks Expected Std CM 23% Distributor Buy Price 1853.0 Distributor Margin Dealer Buy Price Dealer Margin MRP/MSRP (without VAT) VAT MRP/MSRP(with VAT) 8% 2001.2 20% 2401.5 5.00% 2521.57462 • INR 1096 product translates to INR 2522 Retail Price • Key Take Away • Observe how the price translates at every stage • ACowStick Std CM*is 23% •((SP-CP)/SP) • Distributor Margin is 8% • Dealer Margin is 20% *Please refer to some good reference on CM and Operating profit
  11. 11. Operating Profit (EBIT) • OP is a measure of income that tells how much of revenue will eventually become profit for a company • Operating profit is important because it is an indirect measure of efficiency. The higher the operating profit, the more profitable is a company's core business
  12. 12. Price – Perception - Reality • • • • Perception is a wonderful thing Perceived value is different for different things As Humans we try to put a value to everything Lets take an example – Put a price tag for the below product • In US customers might say 800 to 1000 USD • In India customers might put a value of 300 to 400 USD Price is Perception and if the price tag crosses that perceived value, you will have to sell the product If it matches the perceived value you may not need to sell – It may sell for itself!
  13. 13. Pricing - Discussion • Perceived value – Lot of factors may influence the perception of value to people/customers • Brand, Features, Competitor knowledge etc are some factors influencing perceived value Lets get on to actual pricing strategies …..
  14. 14. Decide Margin – Ignore Everything else … • In our Price Build-up you can set a margin that you expect from selling FunTabStick • Example (slide 10) shows the margin expected is 30% • Problems – Even though the margin in calculation meet your expectation the end retail price may not work in the market – It may be too high for market or too low ! – It does not take into account the demand (based on the price you just decided) Strategy : Cost-plus pricing
  15. 15. 50 = 10 (CM$)x4(units) + 2(CM$)*5(units) + Jackpot • FunTabStick is an absolutely new product in market • Competitors will take some time to catch upto this killer product by ACowStick • ACowStick can price for few months this product at a very high price • Inturn recovering some of its Research and Development cost • later correcting the retail price (Margin) Strategy : Skimming
  16. 16. LossFit !!!(Loss-Profit) • Why will a company sell a product at 0% margin or even –ve margin? • One reason could be it need to boost its other profitable sales • It is a very good and effective method to expand its market share as a whole • This needs a very careful thinking Strategy : Loss Leader
  17. 17. Common Sense Variable Exchange Rate • Research the market for Product, Price and Placement • Know your competition similar offering • Know your unique differentiation as compared to competitors (USP) • Fix Retail Price, Fix FOB and change Margins and reach an acceptable level 51.25 Maximum Retail Price (MRP) 1999 5% VAT Dealer/Retailer Landed (INR) 1903.81 8% 1762.79 18% 1500.24 ACowSticks Expected Std CM 5% MRP without VAT (INR) Distributor Margin Distributor Landed (INR) Dealer/Retailer Margin ACowSticks Landed Cost (INR) 1425.23 Fixed Customs Duty 23.90% 1150.31 Freight + Insurance + Handling FOB (INR) Strategy : Market Oriented Customs Assessed Value (INR) 5.00% 1095.53 FOB (USD) $21.4
  18. 18. Get-in the market • To initially get the market share the price of product will be low • Once the product starts selling in the market and ACowStick starts gaining the market share the product price can be revised • This is just to attract customers Strategy : Penetration
  19. 19. First in Class • Set the price Artificially high, to create a Premium perception in minds of customer • Imagine you pass-by a store and you see a hoarding – “The worlds most premium and costliest icecream” – Will your heads turn and would you buy? • This product will gain exceptional reputation and will become a desirable product (inturn Brand) Strategy : Premium
  20. 20. Consumer Psychology • Which price will have your heads turn? – 99 cents or 1 Dollar? • Instead of pricing product @ ex: Rupees 300 India has something commonly known as Bata pricing Rupees 299 ! Strategy : Psychological
  21. 21. Other Strategies • Only key pricing strategies for ACowStick is discussed here • For other strategies please refer to good marketing references also • Contribution margin based pricing being one amongst them – http://en.wikipedia.org/wiki/Pricing_strategies
  22. 22. Other Important Reading • http://en.wikipedia.org/wiki/Cost%E2%80%93volume%E2%80 %93profit_analysis

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