SHORT PRESENTATION ABOUT PRICING FUNDAMENTALS

1. www.eoi.es
PRICING STRATEGY
BLENDED EDUCATION
PROFESSOR
Antonio Fontanini

2. Marketing Strategy Planning Process
04/08/14
Customers
Needs and other
Segmenting
Dimensions
Company
Mission, Objectives,
& Resources
Competitors
Current &
Prospective
S.
W.
O.
T.
External Market Environment
Technology, Political & Legal, Social & Cultural, Economic
Targeting &
Segmentation
Positioning &
Differentiation
Narrowing down to focused strategy with quantitative and qualitative screening criteria

4. Street price = Cost +
margin of the
manufacturer + margin
of the distribution + VAT

5. Price is the only element
of the marketing mix
that produces revenue
the others “P”S
generate costs

6. Price communicates to
the market the company
intended value
positioning of its
product or brand

7. Cantidad Q
PrecioP
D
D
Demand Curve (well, here a line)

8. We have to distinguish DEMAND CHANGES from
CHANGES IN THE DEMAND CURVE

9. DEMAND CURVES

10. How do we set the price?
• Step 1: Select the pricing
objective
• Step 2: Determining demand
• Step 3: Estimating costs
• Step 4: Analyze competitors
costs, prices and offers
• Step 5: Select a Pricing Method
• Step 6: Selecting the Final Price

11. Pricing
Objectives
Sales
Oriented
Dollar or Unit
Sales Growth
Profit
Oriented
Status Quo
Oriented
Growth in
Market Share
Target
Return
Maximize
Profits
Meeting
Competition
Nonprice
Competition
Step 1: Select the price objective

12. Step 2: Determining demand
• Price sensitivity:
– First we have to understand what affects
price sensitivity
– In general customers are more price
sensitive to products that cost a lot or
are bought frequently
– On the other hand, they are less price
sensitive to low cost items they buy
infrequently and also when is only a
small part in a big purchase.
– Total Cost of Ownership Concept

13. Step 2: Determining demand
• Price sensitivity:
– Statistical analysis
– Price experiments
– Surveys
• Price elasticity of demand:
– How responsive the demand will be to a change
in price.
– Less elasticity when:
1. Few or no substitutes or competitors
2. Buyers do not notice the higher price
3. Buyers are slow to change their buying
habits
4. Buyers think high prices are justified.
– When demand is elastic, you are to consider
lowering the price.

14. Cantidad Q
PrecioP D
D
ε > 1
ε < 1
ε = 1
DEMAND
ELASTICITY

15. DEMAND ELASTICITY: SUMMARY

16. Step 3: Estimating costs
• Fixed costs
• Variable costs
• Total costs
• Experience curve or learning
curve
• Economies of scale
• Accounting considerations
• Target costing

17. Increase Overhead costs or how to accumulate fat

18. costo
compra costo
materia prima total
de la
costo compra
de costo
aprovisionamiento total
de
costo producción
mano
de obra PRECIO
DE
gastos COSTO PRECIO
generales COMPLETO DE
industriales VENTA
costo
financiero
costo de
mkt
costo
administrativo
MARGEN
MARGINS ON COSTS OR ON
SALE PRICE

19. ECONOMIES OF SCALE AND EXPERIENCE CURVE
Product
Product Cost
($) per unit
Economies of scale
AC1
B
A
AC2
Learning
C
Experience curve

20. BREAK EVEN PRICE

21. CHEAP METAL INC.
(VERY SIMPLE) CASE
CHEAP METALS Inc., dedicated to metal tools
production, sold 80,000 units in 2007, with Revenues
of 600,000 euros.
Fixed Costs were 100,000 euros and Variable Cost
per unit was 0,1 euros
(Please):
a) Calculate break even point in term of unit sales.
b) Represent break even graphically.

22. Break Even FORMULA:
REVENUE = FIXED COSTS + VARIABLE COSTS
SALE PRICE PER UNIT= 600,000/80,000 = 7,5
VARIABLE COST PER UNIT = 0,1
FIXED COSTS = 100,000
BE_UNITS * 7,5 = BE_UNITS * 0,1 + 100,000
BE_UNITS = 13,513
BREACK-EVEN AT CHEAP METAL INC.

23. Sales and Costs
Units
Euros
13,513
101,347
Sales
Fixed Costs
GRAPHIC REPRESENTATION
Variable Costs
Total Costs

24. OUTSOURCING

25. Hyunday in Europe
A (very) (really very) Simple Outsourcing Case
Hyunday car manufacturer decides to establish itself in Europe.
The problem here is cars are principally fueled by diesel engines:
To enter into this market with a diesel car Hyunday has 2 options:
to manufacture the new engine or to purchase it by a third party.
We have to consider the new engine Development Costs are
estimated in 37,5 million euros while the unit variable cost of
manufacturing is 1,500 euros; at the same time, the Italian firm VM
would be very happy to deliver diesel engines to Hyunday at 2.250
euros per unit:
¿How many cars does Hyundai have to sell
before internal manufacturing would be
rentable?

26. Hyunday in Europe
A (very) (really very) Simple Outsourcing Case
Hyunday car manufacturer decides to establish itself in Europe.
The problem here is cars are principally fueled by diesel engines:
To enter into this market with a diesel car Hyunday has 2 options:
to manufacture the new engine or to purchase it by a third party.
We have to consider the new engine Development Costs are
estimated in 37,5 million euros while the unit variable cost of
manufacturing is 1,500 euros; at the same time, the Italian firm VM
would be very happy to deliver diesel engines to Hyunday at 2.250
euros per unit:
¿How many cars does Hyundai have to sell before internal
manufacturing would be rentable?
37,500,000 + X * 1,500 = X * 2,250
X = 50,000 (CARS)

27. INTERMEDIARIES: A COLD ANALISIS

28. ELIMINATING INTERMEDIARIES
XXI CENTURY MKTG SPORT
(ANOTHER VERY, VERY SIMPLE CASE)
Let´s suppose Fixed Costs to Directly distribute
products for a Supermarket Chain is 1,000,000 euros
per annum, while the unitary variable cost is 5% of
Sale (per each euro of sale).
The alternative would be to subcontract the home
delivery to a third party, at a cost of 10% of the Sale
volume
¿What is the minimum Sale Volume justifying direct
delivery?

29. ELIMINATING INTERMEDIARIES
XXI CENTURY MKTG SPORT
(ANOTHER VERY, VERY SIMPLE CASE)
Let´s suppose Fixed Costs to Directly distribute products for a Supermarket Chain is 1,000,000
euros per annum, while the unitary variable cost is 5% of Sale (per each euro of sale).
The alternative would be to subcontract the home delivery to a third party, at a cost of 10% of
the Sale volume
¿What is the minimum Sale Volume justifying direct delivery?
1,000,000 + 5/100 * V = 10/100 * V
V = 20 M
Additional thought

30. Step 4: Analyze costs,
competitors prices
and offers

31. Step 5: Selecting a Pricing Method
• Mark up pricing
• Target return pricing
• Perceived value pricing
• Going-rate pricing
• Auction type pricing

32. Target costing

33. Mark-ups
Cost = 24.00 = 80%
Cost = 21.60 = 90%
Cost = 30.00 = 60%Markup = 2.40 = 10%
Markup = 6.00 = 20%
Markup = 20.00 = 40%
Producer
Wholesaler
24.00
30.00
50.00
Markup is usually stated as a percent of the selling price,
not of the cost
Retail

34. Step 5: Selecting a Pricing Method
• Perceived value pricing:
– Value pricing = Perceived benefits – cost for
getting the goods
– A Company must deliver the value promised by
their value proposition and the customer must
perceive this value
– How to treat different buyers:
• Price buyers: Stripped down versions and
reduced services
• Value buyers: Keep on innovating new value
and reaffirm agressively their value.
• Loyal buyers: Product up to what is
promised. Invest in relationship and
intimacy.

35. Value Proposal Strategies
Loyalty High value Premium
Good value Medium value Overcharging
Economy False economy Rip off
Price
Quality

36. Value Proposal
Precio
Alto Medio Bajo
Alta
Baja
Calidaddelproducto
Media
Precio
Alto Medio Bajo
Alta
Baja
Calidaddelproducto
Media
Estrategia de fijación de precios
Estrategia de
recompensa
Estrategia de
recompensa
Estrategia de
valor medio
Estrategia de
economía
Estrategia de
recompensa
Estrategia de
recompensa
Estrategia de
valor medio
Estrategia de
economía
Estrategia
de margen
excesivo
Estrategia
de robo
Estrategia
de falsa
economía
Estrategia
de margen
excesivo
Estrategia
de robo
Estrategia
de falsa
economía
Estrategia de
alto valor
Estrategia de
supervalor
Estrategia de
buen valor
Estrategia de
alto valor
Estrategia de
supervalor
Estrategia de
buen valor

37. Value Proposal

41. Step 5: Selecting a Pricing Method
• Going-rate pricing:
– The firm prices largely on
competitors price.
– Follow the leader
• Auction type pricing:
– Ascending bids
– Descending bids
– Sealed-bid auctions

42. PRICE TUNNEL
Same
form
Different
form, same
function
Different form
and function,
same objective
Price
Corridor of
the Mass
High degree of legal and resource
protection
Difficult to imitate
Some degree of legal and resource
protection
Low degree of legal and resource
protection
Easy to imitate
Mid-level pricing
Lower-level pricing
This tool helps managers find the right price for an irresistible offer, which, by the way,
isn’t necessarily the lower price. The tool involves two distinct buy interrelated steps.
The first step involves identifying the price corridor of the mass which deals with
customer price sensitivity and pricing strategies of products offered outside the group of
traditional competitors. The second step deals with specifying a level within the price
corridor which factors in legal protection and exclusive assets.
Step 1: Identify the price corridor
of the mass.
Step 2: Specify a price level within the
price corridor.
Three alternative product/service types:

43. Step 6: Selecting the final price
• Impact of other marketing activities:
– Coherency
– Budget
• Company pricing policies
• Gain and risk sharing pricing
• Impact of price in distributors and
dealers
• Take under consideration the law

44. Price
Quantity
Price Skimming
Sell at high
price before
reducing to
next price level
and repeat
Initial
Price
Second
Price
Final
Price
In price skimming, initial price is
set high--at top of the demand
curve
Most sensible when:
• Demand is inelastic
• There is an “elite market” that is
less price sensitive
• Barriers to entry (patents, etc.)
• Gradually working down the
demand curve with lower priced
marketing mixes over time.
Early adopters:
• Set trends
• Influence people
• Pay premium price
Price level policies

45. Price
Quantity
Penetration Pricing
Whole
market price
Penetration pricing means
entering the market with a
low initial price:
• Capture market share
quickly
• Take advantage of
growth
• If competition is likely to
follow quickly, or if
• A low price will give
competitors less
incentive to enter
Price level policies

46. Product Mix Pricing
• Product line pricing
• Optional feature pricing
• Captive product pricing
• Two part pricing
• Byproduct pricing
• Product bundling pricing

47. Discriminatory Pricing
Customers pays for different prices for products
with similar costs
• Customer segment (SW for enterprises or
for students)
• Product form (different versions, specially
SW)
• Image (perception) pricing (Cosmetics,
Perfumes)
• Location pricing (SW via the WEB or at
Retailers)
• Time pricing (Peak Hours, Mobile
Telephony, ..)

48. Preconditions
• Market must be segmentable
• The lower price segment should not
be able to resell the product to the
higher price segment
• The competitors must not be able to
undersell the firm in the higher price
segment
• Should not breed customer
resentment and illwill
• Price discrimination should not be
illegal

49. Trade
Quantity Seasonal
Discount
Pricing
Sale Cash

50. Initiating price cuts
• Could happen due to many circumstances
• Some of the reasons are:
– Excess plant capacity
– Overstock
– Dominate the market through lower
costs
• Be aware of:
– Low quality trap (low cost = low quality)
– Fragile market share trap (price
concious customers vs loyal)
– Shallow-pockets trap (competitors
staying longer)

51. Discounts and Allowances
• Early payment
• Off – season / Special Events
• Bulk purchase
• Retail discount
• Cash discount (Instead of VISA)
• Low interest financing
• Longer payment terms
• Warranties and service contracts
• Psychological discounting

52. The Discount 7 Commandments
1. DO NOT DO DISCOUNT BECAUSE
OTHERS DO.
2. BE CREATIVE.
3. USE DISCOUNTS TO REDUCE STOCKS
OR TO GENERATE MORE BUSINESS.
4. ESTABLISH A TIMING TO THE OFFER.
5. BE SURE FINAL CUSTOMERS GET
SOME BENEFITS.
6. IN A MATURE MARKET, ONLY TO
SURVIVE.
7. STOP DISCOUNTING ASAP.

53. Initiating price increases
• Main reason is inflation
• When demand exceeds supply
• When costs go up (Taxes, Govern. Policy)
• Feeling of fairness required
• How to do it?
– Delayed quotation pricing (no till
finished)
– Escalator clauses (pay now but may
increase)
– Unbundling (take something out)
– Reduction of discounts
• Strong brands can command premium
price but premiums cannot be excessive.

54. Indirect price increases
• Shrinking pack size for same price
• Substituting less expensive raw
materials
• Reducing product features
• Removing product services
• Using less expensive packaging
material
• Reducing the number of packs and
sizes offered
• Creating new economy brands

55. Responding to Competitors Price
• If high product homogeneity: enhance the
augmented product if cannot reduce the price.
• If heterogeneous products:
– Analyse: Why? Is it permanent? P&L? Future
reactions?
– The Brand leader can:
1. Mantain price
2. Mantain price and add value
3. Reduce price
4. Increase price and improve quality
5. Launch a low price fighter line
It is important to avoid price wars when
possible, specially at the introduction phase

56. The Product Life Cycle
Total
Industry
Profit
+
-
$ 0
Market
Introduction
Market
Growth
Market
Maturity
Sales
Decline
Time
Total
Industry
Sales
Price
Skim the
cream at a
high price
or
Low to
penetrate
faster
Meet competition (especially in oligopoly)
or
Price dealing and price cutting
or
Value pricing for long-term relationships

57. INTRODUCTION HIGH COST PHASE
• Customers require education to
understand its benefits
• We generate “INITIATORS” who will
bring “IMITATORS”
• We need Channel Incentives
• Generally HIGH PRICE to finance high
costs
• PRICE IS ALMOST NEVER A LEVER
• PROMOTION AND PLACEMENT ARE
LEVERS
Pricing Strategies in the P L C

58. Pricing Strategies in the P L C
GROWTH COMPETITION GOES UP: 2 CHOICES
• PRODUCT DIFFERENTIATION: Develope Higher
Features / Image to dominate the market,
reducing sensibility to price.
• COST REDUCTION: Cheaper product
development, with PENETRATION PRICES (for
all industry) or NEUTRAL PRICES (market not
sensitive to price).
• PROMOTION AND PLACEMENT ARE LEVERS

59. Pricing Strategies in the P L C
MATURITY THE LONGEST PHASE: PRICE IS A LEVER
• When to start a price war
1. Accumulated experience by Buyers
2. Imitating other offers
3. Price sensibility is up
4. New entrants are efficient in production
and distribution
SOME CHANGES:
1. To improve cost control
2. To extend the product line
3. To evaluate the distribution channels role

60. PRICING IN NEGOTIATION THEORY

61. During a Negotiation
Is it better to make the first move?

62. Pricing and Retailing: Germany

63. Marketing Strategy Planning Process
Customers
Needs and other
Segmenting
Dimensions
Company
Mission, Objectives,
& Resources
Competitors
Current &
Prospective
S.
W.
O.
T.
External Market Environment
Technology, Political & Legal, Social & Cultural, Economic
Targeting &
Segmentation
Positioning &
Differentiation
Narrowing down to focused strategy with quantitative and qualitative screening criteria

64. Gracias, gracias,
gracias
fontanini@learning.eoi.es