Pricing Strategy - A Focus On Profit, Not Sales


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A brief introduction to Pricing Strategies

Pricing Strategy - A Focus On Profit, Not Sales

  1. 1. Pricing Strategy: <br />A focus on profit, not sales<br />
  2. 2. Supply & Demand<br />Price supply<br />demand<br /> Quantity<br />
  3. 3. “Making it up on quantity”<br />Required increase in sales volume (%) 100<br /> 80<br /> 60<br /> 40<br />20% price 20<br />decrease<br /> 20 40 60 80 <br />20% price 20 Variable unit cost<br />increase as % of price<br /> 40<br /> 60<br /> 80<br />Acceptable decrease in Sales Volume (%) 100<br />
  4. 4. Pricing over Product Life Cycle<br />Introduction Growth Maturity Decline<br />
  5. 5. Differences in pricing strategies<br />In a “dumb industry”<br />Operators fight with price<br />Customers become more price sensitive<br />In a “smart industry”<br />Operators fight with…<br />More complex pricing<br />More varied pricing plans<br />Greater subtlety of pricing options<br />Greater use of techniques from other fields<br />
  6. 6. PRICINGSTRATEGY<br />How companies make pricing decisions…<br /> “Pricing strategy always has been more of a poker game than a science.”<br />William T. Moran, Admar Research<br /> “Successful pricing is an art, not a science.”<br />John I. Leahy, Black & Decker<br /> “Pricing decisions are not easy to make; they are often inherently ‘soft’.”<br />William E. Johnson, William E. Johnson Assoc. <br />
  7. 7. Pricing Strategy<br />Pricing Objectives<br />Pricing Concerns: 4 C’s<br />Pricing Models<br />Price Bundling<br />Price Segmentation<br />Price Plan<br />
  8. 8. 1. Objectives in Setting Price<br />Increase profits <br />Attract new customers<br />Maintain current customers<br />Increase profit per customer<br />Introduce new product <br />Generate cash<br />Improve ROI<br />
  9. 9. Attract New Customers<br />Introductory coupons / discounts<br />provide incentive<br />maintain reference price<br />Trial offers<br />increase familiarity<br />reduce risk<br />Problem<br />perceived as unfair<br />
  10. 10. Maintain Current Customers<br />Meet competition<br />matching prices <br />add to bundle (as long as customers want it!)<br />Create barriers to exit <br />contracts / subscriptions<br />automatic billing<br />phone numbers (no longer in the U.S.) <br />family plans<br />Provide loyalty programs<br />frequent flyer<br />Starbuck cards<br />
  11. 11. Increase Profit per Customer<br />Increase prices <br />reduce product? (candy bar pricing)<br />justify/ notify / base on costs<br />Adjust product mix<br />sales incentives for more profitable business<br />Adjust customer mix <br />teenagers vs. seniors<br />Charge for extras <br />what’s valuable to customer and cheap to company<br />Get money up front<br />Prepaid subscriptions<br />
  12. 12. Introduce New Product<br />Skimming: Adjusts prices down over time:<br />PROS: skims off maximum profit for each segment<br />establishes high reference price<br />CONS: attracts competition<br />difficult to administer<br />Penetration: Starts at lowest possible price<br />PROS: penetrates market quickly<br />keeps out competition<br />CONS: creates low reference price<br />misses full profit potential<br />
  13. 13. 2. Concerns in setting price: 4C’s<br /> Competition Customer<br /> Cost Custom<br />
  14. 14. 3. Pricing Models<br />Cost-based Pricing<br />Value-based Pricing<br />Flat-Rate Pricing<br />Ala-Carte Pricing <br />Two-Part Pricing<br />Peak Load / Congestion Pricing<br />Dynamic Pricing<br />
  15. 15. Cost-based vs. Value-based<br />Cost-based <br />most common pricing method <br />easiest pricing method<br />considered fair<br />difficult to allocate fixed costs<br />sub-optimal profits<br />Value-based <br />optimal profits <br />requires research<br />complicated to administer<br />can be considered unfair<br />
  16. 16. Flat-Rate Pricing<br />Single rate per time period: <br />PROS: <br />provides unlimited use<br />increases use<br />simple to explain & bill <br />popular with customers / low risk<br />CONS:<br />difficult to predict average price <br />unfair in that some people subsidize others<br />fair in that charges are predictable<br />
  17. 17. Ala-Carte Pricing<br />Variable rate depending on use: <br />PROS: <br />considered fair<br />greater choice<br />greater control<br />CONS:<br />more difficult to explain<br />more difficult to bill<br />more risk<br />
  18. 18. Two-part Pricing I<br />Combines flat rate plus variable: e.g., monthly fee plus cost per minute (declining?)<br />PROS<br />spreads costs more fairly<br />CONS<br />perceived as hassle<br />unpredictable<br />
  19. 19. Two-Part Pricing II<br />Combines down-payment & flat rate per month:<br />PROS:<br />covers fixed costs immediately<br />spreads customer’s costs<br />fits customer’s monthly budget<br />generates financing revenues<br />predictable / low risk<br />CONS:<br />increases total cost to customer<br />requires long-term billing<br />
  20. 20. Peak Load / Congestion Pricing<br />Variable rate depending on time of day or week:<br />PROS: <br />spreads use<br />encourages use in unpopular time<br />considered fair<br />easy to explain<br />CONS:<br />difficult to bill<br />
  21. 21. Dynamic Pricing<br />Variable rate for each customer:<br />PROS:<br />maximizes profit per customer<br />CONS: <br />difficult to implement<br />requires detailed demand schedule <br />difficult to explain<br />considered unfair<br />
  22. 22. 4. Price Bundling / Unbundling<br />With own products / services<br />bikini top with bottom<br />seats in car<br />training with purchase<br />McDonalds’ Happy Meals<br />season tickets<br />
  23. 23. With other products / services<br />discount cost of buns with hot dog purchase<br />“free” parking lot with grocery store<br />“free” Microsoft software with computer<br />include airline tickets with tour<br />
  24. 24. Benefits of Bundling/Unbundling<br />Bundling<br />provide unique assortment<br />sell unpopular with popular<br />provide added incentive to purchase or to stay<br />hide / disguise price<br />Unbundling <br />competitive defense<br />better serve customer<br />increase revenues<br />Mixed<br />
  25. 25. 5. Price Segmentation<br />Big opportunity:<br />Computer allows finer discrimination<br />Customers want choice but not confusion<br />
  26. 26. Segments<br />Consumer type<br /><ul><li>age
  27. 27. sex
  28. 28. income
  29. 29. education
  30. 30. geography, etc.</li></ul>Use of product<br /><ul><li>sports information
  31. 31. financial reports
  32. 32. information, etc.
  33. 33. Service level
  34. 34. speed
  35. 35. quality
  36. 36. 7/24/365
  37. 37. options / content
  38. 38. Urgency of need
  39. 39. immediate
  40. 40. soon
  41. 41. overnight</li></li></ul><li>Segments<br />Volume of use:<br />emergency only<br />limited usage<br />quantity discount<br />unlimited usage<br />Time of use:<br />off-peak<br />normal working hours<br />unrestricted<br /><ul><li>Longevity of customer
  42. 42. special extras for longevity
  43. 43. loyalty programs
  44. 44. Length of contract
  45. 45. 1, 2, 3 year sliding scale
  46. 46. Attitudes
  47. 47. high tech (image)
  48. 48. utility
  49. 49. Finances
  50. 50. flush
  51. 51. tight</li></li></ul><li>6. Pricing Plan<br />Determine target market(s).<br />What do those consumers want?<br />What can you give them that competitors cannot? (or haven’t thought of yet)<br />What are their financial impediments?<br />How can you structure your pricing to solve their problems?<br />How profitable will that be?<br />
  52. 52. Summary of Strategy<br />Objectives of price vary; profit is #1<br />Pricing concerns are the 4C’s<br />cost / competition / customer / custom<br />Pricing models can be mixed and matched <br />Bundling can be with both self & others<br />Segmentation should be fine tuned<br />Plan should be based on each market segment<br />
  53. 53. Thank You!<br />