PRICE has a far greater effect on PROFITS than REVENUE and COSTS have. In fact, on average across the S&P1500, each 1% change in PRICE equals an 8% change in PROFIT. This presentation introduces is an introduction to the overall good and bad pricing strategies, including Differential-Value Pricing (sm)

1. Maximizing Profit Through Strategic Pricing
Robert A. McKinney
Pricing Strategist with The McKinney Group, LLC
Copyright 2009

2. The McKinney Group, LLC
Effect of price on profit
What is traditional pricing
• Cost-plus pricing
• Customer-driven pricing
• Competition-driven pricing
What is strategic pricing
• Keys to strategic pricing
• Differentiated-Value Pricing(sm)
• Copier example
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3. • Growth-oriented startup to $50MM
• Competitive Strategy
• Strategic Pricing
•
• Certified Managerial Accountant (CMA)
• MBA, Strategic Management, Purdue University
• Member:
• Experience:
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4. The McKinney Group, LLC
Effect of price on profit
What is traditional pricing
• Cost-plus pricing
• Customer-driven pricing
• Competition-driven pricing
What is strategic pricing
• Keys to strategic pricing
• Differentiated-Value Pricing(sm)
• Copier example
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5. Pricing affects the bottom line in many ways
• Influences perceived value in marketplace
• Influences how well a product will sell
• Determines profit
• Each 1% Δ in price = 8% Δ in profit
Original Price Discounted price
Price $114 Price $103 10% price cut
Costs $100 Costs $100
Net Profit $14 Net Profit $3 80% profit cut!
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6. While lower prices sometimes lead to more sales,
more sales are required just to break even
Total Profit = Profit per piece x Quantity sold
$100,000 overhead (fixed) costs
/ $14 profit per piece
7,143 pieces must be sold to break even
$100,000 overhead (fixed) costs
/ $3 profit per piece
33,333 pieces must be sold to break even
Lower price would require >4x the
sales just to break even
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7. The McKinney Group, LLC
Effect of price on profit
What is traditional pricing
• Cost-plus pricing
• Customer-driven pricing
• Competition-driven pricing
What is strategic pricing
• Keys to strategic pricing
• Differentiated-Value Pricing(sm)
• Copier example
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8. What is traditional pricing
Reacts to market conditions rather than proactively
managing them
Focused on:
• Closing deals
• Growth
• Maximizing market share
Players:
• Finance:
• Marketing:
• Sales:
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9. Cost-plus pricing
“Fair” profit after all costs
Leads to overpricing and underpricing
• Most companies don’t know their total costs
• Costs change
• Competitor’s costs are different than yours
• Customers don’t care about your costs
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10. Customer-driven pricing
(“Willingness-to-pay” pricing)
Goal: Maximum number of happy customers
Leads to discounting and underpricing
• Teaches customers that you are not serious about getting paid for the
value you create
• Rewards aggressive behavior by procurement departments
• Price disparities can damage relationships with existing customers
• Encourages competitors to discount also (“Race to the bottom”)
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11. Customer-driven pricing
(“Willingness-to-pay” pricing)
Price History, Division
$400
$350
$300
$250
$/unit
$200
5-year CAGR
( 2002-2007)
$150
Fredonia bulk -11%
$100
Paulding bulk -10%
$50
$-
2000 2001 2002 2003 2004 2005 2006 2007
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12. Customer-driven pricing
(“Willingness-to-pay” pricing)
Pricing vs. volume, Division
$1,800
$1,600
$1,400
$1,200
$1,000
$/ unit
$800
$600
$400
$200
$-
- 0 0 0 0 0 0 0 0 0 00
1, 00 2, 00 3, 00 4, 00 5, 00 6, 00 7, 00 8, 00 9, 00 10, 0
Units per year
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13. Competition-driven pricing
Driven by market share and growth goals
Leads to price wars and commoditization
• Easiest way to make a sale, cut the price
Generic business strategies
1. Low Cost
2. Differentiation
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14. The McKinney Group, LLC
Effect of price on profit
What is traditional pricing
• Cost-plus pricing
• Customer-driven pricing
• Competition-driven pricing
What is strategic pricing
• Keys to strategic pricing
• Differentiated-Value Pricing(sm)
• Copier example
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15. What is strategic pricing
Focused on value creation
Proactively manages market conditions
Driven to maximize net profit
Controlled
Players:
• Finance
• Marketing
• Sales
• Management
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16. Differentiated-Value Pricing(sm) ensures that you
profit from the value that you create
DVP(sm) is a framework to quantify value
• Basis of your value proposition
DVP(sm) is the foundation of strategic pricing
• Allows you to determine prices that maximize net profits
• Minimizes risk of commoditization
• Minimizes risk of price wars & “races to the bottom”
DVP(sm) helps the marketing team with all aspects of developing a
marketing mix
DVP(sm) improves the effectiveness of Sales
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17. Example: Determining price for new copier from
Alpha Copier Company
Finance
• Manufacturing costs: $1,250
• Alpha’s standard gross margin: 50%
• Price should be $1,875
Sales
• “Market is very competitive”
• Beta company has a $1,200 copier.
• Beta has also been very aggressive regarding price, and has been
marketing themselves heavily in an attempt to grow market share
• Price can be no more than 15% higher than Beta ($1,400)
Finance and Sales agree on $1,750
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18. The first step is to understand the value created by
your company and its competition
Attributes Alpha Beta
Pages per minute 30 15
Resolution 600 x 600 300 x 300
Paper capacity 500 sheets 1,000 sheets
Duplex capacity Yes No
USB input Yes No
Internet capability Yes No
Brand image Reliable Low cost
Cost ?? $1,200
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19. The next step is to quantify the value
Secondary research
• Historical company sales data
• Scanner data
Primary research
• Market research panels or focus groups
• Surveys
• Buy-response surveys
• Conjoint (“tradeoff”) analysis
• In-store or laboratory purchase experiments
• In depth customer interviews
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20. The next step is to quantify the value
Secondary research
• Historical company sales data
• Scanner data
Primary research
• Market research panels or focus groups
• Surveys
• Buy-response surveys
• Conjoint (“tradeoff”) analysis
• In-store or laboratory purchase experiments
• In depth customer interviews
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21. Translating value creation to dollars and cents
Attributes Alpha Beta Avg ∆ in value
(Alpha vs. Beta)
Pages per minute 30 15 $75
Resolution 600 x 600 300 x 300 $200
Paper capacity 500 sheets 1,000 sheets -$50
Duplex capacity Yes No $75
USB input Yes No 25
Internet capability Yes No 50
Brand image Reliable Low cost $300
Cost ?? $1,200 $725
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22. Using Differentiated-Value Pricing (sm) to calculate price showed
Alpha that their new copier created more value than they thought
$1,200 Beta copier
$725 Additional value created by Alpha’s new model
$1,925 Value of Alpha’s new copier
3% difference in price
38% difference in price
7% difference in net profit
450% Δ in net profit
$1,875 Cost-plus price determined by Finance
$1,400 Competition-driven price determined by Sales
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23. Differentiated-Value Pricing (sm) also allows Alpha to support
their value proposition when communicating with internal
players, distributors, and customers
$1,200 Beta copier Attributes Alpha Beta
Pages /minute 30 15
Additional value created by Resolution 600 x 600 300 x 300
$725 Alpha’s new (differentiated) model Duplex Yes No
USB input Yes No
$1,925 Value of Alpha’s new copier Internet Yes No
Brand image Reliable Low cost
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24. DVP(sm) is a foundation for strategic pricing
Skim pricing
Bundling Rebates /
Bundling Coupons
Bundling
Seg mentation
Price fences
||||||||||||||
Differentiated-Value Pricing(sm)
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25. For more information, including many free resources about
pricing and business strategy, go to: www.TMG-SMC.com
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