Pricing As A Strategic Marketing Tool
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The document discusses pricing as a strategic marketing tool. It outlines symptoms of pricing problems, such as incentive compensation based on revenue rather than profits. It also discusses factors that influence price sensitivity, including unique value, substitute awareness, and total expenditure. The document advocates setting prices using strategic pricing approaches like price bands and margin bands to maximize profits by leaving less money on the table and maintaining higher than average prices.
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Pricing As A Strategic Marketing Tool
- 1. Pricing as a Strategic Marketing Tool © Tom Smith, Insights From Analytics, 2014
- 2. Selling Value Price + Perception = Value © Insights From Analytics, 2014
- 3. Symptoms of Pricing Problems • Sales’ incentive compensation based on sales (revenue), rather than profits (margins), and the rep can affect the final price. • Cost of goods sold are rising as a percent of sales (eroding margins). • Price changes are made across the board. • The use of cost-plus pricing. © Insights From Analytics, 2014
- 4. What is a Price? It’s what you think your product is worth to that customer at that time. © Insights From Analytics, 2014
- 5. What Else is a Price? • It’s the customer’s least favorite part of buying. • It’s a marketing expense to the seller. • It’s the only marketing tool that directly affects both the top and bottom lines of the P&L. • It’s the easiest marketing tool for the competition to copy. • It’s a marketing tool representing everything about the product -especially quality and value perceptions. © Insights From Analytics, 2014
- 6. Price Change Models Fixed costs unchanged: -(% Price Change) (% Margin) - (% Price Change) = % Sales Change Fixed costs changing: % Sales Change from Above + $ Change in Fixed Costs (New Margin) x (Unit Sales) May lose existing business: Breakeven = Price Change Margin © Insights From Analytics, 2014
- 7. The 4 C’s of Pricing What is the highest price I can charge and still make the sale? • Customers • Competitors Am I willing to sell at that price? • Costs • Constraints © Insights From. Analytics, 2014
- 8. Costs Must Have Some Role? • Costs help find the most profitable quantities to sell and markets to serve. • The only relevant costs for pricing are: • Forward-looking • Incremental • Avoidable • Pitfalls: • • • • Using average variable costs Using accounting depreciation Treating a single cost as all relevant or irrelevant Overlooking opportunity costs © Insights From Analytics, 2014
- 9. Price Bands Units Industry Average Price Level Price Index Unit sales or order frequency of a single product sold to a single market segment over a range of prices © Insights From. Analytics, 2014
- 10. Price Band Drivers • Supplier-driven • “Cost-to-serve” difference • Uneven competitive intensity • Pricing structure • Customer-driven • • • • Customer buying process Uneven switching cost Imperfect knowledge of market price levels Uneven economic value to customer © Insights From Analytics, 2014
- 11. Factors Affecting Price Sensitivity • Unique value • Substitute awareness • Difficult comparison • Total expenditure • End-benefit • Shared cost • Sunk investment • Price-quality • Inventory © Insights From Analytics, 2014
- 12. Margin Bands Band widths typically increase as their definitions become more precise for a given product/market segment. Volume Discount Competitive Discount List Price Freight Credit Terms Invoice Price Off-Invoice Promotions Pocket Price © Insights From Analytics, 2014 Selling, commissio n order processing Finished goods, Spare parts Margin
- 13. Strategic Pricing Pricing Strategy = Move the price band Pricing Tactic = Move up the price band without losing volume Have an infinite number of price points. Give the customer what they want at the price you want them to pay. © Insights From Analytics, 2014
- 14. Alternative Pricing Strategies • Skimming • Sequential skimming • Penetration • Neutral • Segmentation • Buyer identification • • • • • • Purchase location Time of purchase Purchase quantity Product design Product bundling Tie-ins/metering © Insights From Analytics, 2014
- 15. Tactical Pricing – Move Up The Band • Shift mix of orders taken • Customer mix • Order size mix • Reduce money left on the table • Establish the highest possible level • Only use price levers when they pay off • Maintain • Overall share position • Upward pressure on industry prices • Strong customer relationships © Insights From Analytics, 2014
- 16. Summary • Sell at a premium price • Increase industry prices • Maintain higher than average prices • Leave less on the table • Give less away © Insights From Analytics, 2014
- 17. A Final Thought “It is unwise to pay too much, but it’s worse to pay too little. When you pay too much, you lose a little money. When you pay too little, you sometimes lose everything, because the thing you bought was incapable of doing the thing it was bought to do. The common law of business balance prohibits paying a little and getting a lot -- it can’t be done. If you deal with the lowest bidder, it is well to add something for the risk you run. And if you do that, you will have enough to pay for something better.” © Insights From Analytics, 2014
Editor's Notes
- Virtually no management focus on price Lack of formal education or publications Single biggest driver of pricing decisions is usually cost; however, cost should not be part of the equation Cost has nothing to do with price Myths Customers are price sensitive -- no, they are value sensitive Price is a competitive advantage -- only if you’re the low cost producer, of which there is only one and it’s driven by economies of scale Cost affects price -- cost has no impact on price, value does Summary Pricing is a very important business activity that deserves the focus of management Pricing is a human endeavor, modeling is inappropriate Companies make money on margins, not pricing Much more flexibility to pricing than anyone imagines
- A 5% price cut = 50% profit reduction. Do not compensate based on revenue, you’re tacitly endorsing price cuts. Put production on the same margin as sales. This will encourage them to reduce costs. The more prices you have, the more volume and revenue you generate (price segmentation). Draw price/volume curve with only a few price levels versus a lot of price levels and watch the open spaces, missed revenue, disappear. Ways to vary price for the same product: timing - airline, hotel, utilities, Broadway, deliveries location - hotel, outlet malls, event seats bundling - integrated systems - PacFab, IT VARs volume - bogof, Sams customer ID - affinity cards, AARP product variations - color, package metering - utilities Nothing is sacred about the unit of sales. Sell what the customer wants thereby providing greater value.
- Everything is relative: people situations perceptions
- 3. Revenue - Fixed and Variable Costs = Profits It’s a marketing expense to the seller because they are leaving money on the table. Top line is revenue; bottom line is profit
- 1. If a business has 40% margin and cuts price 10%, they must increase sales 33% to breakeven.-10 / 40-10 = 33% A 10% price increase could absorb a 20% reduction in sales. 3. To justify lowering prices not to lose business you must consider how much business you’d have to lose. A 5% price cut with a 40% margin would be justified only if you would lose at least 12.5% of your business. -5 / 40 = -12.5%
- Customers define value Competitors help define the price band Costs are a given Constraints are perceived except for governmental Pricing is a marketing activity, not a business or cost analysis activity Pricing is a marketing activity not a business, or financial analysis, activity. Many creative solutions are available. Robinson-Patman (anti-price discrimination act) only prohibits different prices among competitors: “cost to serve” clause “competitive quote” clause Avoid collusion (e.g., ADM)
- Variable costs for pricing purposes are specific to that particular customer: selling proposal development (new business investment) management time (planning & management) quality control (proofreading, mechanical art) credit special handling (packaging, presentation) There are things the customer sees value in and must be willing to pay for. Must find out what those things are and sell against them. These will vary by customer. Forward-looking = future expenses Incremental = special requests or needs Avoidable = make goods (6 Sigma, TQM help to reduce)
- Price bands are wider than you think. Can always be wider. 50X is about as high as you can go (smallest observed was kraft paper @ 20%) Customers will always buy the most expensive first. Take margin where perception/value is higher and take add value. Drivers: perception, time, contract.
- “Cost to serve” differences based on location, volume, etc. Pricing structure can be affected by government price controls, et. al. Customer buying process = 3-bid vs. non-shopper Uneven switching cost = supplemental product cost Uneven economic value to the customer = seasonal energy needs – gas in winter, electricity in summer
- Unique value = customer benefit varies as different buyers realize different value (e.g., plastic pellets for a toy mftr. vs. stress ball mftr.) Substitute awareness = customer service vs. competition (supplemental product availability) Difficult comparison = structure prices differently, don’t quote to spec (prevent apples to apples comparison) Total expenditure = break down total cost of ownership (show l.t. benefits w/r to parts, service, maintenance) End-benefit = less price sensitive on less costly items (plastic pellets for toys vs. automobile dash boards) Shared cost = more price sensitive if you pay for the whole thing Sunk investment = make money on spares, parts, etc. (razor & blades) Price-quality = status/image of products/services (Toyota vs. Lexus) Inventory = more inventory equals more price sensitivity (pellets); shorten shelf life to shorten inventory cycle (OTC drugs); service business can sign contracts but the inventory is service
- Margin bands are much bigger than pricing bands since margins increase exponentially: Invoice (tall curve) Pocket Price (medium)Margin (flatter) __________ ______________________________ External Components Internal Components More specialized = higher price due to greater customization
- Strategic: 1) Price Leadership - high share, high technology, high quality 2) Price Signaling Tactical: 1) Moving your average price band up in the industry without anyone noticing 2) Reducing the dollars left on the table Industry price band is much bigger and wider. Show moving company price band within the industry price band
- Skimming - targeting only most profitable or least price sensitive Sequential skimming - varying prices to above Penetration - increase price as gain share (Microsoft, Freightliner) Neutral - maintaining place within the industry price band (stay at high end) Buyer identification = Sam’s Purchase location = grocery stores – affluent, lower income, crime Time of purchase = in advance vs. at the door Purchase quantity = discounts Product design = modern vs. old (IPhone) Product bundling = integrated system, one stop shopping Tie-ins/metering = cell phones, water usage, electical usage
- Pricing levers: 1) price level; 2) timing; 3) communication