This document discusses pricing strategy and provides guidance on setting prices. It covers: 1) Setting prices to increase profits, attract new customers, and maintain existing customers. 2) Considering competition, costs, customers, and industry customs when setting prices. 3) Common pricing models like cost-based, value-based, flat-rate, and dynamic pricing. 4) Using bundling to provide incentives and disguise prices. 5) Segmenting customers based on attributes to set personalized prices. 6) Developing a pricing plan tailored to target market segments.

1. Pricing Strategy: A focus on profit, not sales

2. Supply & DemandPrice supplydemand Quantity

3. “Making it up on quantity”Required increase in sales volume (%) 100 80 60 4020% price 20decrease 20 40 60 80 20% price 20 Variable unit costincrease as % of price 40 60 80Acceptable decrease in Sales Volume (%) 100

4. Pricing over Product Life CycleIntroduction Growth Maturity Decline

5. Differences in pricing strategiesIn a “dumb industry”Operators fight with priceCustomers become more price sensitiveIn a “smart industry”Operators fight with…More complex pricingMore varied pricing plansGreater subtlety of pricing optionsGreater use of techniques from other fields

6. PRICINGSTRATEGYHow companies make pricing decisions… “Pricing strategy always has been more of a poker game than a science.”William T. Moran, Admar Research “Successful pricing is an art, not a science.”John I. Leahy, Black & Decker “Pricing decisions are not easy to make; they are often inherently ‘soft’.”William E. Johnson, William E. Johnson Assoc.

7. Pricing StrategyPricing ObjectivesPricing Concerns: 4 C’sPricing ModelsPrice BundlingPrice SegmentationPrice Plan

8. 1. Objectives in Setting PriceIncrease profits Attract new customersMaintain current customersIncrease profit per customerIntroduce new product Generate cashImprove ROI

9. Attract New CustomersIntroductory coupons / discountsprovide incentivemaintain reference priceTrial offersincrease familiarityreduce riskProblemperceived as unfair

10. Maintain Current CustomersMeet competitionmatching prices add to bundle (as long as customers want it!)Create barriers to exit contracts / subscriptionsautomatic billingphone numbers (no longer in the U.S.) family plansProvide loyalty programsfrequent flyerStarbuck cards

11. Increase Profit per CustomerIncrease prices reduce product? (candy bar pricing)justify/ notify / base on costsAdjust product mixsales incentives for more profitable businessAdjust customer mix teenagers vs. seniorsCharge for extras what’s valuable to customer and cheap to companyGet money up frontPrepaid subscriptions

12. Introduce New ProductSkimming: Adjusts prices down over time:PROS: skims off maximum profit for each segmentestablishes high reference priceCONS: attracts competitiondifficult to administerPenetration: Starts at lowest possible pricePROS: penetrates market quicklykeeps out competitionCONS: creates low reference pricemisses full profit potential

13. 2. Concerns in setting price: 4C’s Competition Customer Cost Custom

14. 3. Pricing ModelsCost-based PricingValue-based PricingFlat-Rate PricingAla-Carte Pricing Two-Part PricingPeak Load / Congestion PricingDynamic Pricing

15. Cost-based vs. Value-basedCost-based most common pricing method easiest pricing methodconsidered fairdifficult to allocate fixed costssub-optimal profitsValue-based optimal profits requires researchcomplicated to administercan be considered unfair

16. Flat-Rate PricingSingle rate per time period: PROS: provides unlimited useincreases usesimple to explain & bill popular with customers / low riskCONS:difficult to predict average price unfair in that some people subsidize othersfair in that charges are predictable

17. Ala-Carte PricingVariable rate depending on use: PROS: considered fairgreater choicegreater controlCONS:more difficult to explainmore difficult to billmore risk

18. Two-part Pricing ICombines flat rate plus variable: e.g., monthly fee plus cost per minute (declining?)PROSspreads costs more fairlyCONSperceived as hassleunpredictable

19. Two-Part Pricing IICombines down-payment & flat rate per month:PROS:covers fixed costs immediatelyspreads customer’s costsfits customer’s monthly budgetgenerates financing revenuespredictable / low riskCONS:increases total cost to customerrequires long-term billing

20. Peak Load / Congestion PricingVariable rate depending on time of day or week:PROS: spreads useencourages use in unpopular timeconsidered faireasy to explainCONS:difficult to bill

21. Dynamic PricingVariable rate for each customer:PROS:maximizes profit per customerCONS: difficult to implementrequires detailed demand schedule difficult to explainconsidered unfair

22. 4. Price Bundling / UnbundlingWith own products / servicesbikini top with bottomseats in cartraining with purchaseMcDonalds’ Happy Mealsseason tickets

23. With other products / servicesdiscount cost of buns with hot dog purchase“free” parking lot with grocery store“free” Microsoft software with computerinclude airline tickets with tour

24. Benefits of Bundling/UnbundlingBundlingprovide unique assortmentsell unpopular with popularprovide added incentive to purchase or to stayhide / disguise priceUnbundling competitive defensebetter serve customerincrease revenuesMixed

25. 5. Price SegmentationBig opportunity:Computer allows finer discriminationCustomers want choice but not confusion

26. SegmentsConsumer typeage

27. sex

28. income

29. education

30. geography, etc.Use of productsports information

31. financial reports

32. information, etc.

33. Service level

34. speed

35. quality

36. 7/24/365

37. options / content

38. Urgency of need

39. immediate

40. soon

41. overnightSegmentsVolume of use:emergency onlylimited usagequantity discountunlimited usageTime of use:off-peaknormal working hoursunrestrictedLongevity of customer

42. special extras for longevity

43. loyalty programs

44. Length of contract

45. 1, 2, 3 year sliding scale

46. Attitudes

47. high tech (image)

48. utility

49. Finances

50. flush

51. tight6. Pricing PlanDetermine target market(s).What do those consumers want?What can you give them that competitors cannot? (or haven’t thought of yet)What are their financial impediments?How can you structure your pricing to solve their problems?How profitable will that be?

52. Summary of StrategyObjectives of price vary; profit is #1Pricing concerns are the 4C’scost / competition / customer / customPricing models can be mixed and matched Bundling can be with both self & othersSegmentation should be fine tunedPlan should be based on each market segment

53. Thank You!