8/3/2019 Focus Hour

1/70

1

PricingMaking Profitable Decisions

Tutorial

8/3/2019 Focus Hour

2/70

2

REVIEW

What Have Been

Introducedon the Course?

8/3/2019 Focus Hour

3/70

8/3/2019 Focus Hour

4/70

4

Introduction

Price defined

Profit impact of price change

Pricing strategy in brief

Factors influencing the pricing decision

8/3/2019 Focus Hour

5/70

5

Factors Affecting Pricing

Internal company factors

External environment factors

8/3/2019 Focus Hour

6/70

6

Pricing Strategy DefinitionValue creation

Price structure

Price and value communication

Pricing policy

Price level

8/3/2019 Focus Hour

7/70

7

CustomerV

alue ManagementPrinciples

Perceived value for the customers

8/3/2019 Focus Hour

8/70

8

General Approac

hes to Pricing

Cost based approach

Buyer approach

Competition based approach

Product mix pricing

Price adjustment strategy

8/3/2019 Focus Hour

9/70

9

Customers Perception of PriceReference prices

Price quantity inference

8/3/2019 Focus Hour

10/70

10

SOMETHINGTO BE

FOCUSED

8/3/2019 Focus Hour

11/70

11

DeterminingRelevant Costs

Incremental costs

are the costs associated with change in

pricing and sales.

= Variable costs + Some fixed costs (that

directly results from implementing a price

change or from offering a version of theproduct at a different price level)

8/3/2019 Focus Hour

12/70

12

Determining Relevant Costs

(cont.)Avoidable costs

are those that either have not yet been

incurred or that can be reversed, for

example, the costs of selling a product,

delivering it to customer and replacing the

sold item in inventory

8/3/2019 Focus Hour

13/70

13

Determining Relevant Costs

(cont.)Sunk costs: those costs that a company is

irreversibly committed to bear. For example,

the past expenditure on research anddevelopment, the rent on building and

equipment within the term of current lease.

8/3/2019 Focus Hour

14/70

14

Estimating

Relevant Costs

Beware of averaging total variable costs toestimate the costs of the single unit

Beware of accounting depreciation formulasBeware of treating a single costs as either allrelevant or all irrelevant for pricing

Beware of overlooking opportunity costs

8/3/2019 Focus Hour

15/70

15

Financial Analysis in Pricing

Key questions

How much would the sales volume have to

increase to profit from a price reduction?

How much would the sales volume decline

before a price increase becomes

unprofitable?

8/3/2019 Focus Hour

16/70

16

Breakeven Analysis:Th

e Basis Case

A

B

P

P

C

(Q

(P

0

% Breakeven sales change =- (P

CM + (P

(P = P PC: Average variable Costs, C= AVC

CM: Contribution Margin, CM = P C

8/3/2019 Focus Hour

17/70

17

Breakeven Sales Incorporating

a Change in Variable Costs

% Breakeven sales change =- (CM

New CM

8/3/2019 Focus Hour

18/70

18

Breakeven Sales with

Incremental Fixed Costs

% Breakeven sales change =- (CM

New CM

Change in fixed costs

New CM x Initial Unit Sales

+

8/3/2019 Focus Hour

19/70

19

Breakeven Sales Analysis for

Reactive Pricing

% Breakeven sales change

for reactive price change

(P

CM=

8/3/2019 Focus Hour

20/70

20

Customer

Use value refers to the total savings orsatisfaction that the customer receives from theproduct

A products economic value is the price of the

customers best alternative (called thereference value) plus the value of whateverdifferentiates the offering from the alternatives(called the differentiation value)

Total economic value is the maximum price thata smart shopper fully informed about themarket and asking the best value would pay

8/3/2019 Focus Hour

21/70

21

Economic Value Analysis

Positive

Differentiation

Value

Reference

Value

Negative

Differentiation

Value

Total

Economic

Value

Differentiation value is the value to the

customer (both positive and negative) of

any difference between your offering and

the reference product

Reference value is the cost (adjusted fordifference in units) of the competing

product that the customer views as the

best alternative for this one

8/3/2019 Focus Hour

22/70

8/3/2019 Focus Hour

23/70

23

Factor Affecting Price

Sensitivity1. Perceived substitutes effect

2. Unique value effect

3. Switching cost effect

4. Difficult comparison effect

5. Price quality effect

6. Expenditure effect

7. End Benefit effect

8. Shared Cost effect

9. Fairness effect

10. Inventory effect

8/3/2019 Focus Hour

24/70

24

Perceived SubstitutesEffect

What alternatives are buyers typically aware

of when making a purchase?

To what extent are buyers aware of the pricesof those substitutes?

To what extent can buyers price expectation

to influenced by the positioning of one brand

to particular alternatives or by the alternatives

offer them?

8/3/2019 Focus Hour

25/70

25

UniqueV

alueEffect

Does the product have any unique attributesthat differentiate it from competing products?

What attributes do customer believe areimportant when choosing a supplier?

How much do buyers value unique,differentiating attributes? How can one

increase perceived importance ofdifferentiating attributes and/or reduce theimportance of those offered by thecompetition?

8/3/2019 Focus Hour

26/70

26

Difficult Comparison Effect

How difficult is it for to compare the offer of differentsupplier?

Can the attributes of the product be determined byobservation or must the products be purchased and

consumed to learn what it offers?What portion of the market has positive pastexpenditure with your products? With the brands ofthe competition?

Is the product highly complex requiring costlyspecialists to evaluate its differentiating attributes?

Are the price of different suppliers easily comparableor are they stated for different sizes and combinationthat make comparison difficult?

8/3/2019 Focus Hour

27/70

27

Price qualityEffect

Is a prestige image an important

attribute of the product?

Is the product enhanced in value when

its price excludes some consumer?

Is the product of unknown quality and

are there few reliable cues forascertaining quality before purchase?

8/3/2019 Focus Hour

28/70

28

Expenditure

Effect

How significant are buyers

expenditures for the product in absolute

dollar terms (for business buyers) and aportion of income (for end consumer)?

8/3/2019 Focus Hour

29/70

29

End BenefitEffect

What end benefit do buyers seek from theproduct?

How price sensitive are buyer to the cost of

the end- benefit?What portion of the end-benefit does the priceof the product account for?

To what extent can the product be

repositioned in customers minds as relatedto an end-benefit for which the buyer is lesscost sensitive or which has a larger totalcosts?

8/3/2019 Focus Hour

30/70

30

Shared Cost

Effect

Does the buyer pay the full cost of the

product?

If not, what portion of the cost does the

buyer pay?

8/3/2019 Focus Hour

31/70

31

Fairness

Effect

How does the products current price

compare with prices people have paid in the

past for product in this category?What do buyer expect to pay for similar

product in similar purchase contexts?

Is the product seen as necessary to maintain

a previously enjoyed standard of living or is it

purchased to gain something more out of life?

8/3/2019 Focus Hour

32/70

32

Inventory

Effect

Do buyer hold inventories of the

product?

Do they expect the current price to be

temporary?

8/3/2019 Focus Hour

33/70

33

Switching Cost

Effect

To what extent have buyers already

made investment in dealing with one

supplier that they would need to incuragain if they switched supplier?

For how long are buyers locked in by

those expenditure?

8/3/2019 Focus Hour

34/70

34

Understanding PricingG

amesPricing is a game because success

depends not only on a companys own

pricing decision but also on howcustomers and competitors respond to

them

Pricing is a Negative sum game

8/3/2019 Focus Hour

35/70

35

Plan for Managing

CompetitionSegmentA Segment B Segment C Segment D

Our company

CompetitorA

Competitor B

Fringe

CompetitorsConsumers

Segments

attractiveness

8/3/2019 Focus Hour

36/70

36

Life Cycle Pricing

Pricing the innovation for market

development

Pricing the new product for growth

Pricing the established product in

maturity

Pricing a product in market decline

8/3/2019 Focus Hour

37/70

37

Pricing the Innovations for

Market DevelopmentShould be set to communicate the

products value to marketplace.

Marketing innovations through price-

induced sampling

Marketing innovations through direct sales

Marketing innovations through distribution

channel

8/3/2019 Focus Hour

38/70

38

Pricing the New Product for

GrowthPricing the differentiated product

Pricing the low-cost product

Price reductions in growth

8/3/2019 Focus Hour

39/70

39

Pricing the Established

Product in MaturityIncreasing price competitions as the market

moves from growth to maturity

The buyers are able to evaluate and comparecompeting product, reducing brand loyalty and the

value of a brands reputation

The imitation of the most successful product design,

technology and marketing strategies reduces

product differentiation, making the various brands

more directly competitive with one another

New competitors be attracted

8/3/2019 Focus Hour

40/70

40

Pricing the Established

Product in Maturity (cont.)Some options

Unbundling related products and services

Improved estimation of price sensitivity

Improved control and utilization of costs

Expansion of the product line

Reevaluation of distribution channels

8/3/2019 Focus Hour

41/70

41

Pricing a Product in Market

DeclineAlternative strategies in decline

Retrenchment strategy involves either partial or

complete capitulation of some market segmentsto refocus resources on others where the firmhas a stronger position

Harvesting strategy is a phased withdrawal

industry to maximise income Consolidation strategy is an attempt to gain a

stronger position in the decline industry

8/3/2019 Focus Hour

42/70

42

Segmented PricingSegmenting by buyer identification

Segmenting by purchase location

Segmenting by time of purchaseSegmenting by purchase quantity

Segmenting by product design

Segmenting by product bundling

Segmenting by tie-ins and metering

8/3/2019 Focus Hour

43/70

43

Segmenting by Time of

PurchasePeak-load pricing: segmentation based

on different cost of serving consumers

Yield management: simultaneously

integrates differences both in the costs

and in price sensitivity.

8/3/2019 Focus Hour

44/70

44

Segmenting by Purchase

QuantityVolume discounts most common when sellingproducts to business consumers.

Order discounts to encourage customers toplace large orders.Step discounts (or block discounts) commonfor public utilities from which customers buywater and electricity for multiple uses and

place a different value on it for each use.Two-part pricing involve two separate chargeto consume a single product.

8/3/2019 Focus Hour

45/70

45

Segmenting by Product

BundlingOptimal bundling: often used by

supermarkets in the form of special

promotions

Value-added bundling to attract price-

sensitive buyer without reducing prices to

those who are relatively price sensitive

8/3/2019 Focus Hour

46/70

46

Segmenting by Tie-ins and

MeteringTie-in sales. Along with the purchase or

lease of a machine, a buyer

contractually agreed to purchase acommodity used with the machine

exclusively from the seller

Metering

8/3/2019 Focus Hour

47/70

47

What Could be futher

Pricing in marketing-mix Pricing and the product line

Pricing substitute products

Pricing complementary products

Pricing and promotion Pricing tactics to induce trial

Trial offers

Coupon

Rebates

Defensive dealing

Trade dealingPricing and distribution Maintaining minimum resale prices

Limiting maximum resale prices

8/3/2019 Focus Hour

48/70

48

And three more should be

studiedCustomerNegotiation

Pricing Psychology

The law and ethics in pricing

8/3/2019 Focus Hour

49/70

49

Th

ank you for attention!

Vu Minh Duc(MS, PhD)

Deputy Dean of Marketing FacultyNational Economics University

Cell phone: 091 262 1346

Email: ducvm@neu.edu.vn

8/3/2019 Focus Hour

50/70

50

W

ays to Ch

ange PriceChange the quantity of money or goods andservices to be paid by the buyer

Change the quantity of goods and servicesto be provided by the seller

Change the quality of goods and servicesprovided

8/3/2019 Focus Hour

51/70

51

More Ways to Change Price

Change the premiums or discounts to beapplied for quantity reasons.

Change the time and place of transfer ofownership.

Change the place and time of payment.

Change the acceptable form of payment.

8/3/2019 Focus Hour

52/70

52

Faster Technological Progress

HasReduced the gap between invention

and innovation

Reduced the average age of products

Intensified competition from alternative

uses of income

8/3/2019 Focus Hour

53/70

53

Proliferation ofNew Products

Population explosion of new products

Product lines have widenedBlurred market segments

Small price differentials may producerelatively large shifts in demand

8/3/2019 Focus Hour

54/70

54

Increased Demand for

Services

Increase in demand for services has led

to an increase in prices, which have ledto public concern and governmental

activity

There is also an increase in demand for

services built into products

8/3/2019 Focus Hour

55/70

55

Increased Global Competition

Increased foreign trade around the

world has increased the amount of pricecompetition faced by domestic

producers

8/3/2019 Focus Hour

56/70

56

The Changing Legal

Environment

Deregulation and privatization of

companies have resulted in morecomplex, more difficult, and more

important pricing decisions

8/3/2019 Focus Hour

57/70

57

Economic Uncertainty

Slowed or stopped inflation rates in

other countries economies has led tothe need for new approaches to

developing pricing strategies

8/3/2019 Focus Hour

58/70

58

Five Factors to Consider

Demand

Costs

Competitive factors

Corporate profit and market objectives

Regulatory constraints

8/3/2019 Focus Hour

59/70

59

Demand Implications

Market versus product elasticity

Derived demand for buyers output

Likelihood of competitive entry

Demand consequences of a product

line

8/3/2019 Focus Hour

60/70

60

CostImplications

Cost-plus pricing

Maximizing margins

Pricing with scarce resources

8/3/2019 Focus Hour

61/70

61

Marketing and Distribution

Strategy Implications

The product life cycle

Sales force management

8/3/2019 Focus Hour

62/70

62

How To Become a Proactive

Pricer

1. Understand how pricing works

2. Understand how customers perceive

prices and price changes

8/3/2019 Focus Hour

63/70

63

The Three Levels of Pricing

Management1. Understanding the economic and

competitive environment

Factors that influence supply and demand

2. Developing product and market

pricing strategy

Benefits, costs, and prices

3. Administering the pricing process

Tactical pricing decisions

8/3/2019 Focus Hour

64/70

64

Level One1. Traditional Economic1. Traditional Economic

How will current and future supply and

demand dynamics affect overall marketprice levels?

Economic/market environment

Changes in competition, supply, capacity

Shifts in demand

New product developments

8/3/2019 Focus Hour

65/70

65

Level Two

2. Product and Market Strategy2. Product and Market Strategy

Within each market segment, what is

the correct list or target price for each

product?

Customers perceptions of price and value

Price research

Profitability analysis

Pricing strategy

8/3/2019 Focus Hour

66/70

66

Concept Of Benefits

A product or service must promise to:

Perform identified functions,

Solve identified problems, or

Provide specified pleasure.

Thus, a product or service is bought forwhat it does, notwhat it is made of.

8/3/2019 Focus Hour

67/70

67

Customers Perceptions AreImportant!

The relative benefits customers perceive the

product or service provides;

The relative total costs of acquiring, installing,and using the product or service over its

lifetime;

The tradeoff that customers perceive between

receiving the perceived benefits compared tothe total costs - perceived value

8/3/2019 Focus Hour

68/70

68

Model Of Price-valueRelations

hip

Willingnessto buy

Perceivedvalue

Perceivedmonetarysacrifice

Perceivedquality

ActualPrice

8/3/2019 Focus Hour

69/70

69

Level

Three

3. Price Structure Management3. Price Structure Management

How to determine the actual price to receivefrom each transaction?

Organizing for price administration

Transaction management: setting discounts,

allowances, rebates Establishing pricing tactics

Maintaining feedback and control

Legal and ethical issues

8/3/2019 Focus Hour

70/70

Tactical Pricing Decisions

Tactical pricing decisions concern day-to-day management of the pricing function,

including: Timing of price changes

Amount of price changes

Direction of price changes

Administering price changes

Communicating price changes to sales force

customers