practically theoretical takeaways from the scientifically emotional world of pricing
TRANSCRIPT
PRACTICALLY THEORETICAL TAKEAWAYS FROM THE SCIENTIFICALLY EMOTIONAL WORLD OF PRICINGJD DILLON
PRODUCT CAMP SILICON VALLEY
MARCH 2017
BUT FIRST, A WORD FROM OUR SPONSOR
"The single most important decision in
evaluating a business is pricing power.”Warren Buffett
PRACTICALLY THEORETICAL TAKEAWAYS FROM THE SCIENTIFICALLY EMOTIONAL WORLD OF PRICING
PRICING IS EMOTIONALJUST ASK MY LATE GRANDFATHER
½ Price @
Podiatrist
PRICING IS EMOTIONAL: REFERENCE PRICECOMPARISON TO PERCEIVED ALTERNATIVES
Different Alternative
14X Price Increase
PRICING IS EMOTIONAL: EXPENDITURE EFFECTSIZE OF PURCHASE IMPACTS PERCEPTION OF PRICE DELTA
Where does $595 Matter More?
PRICING IS EMOTIONAL: FAIRNESS EFFECTGENERAL PERCEPTION TIED TO SELLER’S MOTIVES
$-
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
$4,000
Tic
ke
t P
ric
e
26 Different Ticket Prices (Snapshot on 13 December)
United Flight from SFO to JFK (3 January 2013)
Start a riot on your next flight
PRACTICALLY THEORETICAL TAKEAWAYS FROM THE SCIENTIFIC EMOTIONAL WORLD OF PRICING
PRICING IS SCIENTIFICSTRATEGIC ANALYSIS FOR A CORPORATION (APPLE)
APPLE Annual Ending 9/16 %
Revenue $215.6B
COGS $131.4B 61%
OPEX $24.2B 11%
Operating Income $60.0B 28%
1.4%
2.2%
0.4%
3.6%
Rev Incr
COGS Decr
OPEX Decr
Price Incr
Profit Result from 1% Changes
Pricing is the
#1 Profit Lever
PRICING IS SCIENTIFICTACTICAL ANALYSIS FOR A REGION & PRODUCT SET (SSD)
Regional Data Prior YearPrice
ChangeConstant Volume
Constant Margin$
Revenue $1,445,786
Unit Cost $410.46
Unit Price $674.03 (20%) $539.22 $539.22
# of Units 2,145 2,145 4,375
Margin % 39%
Margin$ $565,365 $276,198 $563,340
Margin$ cut in ½ [or] Unit Quota Doubled
PRACTICALLY THEORETICALTAKEAWAYS FROM THE SCIENTIFICALLY EMOTIONAL WORLD OF PRICING
PRICING CAN BE THEORETICAL…FOUR COMPLEMENTARY PRICING THEORIES
Cost Margin Financial: Return on Fixed & Variable Costs
Price Customers Cust Sat: Willingness To Pay (WTP)
Price Competition Market Share: Price is Tool to increase SOM%
Reference
Value
Differentiated
ValueMaximize Value: Charge what it’s worth
ObjectivesTheory
… BUT DON’T BE TOO THEORETICALJC PENNY PRICING STRATEGY LAUNCHED IN FEBRUARY 2012
Became unprofitable & share price cut in ½ during
Ron Johnson’s 17-month tenure as CEO of JC Penny
PRACTICAL THEORETICAL TAKEAWAYS FROM THE SCIENTIFICALLY EMOTIONAL WORLD OF PRICING
PRACTICAL TAKEAWAYS… AND CREATIVELY LOWER PRICE AS A LAST RESORT
PRACTICAL TAKEAWAYSINVERT YOUR MINDSET TO IMPROVE PRODUCT DEVELOPMENT
BECOMES
CostProduct Price Value Customer
Customer Value Price Cost Product
PRACTICAL TAKEAWAYSPRICING REQUIRES DISCIPLINE, PROCESS, & STRUCTURE…
PRACTICALLY THEORETICAL TAKEAWAYS FROM THE SCIENTIFICALLY EMOTIONAL WORLD OF PRICING
THE SVBN SHOULD TAKE AWAY THAT PRICING…
… is theoretically practical & scientifically emotional
… hence demands discipline and creative management
ONE MORE TIME, FROM THE ORACLE…
"The single most important decision in
evaluating a business is pricing power.”Warren Buffett
PRACTICALLY THEORETICAL TAKEAWAYS FROM THE SCIENTIFICALLY EMOTIONAL WORLD OF PRICINGJAMES (JD) DILLON
(408) 772-3169
PRICING IS SCIENTIFIC (APPENDIX)MATHEMATICS AROUND 1% STRATEGIC PRICE CHANGES
APPLE P&L $B Rev Incr COGS Decr OPEX Decr Price Incr
Revenue $215.60 $217.76 $215.60 $215.60 $217.76
COGS $131.40 61% $132.71 $130.09 $131.40 $131.40
OPEX $24.20 11% $24.20 $24.20 $23.96 $24.20
Operating Income $60.00 28% $60.84 $61.31 $60.24 $62.16
Pricing Impact 1.4% 2.2% 0.4% 3.6%
PRICING IS SCIENTIFIC (APPENDIX)MATHEMATICS AROUND 20% TACTICAL PRICE CHANGES
Regional Data Prior YearPrice
ChangeConstant Volume
Constant Margin$
Revenue $1,445,786 $1,156,629 $2,359,091
Unit Cost $410.46 $410.46 $410.46
Unit Price $674.03 (20%) $539.22 $539.22
# of Units 2,145 2,145 4,375
Margin % 39% 24% 24%
Margin$ $565,365 $276,198 $563,340
Delta P /GM% Margin$ # of Units
20/39 -51% +104%