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PRICING STRATEGY

BLENDED EDUCATION

PROFESSOR Antonio Fontanini

Marketing Strategy Planning Process

04/08/14

Customers Needs and other

Segmenting Dimensions

Company Mission, Objectives,

& Resources

Competitors Current & Prospective

S. W. O. T.

External Market Environment Technology, Political & Legal, Social & Cultural, Economic

Targeting & Segmentation

Positioning & Differentiation

Narrowing down to focused strategy with quantitative and qualitative screening criteria

Street price = Cost + margin of the

manufacturer + margin of the distribution + VAT

Price is the only element of the marketing mix

that produces revenue the others “P”S generate costs

Price communicates to the market the company

intended value positioning of its product or brand

Cantidad Q

Precio

P

D

D

Demand Curve (well, here a line)

We have to distinguish DEMAND CHANGES from CHANGES IN THE DEMAND CURVE

DEMAND CURVES

How do we set the price?

• Step 1: Select the pricing objective • Step 2: Determining demand • Step 3: Estimating costs • Step 4: Analyze competitors

costs, prices and offers • Step 5: Select a Pricing Method • Step 6: Selecting the Final Price

Pricing Objectives

Sales Oriented

Dollar or Unit Sales Growth

Profit Oriented

Status Quo Oriented

Growth in Market Share

Target Return

Maximize Profits

Meeting Competition

Nonprice Competition

Step 1: Select the price objective

Step 2: Determining demand •  Price sensitivity: – First we have to understand what affects

price sensitivity – In general customers are more price

sensitive to products that cost a lot or are bought frequently – On the other hand, they are less price

sensitive to low cost items they buy infrequently and also when is only a small part in a big purchase. – Total Cost of Ownership Concept

Step 2: Determining demand •  Price sensitivity: – Statistical analysis – Price experiments – Surveys

•  Price elasticity of demand: – How responsive the demand will be to a change

in price. – Less elasticity when: 1. Few or no substitutes or competitors 2. Buyers do not notice the higher price 3. Buyers are slow to change their buying

habits 4. Buyers think high prices are justified. – When demand is elastic, you are to consider

lowering the price.

Cantidad Q

Precio

P D

D

ε > 1

ε < 1

ε = 1

DEMAND ELASTICITY

DEMAND ELASTICITY: SUMMARY

Step 3: Estimating costs

• Fixed costs • Variable costs • Total costs • Experience curve or learning

curve • Economies of scale • Accounting considerations • Target costing

Increase Overhead costs or how to accumulate fat

costocompra costo materia prima total

de lacosto comprade costoaprovisionamiento total

decosto producciónmanode obra PRECIO

DEgastos COSTO PRECIOgenerales COMPLETO DEindustriales VENTA

costofinanciero

costo demkt

costoadministrativo

MARGEN

MARGINS ON COSTS OR ON SALE PRICE

ECONOMIES OF SCALE AND EXPERIENCE CURVE

Product

Product Cost ($) per unit

Economies of scale

AC1 B

A

AC2 Learning C

Experience curve

BREAK EVEN PRICE

CHEAP METAL INC. (VERY SIMPLE) CASE

CHEAP METALS Inc., dedicated to metal tools production, sold 80,000 units in 2007, with Revenues of 600,000 euros.

Fixed Costs were 100,000 euros and Variable Cost per unit was 0,1 euros

(Please):

a) Calculate break even point in term of unit sales.

b) Represent break even graphically.

Break Even FORMULA: REVENUE = FIXED COSTS + VARIABLE COSTS SALE PRICE PER UNIT= 600,000/80,000 = 7,5 VARIABLE COST PER UNIT = 0,1 FIXED COSTS = 100,000 BE_UNITS * 7,5 = BE_UNITS * 0,1 + 100,000 BE_UNITS = 13,513

BREACK-EVEN AT CHEAP METAL INC.

Sales and Costs

Units Euros

13,513 101,347

Sales

Fixed Costs

GRAPHIC REPRESENTATION

Variable Costs

Total Costs

OUTSOURCING

Hyunday in Europe A (very) (really very) Simple Outsourcing Case Hyunday car manufacturer decides to establish itself in Europe. The problem here is cars are principally fueled by diesel engines:

To enter into this market with a diesel car Hyunday has 2 options: to manufacture the new engine or to purchase it by a third party.

We have to consider the new engine Development Costs are estimated in 37,5 million euros while the unit variable cost of manufacturing is 1,500 euros; at the same time, the Italian firm VM would be very happy to deliver diesel engines to Hyunday at 2.250 euros per unit:

¿How many cars does Hyundai have to sell before internal manufacturing would be rentable?

Hyunday in Europe A (very) (really very) Simple Outsourcing Case

Hyunday car manufacturer decides to establish itself in Europe. The problem here is cars are principally fueled by diesel engines:

To enter into this market with a diesel car Hyunday has 2 options: to manufacture the new engine or to purchase it by a third party.

We have to consider the new engine Development Costs are estimated in 37,5 million euros while the unit variable cost of manufacturing is 1,500 euros; at the same time, the Italian firm VM would be very happy to deliver diesel engines to Hyunday at 2.250 euros per unit:

¿How many cars does Hyundai have to sell before internal manufacturing would be rentable?

37,500,000 + X * 1,500 = X * 2,250

X = 50,000 (CARS)

INTERMEDIARIES: A COLD ANALISIS

ELIMINATING INTERMEDIARIES XXI CENTURY MKTG SPORT

(ANOTHER VERY, VERY SIMPLE CASE)

Let´s suppose Fixed Costs to Directly distribute products for a Supermarket Chain is 1,000,000 euros per annum, while the unitary variable cost is 5% of Sale (per each euro of sale).

The alternative would be to subcontract the home delivery to a third party, at a cost of 10% of the Sale volume

¿What is the minimum Sale Volume justifying direct delivery?

ELIMINATING INTERMEDIARIES XXI CENTURY MKTG SPORT

(ANOTHER VERY, VERY SIMPLE CASE) Let´s suppose Fixed Costs to Directly distribute products for a Supermarket Chain is 1,000,000 euros per annum, while the unitary variable cost is 5% of Sale (per each euro of sale).

The alternative would be to subcontract the home delivery to a third party, at a cost of 10% of the Sale volume

¿What is the minimum Sale Volume justifying direct delivery?

1,000,000 + 5/100 * V = 10/100 * V

V = 20 M Additional thought

Step 4: Analyze costs, competitors prices

and offers

Step 5: Selecting a Pricing Method

• Mark up pricing • Target return pricing • Perceived value pricing • Going-rate pricing • Auction type pricing

Target costing

Mark-ups

Cost = 24.00 = 80% Cost = 21.60 = 90%

Cost = 30.00 = 60% Markup = 2.40 = 10%

Markup = 6.00 = 20%

Markup = 20.00 = 40%

Producer

Wholesaler

24.00

30.00

50.00

Markup is usually stated as a percent of the selling price, not of the cost

Retail

Step 5: Selecting a Pricing Method •  Perceived value pricing: – Value pricing = Perceived benefits – cost for

getting the goods – A Company must deliver the value promised by

their value proposition and the customer must perceive this value – How to treat different buyers: • Price buyers: Stripped down versions and

reduced services • Value buyers: Keep on innovating new value

and reaffirm agressively their value. • Loyal buyers: Product up to what is

promised. Invest in relationship and intimacy.

Value Proposal Strategies

Loyalty

High value

Premium

Good value

Medium value

Overcharging

Economy

False economy

Rip off

Price

Qua

lity

Value Proposal

PrecioAlto Medio Bajo

Alta

Baja

Calida

d del p

roduct

o

Media

PrecioAlto Medio Bajo

Alta

Baja

Calida

d del p

roduct

o

Media

Estrategia de fijación de precios

Estrategia derecompensa

Estrategia derecompensa

Estrategia devalor medio

Estrategia deeconomía

Estrategia derecompensa

Estrategia derecompensa

Estrategia devalor medio

Estrategia deeconomía

Estrategia de margenexcesivo

Estrategia de robo

Estrategiade falsa

economía

Estrategia de margenexcesivo

Estrategia de robo

Estrategiade falsa

economía

Estrategia dealto valor

Estrategia desupervalor

Estrategia debuen valor

Estrategia dealto valor

Estrategia desupervalor

Estrategia debuen valor

Value Proposal

Step 5: Selecting a Pricing Method

• Going-rate pricing: – The firm prices largely on competitors price. – Follow the leader • Auction type pricing: – Ascending bids – Descending bids – Sealed-bid auctions

PRICE TUNNEL

Same form

Different form, same

function

Different form and function,

same objective

Price Corridor of the Mass

High degree of legal and resource protection

Difficult to imitate

Some degree of legal and resource protection

Low degree of legal and resource protection

Easy to imitate

Mid-level pricing

Lower-level pricing

This tool helps managers find the right price for an irresistible offer, which, by the way, isn’t necessarily the lower price. The tool involves two distinct buy interrelated steps. The first step involves identifying the price corridor of the mass which deals with customer price sensitivity and pricing strategies of products offered outside the group of traditional competitors. The second step deals with specifying a level within the price corridor which factors in legal protection and exclusive assets.

Step 1: Identify the price corridor of the mass. Step 2: Specify a price level within the

price corridor.

Three alternative product/service types:

Step 6: Selecting the final price

• Impact of other marketing activities: – Coherency – Budget

• Company pricing policies • Gain and risk sharing pricing • Impact of price in distributors and

dealers • Take under consideration the law

Price

Quantity

Price Skimming

Sell at high price before reducing to next price level and repeat

Initial Price

Second Price

Final Price

In price skimming, initial price is set high--at top of the demand curve Most sensible when: •  Demand is inelastic •  There is an “elite market” that is

less price sensitive •  Barriers to entry (patents, etc.) •  Gradually working down the

demand curve with lower priced marketing mixes over time.

Early adopters: •  Set trends •  Influence people •  Pay premium price

Price level policies

Price

Quantity

Penetration Pricing

Whole market price

Penetration pricing means entering the market with a low initial price: •  Capture market share

quickly

•  Take advantage of growth

•  If competition is likely to follow quickly, or if

•  A low price will give competitors less incentive to enter

Price level policies

Product Mix Pricing

• Product line pricing • Optional feature pricing • Captive product pricing • Two part pricing • Byproduct pricing • Product bundling pricing

Discriminatory Pricing Customers pays for different prices for products

with similar costs •  Customer segment (SW for enterprises or

for students) •  Product form (different versions, specially

SW) •  Image (perception) pricing (Cosmetics,

Perfumes) •  Location pricing (SW via the WEB or at

Retailers) •  Time pricing (Peak Hours, Mobile

Telephony, ..)

Preconditions • Market must be segmentable • The lower price segment should not

be able to resell the product to the higher price segment • The competitors must not be able to

undersell the firm in the higher price segment • Should not breed customer

resentment and illwill • Price discrimination should not be

illegal

Trade

Quantity Seasonal

Discount

Pricing

Sale Cash

Initiating price cuts •  Could happen due to many circumstances •  Some of the reasons are: – Excess plant capacity – Overstock – Dominate the market through lower

costs •  Be aware of: – Low quality trap (low cost = low quality) – Fragile market share trap (price

concious customers vs loyal) – Shallow-pockets trap (competitors

staying longer)

Discounts and Allowances • Early payment • Off – season / Special Events • Bulk purchase • Retail discount • Cash discount (Instead of VISA) • Low interest financing • Longer payment terms • Warranties and service contracts • Psychological discounting

The Discount 7 Commandments 1. DO NOT DO DISCOUNT BECAUSE

OTHERS DO. 2. BE CREATIVE. 3. USE DISCOUNTS TO REDUCE STOCKS

OR TO GENERATE MORE BUSINESS. 4. ESTABLISH A TIMING TO THE OFFER. 5. BE SURE FINAL CUSTOMERS GET

SOME BENEFITS. 6. IN A MATURE MARKET, ONLY TO

SURVIVE. 7. STOP DISCOUNTING ASAP.

Initiating price increases •  Main reason is inflation •  When demand exceeds supply •  When costs go up (Taxes, Govern. Policy) •  Feeling of fairness required •  How to do it? – Delayed quotation pricing (no till

finished) – Escalator clauses (pay now but may

increase) – Unbundling (take something out) – Reduction of discounts

•  Strong brands can command premium price but premiums cannot be excessive.

Indirect price increases • Shrinking pack size for same price • Substituting less expensive raw

materials • Reducing product features • Removing product services • Using less expensive packaging

material • Reducing the number of packs and

sizes offered • Creating new economy brands

Responding to Competitors Price •  If high product homogeneity: enhance the

augmented product if cannot reduce the price. •  If heterogeneous products: – Analyse: Why? Is it permanent? P&L? Future

reactions? – The Brand leader can: 1. Mantain price 2. Mantain price and add value 3. Reduce price 4. Increase price and improve quality 5. Launch a low price fighter line It is important to avoid price wars when

possible, specially at the introduction phase

The Product Life Cycle

Total Industry

Profit

+

-

$ 0

Market Introduction

Market Growth

Market Maturity

Sales Decline

Time

Total Industry

Sales

Price Skim the cream at a high price or Low to penetrate faster

Meet competition (especially in oligopoly) or Price dealing and price cutting or Value pricing for long-term relationships

INTRODUCTION HIGH COST PHASE •  Customers require education to

understand its benefits •  We generate “INITIATORS” who will

bring “IMITATORS” •  We need Channel Incentives •  Generally HIGH PRICE to finance high

costs •  PRICE IS ALMOST NEVER A LEVER •  PROMOTION AND PLACEMENT ARE

LEVERS

Pricing Strategies in the P L C

Pricing Strategies in the P L C GROWTH COMPETITION GOES UP: 2 CHOICES •  PRODUCT DIFFERENTIATION: Develope Higher

Features / Image to dominate the market, reducing sensibility to price.

•  COST REDUCTION: Cheaper product

development, with PENETRATION PRICES (for all industry) or NEUTRAL PRICES (market not sensitive to price).

•  PROMOTION AND PLACEMENT ARE LEVERS

Pricing Strategies in the P L C MATURITY THE LONGEST PHASE: PRICE IS A LEVER •  When to start a price war 1. Accumulated experience by Buyers 2. Imitating other offers 3. Price sensibility is up 4. New entrants are efficient in production and distribution SOME CHANGES: 1. To improve cost control 2. To extend the product line 3. To evaluate the distribution channels role

PRICING IN NEGOTIATION THEORY

During a Negotiation Is it better to make the first move?

Pricing and Retailing: Germany

Marketing Strategy Planning Process

Customers Needs and other

Segmenting Dimensions

Company Mission, Objectives,

& Resources

Competitors Current & Prospective

S. W. O. T.

External Market Environment Technology, Political & Legal, Social & Cultural, Economic

Targeting & Segmentation

Positioning & Differentiation

Narrowing down to focused strategy with quantitative and qualitative screening criteria

Gracias, gracias, gracias fontanini@learning.eoi.es