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1、1,Pricing,Bayer Chair ProfessorWillem Burgers,2,Course Outline,FoundationsCase:Atlantic ComputerThinking StrategicallyCase:McCawEmbedded PricingCase:SignodeTools,Tactics,and Tricks:Metrics,Fences,FramingCase:Blockbuster VideoChannels and PricingCase:Shanghai HonggongMathematics,Case:Jahwah Price Res
2、earchPrice WarCase:Kodak Funtime,3,Importance of Pricing,Marketing and PricingWhere does pricing reside in an organization?“Pricing gets caught between the cracks.Everybody wants to be a part of it.Yet,nobody really owns it.Pricing is ad hoc.”G.Smith,Pricing Strategy and Practice,4,The Strategic Pri
3、cing Pyramid,5,What is the Right Price?,1.Value to Customer,2.Competition,3.Our Cost,4.Strategic Objectives,$,6,Customer Value/Willingness to Pay,Substitutes/Uniqueness?Switching costs?Easy to compare price?Easy to compare quality?Price/Quality relationship?,Significant expenditure?Important end-ben
4、efit?Ingredient?Does the buyer pay?Fairness?Inventory?,7,Value?One Barrel of,Coca ColaMilkEvian WaterOrange JuiceLemon OilScope MouthwashJack DanielVisine Eye Drops,$78.83$126.00$189.90$251.16$390.88$826.65$4,133.26$32,202.24,8,2.Competition,How many sellers?Monopoly OligopolyHow many buyers?Monopso
5、ny-OligopsonyHow differentiated is the product?Monopolistic competition,9,3.Escape the Cost Plus Delusion,Cost Based Pricingproduct cost price value customers?Value Based Pricingcustomers value price cost product?The role of cost in pricingrelevant costs,incremental costs,avoidable costs,opportunity
6、 costs:Our goal is to maximize gross profit,10,4.Strategic Objectives,Growth?Profit?Survival?StabilityCost?,11,Pricing Strategy Alternatives,Competition-based Cost-plusValue-in-useCustom basedAuction/Liquidation,Strategic Objectives/Constraints,12,Business as a Game,But there are many gamesRule base
7、d games(e.g.,employment contract)follow the principle that for every action there is a reaction and to play well you must look ahead and reason backwardFreewheeling games(e.g.,contract negotiation)follow the principle that you can not take away more from the game than you bring to it and to play wel
8、l you must maximize this value,The Players in the Game,CustomersCompetitors CompanyComplementors Suppliers,Parts of the Game,1.Players Who is playing?Can you add players?Do you have to play?2.Added ValuesWhat amount of value disappears when you leave the game?How can you increase value,Parts of the
9、Game,3.RulesCan we change the rules of the game?4.TacticsCan we change perceptions of the game,using threats or promises?5.ScopeCan we go play the game somewhere else?,16,Changing the Pricing Game,Conventional PricingStruggle among competing functions:marketing,sales,finance.Reactive to market condi
10、tions and customer pressureSubsequent to product-market decisionsStrategic PricingChanges incentives to create support across functionsPro-active,policy drivenEarly in the product development process,17,Asking the Right Questions:,18,An unprofitable price?,Pricing errorValue communication defectMark
11、et share delusionsMarket segment errorProduct/service overbuiltCustomer powerCommoditization,19,Market Change Dynamics Leading to Commoditization,Entry of new competitors in market or segmentImitation among competitorsBuyers develop capacity and confidence to measure functions and quality of product
12、s,services,and vendorsExperience and competition among suppliers reduces buyers sense of risk,The Specialty-Commodity Continuum,Price,High,Low,LowHigh,Service Additions,Specialty,Commodity,time,Niche,Experience curve,Value added strategy,Price compression/innovation,21,Breaking the Commodity Cycle,F
13、our possible strategies,Value added strategy:Moving along the diagonal to increase price and servicePrice compression/innovation:Moving along the diagonal reducing prices and services Market focus:Staying up along the arc focusing on the clients only who would pay an additional priceExperience curve
14、:Moving down along the arc ahead of anyone else,22,Embedding the Strategy,Distributors/Salespeople incentives and expectations,skills,knowledge,tools.Customer incentives and expectations,23,Signode,1.What price strategies can you recommend to Signode?2.What suggestions do you have for compensation f
15、or the sales force?3.The sales force offers to increase sales by 5-10%if we allow additional price flexibility.Assume the price flexibility will reduce prices by 4%on average,should you accept the offer?Show with calculation why you should accept the offer or not.4.Do you see any error in Signodes p
16、resent allocation of its marketing resources to different segments?What error do you see?What might be the explanation?5.Any brand strategy suggestions for Signode?,24,Metrics,What is a metric?What is a bad metric?What is the cost of using the wrong metric?Good metrics,25,Good Metrics,1.Are some of
17、your customers substantially more expensive to serve?2.Can you attract additional customers at a lower price?3.Can you link your price to cost to serve to drive expensive customers to your competitors while attracting non-costly customers to you?4.Can you enforce your metric?5.Does your metric fit c
18、hannel selling habits,customer buying habits,and sense of fairness?,26,Quantity Discounts,Typology:No discountsAll units discountsfixed plus variablevariable 1 plus variable 2fixed 1 plus variable 1 and fixed 2 plus variable 2,27,Why Quantity Discounts?,1.keep big customers2.match competition3.save
19、costs4.enable price discriminationLarger buyers are more price elastic/price sensitiveLarger buyers may have more optionsA second or third dress/cup of coffee/has less value5.block new competitive entry,28,Product Line Pricing,A line of substitutes(for example car models)Image buildingMarket expansi
20、on SegmentationPrice defenseEntry point/modelA line of complements(for example restaurant+theater)Bundling/Merging demand curvesTie-ins,29,Price Discrimination,Capturing the customer surplus:Charge customers according to how much they value the product.Need to know the price a customer is actually w
21、illing to pay Need to separate customers according to their willingness to pay more/lessNeed to keep your high-paying customers customers happy,30,Fences,Buyer identificationPurchase locationPurchase timingPurchase quantityProduct bundleTie-insProduct design,31,Price Communication,1.Percentages or n
22、umbers?2.Dont talk price,talk value3.Price cues4.Price endings5.Sale anyone?,32,Price Framing,The power of threeStart from the topReference pricesProspect Theory,33,Body of Knowledge,Focusing on losing fewer customers is the quickest road to greater profitsThe less you talk price,the higher the pric
23、e you will getFinance is wrong when they tell us people do not like riskMore information sells more productThe center is better,34,Body of Knowledge,If you want to tempt customers,distract them firstIf you can not distract them,make them sadSend men to women and send women to menBeautiful women redu
24、ce mens ability to(dis)countGetting little favors gets you to getting big favors,35,Blockbuster Video,1.As Mike tries to survive,competing with Blockbuster,what is the right pricing strategy for Mike?2.What is the price Mike should ask Mr.Atkins for his store?Identify and calculate different possibl
25、e prices,36,Channel Pricing and Sub-Optimization,Sub-optimization:A system consist of sub-systems.When sub-systems optimize performance,system performance is not optimized.Sub-optimization is the core issue of channel performance and channel management,37,Sub-Optimal Pricing,38,Question,Demand for C
26、rocodile shirts is very price elastic.Prior experience shows that a 20%off sale can increase sales by 50%;a 30%off sale can increase sales by 100%.Should the distributor offer a 100 RMB price discount to retailers in exchange for 50%more shirts ordered?Suppose Crocodile produced too many shirts for
27、winter,and now summer is coming.Crocodile lowers its price to the distributors by 200 RMB.What will the distributors do with the price they charge the retailers?Suppose Crocodile lowers the price to retailers directly by 200 RMB in order to get rid of its inventory.Should the retailer lower the pric
28、e by 200 RMB if doing so will double the sales of the shirt?,39,What is your advice for Blockbuster?,“The whole business was operating wrong There werent enough tapes in the storesYear after year the studios kept raising the price of tapes to companies like Blockbuster.When the price of tapes got up
29、 to about$65 each,we realized we couldnt afford to buy enough tapes to sufficiently stock the shelves.”,Sumner Redstone,Chairman of Blockbuster,40,Pricing Policies,“Pricing policies specify the circumstances under which,and the amounts by which,the company will discount its prices in exchange for sp
30、ecific behaviors by customers and the sales force.”“Without a pricing policy you lose control over pricing.”“The goal of a pricing policy is to influence customer behavior;encourage loyalty and cost reducing behaviors.”,41,Price Waterfall,List Price.Invoice Price.Actual Price,RMB 600,RMB 578,RMB 447
31、,Order size discount 10 RMBCompetitive discount 12 RMBPayment terms discount 30 RMBAnnual volume bonus 37 RMB Off-invoice promotions 35 RMB Coop-Advertising 20 RMB Freight 9 RMB,42,Price Band,Percent of Volume,RMB 580 560 540 520 500 480 460 440 420 380,3.7%,7.4%,4.1%,10.1%,14.1%,17.0%,16.2%,6.1%,12
32、.7%,8.6%,Actual Prices Per Unit,43,Promotional Pricing PolicyNegotiated Pricing Policy Quantity Discounting PolicyBid-Loyalty Pricing Policy,Policies,“Rules for the salesforce”+“Means to manage customer expectations”,44,Shanghai Honggong Adv Instruments Co.Ltd.(SHAIC)1.How successful is the SHAIC JV
33、?2.What has been the key success factor for SHAIC?3.What do you see as the key weaknesses of SHAIC?4.How can SHAIC improve its salesforce performance?5.What recommendations do you have for SHAIC?,45,Marketing Math,Division manager Mr.Schneider is not happy with Marketing manager Mr.Zhang:He has call
34、ed Mr.Zhang into his office.Mr.Zhang,”he says,“you decided six months ago to raise our prices by 10%.I let you do it.Now,six months later,our sales are down by 15%.It doesnt take a genius to figure out that,even with the price increase,we are now taking in less money than before.Obviously,our demand
35、 is price elastic(disproportionately sensitive to price),and I would have thought you might have tried to determine price elasticity before you decided to increase our prices.Mr.Zhang?,46,Marketing Math,5.Suppose Firm A raises its prices by 10%,and sales(in dollars)go down by 15%;should Firm A keep
36、its higher prices,or should it lower prices back down?5a.Old gross margin was.25.Say an average piece of clothing selling for RMB 100.-costs the firm RMB 75.-Now that piece of clothing will sell for RMB 110.-So the new gross margin will be RMB 35.-on a sale of RMB 110.-So the new gross margin will b
37、e RMB 35.-/RMB 110.-=.318,47,Marketing Math,Dividing old margin by new margin gives you the percentage of sales that new sales must be(at a minimum)of old sales.25/.318=.786(78.6%),This means that after firm A increased price by 10%,firm A will be better off as long as firm As new sales are at least
38、.786(78.6%)of old sales(that is,dont go down by more than 21.4%).Since sales went down by 15%,to a new level equal to 85%of old sales,firm A will be better off than before.,48,Marketing Math,old situation:.25 x(old sales of)RMB 125,000.-=RMB 31,250.-new situation:(new margin).318 x(new sales of).85
39、x RMB 125,000.-=RMB 33,787.50(If sales had gone down by exactly 21.4%,to a new level equal to 78.6%of old sales,then profits for firm A would have stayed the same:.318 x(new sales of).786 x 125,000.-=31,250.-),49,Marketing Math,A similar formula works also for calculating necessary changes in sales
40、expressed in units:dividing old gross profit per unit by new gross profit per unit gives you the percentage of sales that new sales must be(at a minimum)of old sales,50,Marketing Math,Suppose firm A sells suits for a price of 500 RMB(and its gross profit is still 25%,so firm A purchases these suits
41、for 375 RMB)Suppose firm A now raises its price from 500 RMB to 550 RMB for a suitHow many suits should firm A now sell in a month(to keep the same profit it was making before?)125 RMB(old gross profit per unit)divided by 175(new gross profit per unit)equals.714 or 71.4%Firm A can afford to lose up
42、to 28.6%of its sales of suits(expressed in units)when it increases its price on suits by only 10%,51,Marketing Math,6.Suppose Firm A lowers its prices by 10%,how much should sales go up,at a minimum,to make up for the lower price(so our profit stays the same)?6a The piece of clothing that sold for R
43、MB 100.-now sells for RMB 90.-So our margin has changed from 25%to 16.6%(RMB 15/RMB 90).25/.166=1.506Sales in RMB must go up by a bit over 50%in order to make up for the 10%decrease in price!,52,Marketing Math Exercise,Your company has Fixed costs of$25,000,000Gross profit margin of 34%Sales of$72,0
44、00,000Advertising expenditures of$12,000,000Question:if the company raises its prices by 10%,how much can sales go down(at most)in dollars and in units?Question:if the company lowers prices by 20%how much should sales increase(at a minimum)in dollars and in units?,53,Price and Profit,Creates operati
45、ng profit improvement of,11.15%,7.8%,3.3%,2.3%,price,VC,volume,FC,1%improvement in,“The job of marketing is to increase price.”,54,Creates operating profit improvement of,28.7%,26%,16.7%,6.4%,1%improvement in price at,17.5%,Philips,“The job of marketing is to increase price.”,Price and Profit,55,Jah
46、wah,Offer tactical pricing suggestions to JahwahThe CEO of Jahwah complains that its prices are too low for shower cream and for other products.Why are Jahwahs prices so low?What systemic suggestions do you have?,56,Price Response Estimation,1 expert judgment/Delphi method2.customer surveys3.experim
47、ents4.historical market data,57,Expert Judgment/Delphi method,Develop specific questions:“what is the highest,medium,lowest realistic price and what would be the sales levels at those prices?”Use as many as ten experts,preferably from different functions and different levels of hierarchyShare the re
48、sults,discuss the differences in estimates,utilize the wisdom of crowdsUse outsider to run the process/interviews/meetings,58,Customer Surveys,Ask:“How much would you be willing to pay maximum for this product?”“What would you expect to pay for this product?”How likely is it you would buy at that pr
49、ice?”,59,Experiments,new or current productsin-laboratory,in-store,test market price levels,price metrics,discounts,advertisements,mock-ups,concepts,60,Historical Market Data,What happened the last time oil prices doubles in less than a year?(demand for oil for cars hardly changed,uitilities switche
50、d to coal and natural gas,demand and prices for home insulation products went up sharply)What happened the last time house prices went up by more than 20%in one year?(demand increased,queues formed to buy apartments in new developments)What happened the last time we(or our competitors)raised/cut pri
