1、1PricingBayer Chair ProfessorWillem Burgers2Course OutlineFoundations Case: Atlantic ComputerThinking Strategically Case: McCawEmbedded Pricing Case: SignodeTools, Tactics, and Tricks: Metrics, Fences, Framing Case: Blockbuster VideoChannels and Pricing Case: Shanghai HonggongMathematics, Case: Jahw
2、ah Price ResearchPrice War Case: Kodak Funtime3Importance of PricingMarketing 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 Practice4T
3、he Strategic Pricing Pyramid5What is the Right Price?1. Value to Customer2. Competition3. Our Cost4. Strategic Objectives$61. Customer Value/Willingness to Pay Substitutes/Uniqueness? Switching costs? Easy to compare price? Easy to compare quality? Price/Quality relationship? Significant expenditure
4、? Important end-benefit? Ingredient? Does the buyer pay? Fairness? Inventory?7Value? One Barrel of Coca Cola Milk Evian Water Orange Juice Lemon Oil Scope Mouthwash Jack Daniel Visine Eye Drops $78.83 $126.00 $189.90 $251.16 $390.88 $826.65 $4,133.26 $32,202.2482. Competition How many sellers? Monop
5、oly Oligopoly How many buyers? Monopsony - Oligopsony How differentiated is the product? Monopolistic competition93. Escape the Cost Plus DelusionCost Based Pricingproduct cost price value customers?Value Based Pricingcustomers value price cost product? The role of cost in pricing relevant costs, in
6、cremental costs, avoidable costs, opportunity costs: Our goal is to maximize gross profit104. Strategic Objectives Growth? Profit? Survival? Stability Cost? ?11Pricing Strategy Alternatives Competition-based Cost-plus Value-in-use Custom based Auction/Liquidation Strategic Objectives/Constraints12Bu
7、siness as a Game But there are many games Rule based 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 backward Freewheeling games (e.g., contract negotiation) follow the principle that you can not take aw
8、ay more from the game than you bring to it and to play well you must maximize this value The Players in the Game CustomersCompetitors CompanyComplementors SuppliersParts of the Game 1. Players Who is playing? Can you add players? Do you have to play? 2. Added Values What amount of value disappears w
9、hen you leave the game? How can you increase valueParts of the Game 3. Rules Can we change the rules of the game? 4. Tactics Can we change perceptions of the game, using threats or promises? 5. Scope Can we go play the game somewhere else?16Changing the Pricing Game Conventional Pricing Struggle amo
10、ng competing functions: marketing, sales, finance. Reactive to market conditions and customer pressure Subsequent to product-market decisions Strategic Pricing Changes incentives to create support across functions Pro-active, policy driven Early in the product development process 17Tactical Question
11、s Commonly AskedStrategic Questions That Should be AskedWhat price do we need to cover our cost and profit objectives?What sales changes would be necessary or tolerable for us to profit from a price changes?Can we deploy a marketing strategy that will keep those sales changes within acceptable range
12、s?What costs can we afford to incur, given the prices we can achieve in the marketplace, and still earn a profit?What price is the customer willing to pay?Is our price justifiable given the objective value of our product or service to the customer?How can we better communicate that value, thus justi
13、fying the price?What is the right price structure for the customer/for different customers?What prices do we need to meet our sales and market share objectives?What level of sales or market share can we most profitably achieve?What marketing tools should we use to win market share most cost-effectiv
14、ely?Asking the Right Questions:18An unprofitable price?- Pricing error- Value communication defect- Market share delusions- Market segment error- Product/service overbuilt- Customer power- Commoditization19Market Change Dynamics Leading to Commoditization Entry of new competitors in market or segmen
15、t Imitation among competitors Buyers develop capacity and confidence to measure functions and quality of products, services, and vendors Experience and competition among suppliers reduces buyers sense of riskThe Specialty-Commodity ContinuumPriceHighLowLowHighService AdditionsSpecialtyCommoditytimeN
16、icheExperience curveValue added strategyPrice compression/innovation21Breaking the Commodity Cycle Four possible strategies, Value added strategy: Moving along the diagonal to increase price and service Price compression/innovation: Moving along the diagonal reducing prices and services Market focus
17、: Staying up along the arc focusing on the clients only who would pay an additional price Experience curve: Moving down along the arc ahead of anyone else22Embedding the Strategy- Distributors/Salespeople incentives and expectations, skills, knowledge, tools.- Customer incentives and expectations23S
18、ignode 1. What price strategies can you recommend to Signode? 2. What suggestions do you have for compensation for 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
19、you accept the offer? Show with calculation why you should accept the offer or not. 4. Do you see any error in Signodes present 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?24Metrics W
20、hat is a metric? What is a bad metric? What is the cost of using the wrong metric? Good metrics25Good Metrics 1. Are some of 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
21、customers to your competitors while attracting non-costly customers to you? 4. Can you enforce your metric? 5. Does your metric fit channel selling habits, customer buying habits, and sense of fairness?26Quantity Discounts Typology: No discounts All units discounts fixed plus variable variable 1 plu
22、s variable 2 fixed 1 plus variable 1 and fixed 2 plus variable 227Why Quantity Discounts? 1. keep big customers 2. match competition 3. save costs 4. enable price discrimination Larger buyers are more price elastic/price sensitive Larger buyers may have more options A second or third dress/cup of co
23、ffee/ has less value 5. block new competitive entry 28Product Line Pricing A line of substitutes (for example car models) Image building Market expansion Segmentation Price defense Entry point/model A line of complements (for example restaurant + theater) Bundling/Merging demand curves Tie-ins29Pric
24、e Discrimination Capturing the customer surplus: Charge customers according to how much they value the product. Need to know the price a customer is actually willing to pay Need to separate customers according to their willingness to pay more/less Need to keep your high-paying customers customers ha
25、ppy30Fences Buyer identification Purchase location Purchase timing Purchase quantity Product bundle Tie-ins Product design31Price Communication 1. Percentages or numbers? 2. Dont talk price, talk value 3. Price cues 4. Price endings 5. Sale anyone?32Price Framing The power of three Start from the to
26、p Reference prices Prospect Theory33Body of Knowledge Focusing on losing fewer customers is the quickest road to greater profits The less you talk price, the higher the price you will get Finance is wrong when they tell us people do not like risk More information sells more product The center is bet
27、ter34Body of Knowledge If you want to tempt customers, distract them first If you can not distract them, make them sad Send men to women and send women to men Beautiful women reduce mens ability to (dis)count Getting little favors gets you to getting big favors35Blockbuster Video 1. As Mike tries to
28、 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 possible prices36Channel Pricing and Sub-Optimization Sub-optimization: A system consist of sub-systems. When sub-systems
29、 optimize performance, system performance is not optimized. Sub-optimization is the core issue of channel performance and channel management 37Sub-Optimal Pricing38Question Demand for Crocodile shirts is very price elastic. Prior experience shows that a 20% off sale can increase sales by 50%; a 30%
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 winter, and now summer is coming. Crocodile lowers its price to the distributors by 200 RMB. What will the d
31、istributors 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 price by 200 RMB if doing so will double the sales of the shirt? 39What is your advice for Blockbuster? “Th
32、e 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 to about $65 each, we realized we couldnt afford to buy enough tapes to sufficiently stock the shelves
33、.”Sumner Redstone, Chairman of Blockbuster 40Pricing Policies “Pricing policies specify the circumstances under which, and the amounts by which, the company will discount its prices in exchange for specific behaviors by customers and the sales force.” “Without a pricing policy you lose control over
34、pricing.” “The goal of a pricing policy is to influence customer behavior; encourage loyalty and cost reducing behaviors.”41Price WaterfallList Price.Invoice Price.Actual PriceRMB 600RMB 578RMB 447Order size discount 10 RMBCompetitive discount 12 RMBPayment terms discount 30 RMBAnnual volume bonus 3
35、7 RMB Off-invoice promotions 35 RMB Coop-Advertising 20 RMB Freight 9 RMB 42Price BandPercent of VolumeRMB 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% 12.7% 8.6% Actual Prices Per Unit43Promotional Pricing PolicyNegotiated Pricing Policy Quantity Discounting PolicyB
36、id-Loyalty Pricing PolicyPolicies“Rules for the salesforce” +“Means to manage customer expectations”44Shanghai Honggong Adv Instruments Co. Ltd. (SHAIC)1. How successful is the SHAIC JV?2. What has been the key success factor for SHAIC?3. What do you see as the key weaknesses of SHAIC?4. How can SHA
37、IC improve its salesforce performance?5. What recommendations do you have for SHAIC?45Marketing MathDivision manager Mr. Schneider is not happy with Marketing manager Mr. Zhang: He has called Mr. Zhang into his office. Mr. Zhang,” he says, “you decided six months ago to raise our prices by 10%. I le
38、t 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 is price elastic (disproportionately sensitive to price), and I would have thought you might hav
39、e tried to determine price elasticity before you decided to increase our prices. Mr. Zhang?46Marketing Math 5. Suppose Firm A raises its prices by 10%, and sales (in dollars) go down by 15%; should Firm A keep its higher prices, or should it lower prices back down? 5a. Old gross margin was .25. Say
40、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 be RMB 35.-/ RMB 110.- = .31847Marketing Math Dividing old margin by new margin g
41、ives 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 .786 (78.6%) of old sales (that is, dont go down by more than 21.4%).
42、 Since sales went down by 15%, to a new level equal to 85% of old sales, firm A will be better off than before.48Marketing Math old situation: .25 x (old sales of) RMB 125,000.- = RMB 31,250.- new situation: (new margin) .318 x (new sales of) .85 x RMB 125,000.- = RMB 33,787.50 (If sales had gone do
43、wn 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.-)49Marketing Math A similar formula works also for calculating necessary changes in sales expressed in units: dividing old gross profi
44、t per unit by new gross profit per unit gives you the percentage of sales that new sales must be (at a minimum) of old sales50Marketing 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 for 375 RMB) Suppose firm A now raises it
45、s price from 500 RMB to 550 RMB for a suit How 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 to 28.6% of its sales of suits
46、(expressed in units) when it increases its price on suits by only 10%51Marketing 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 RMB 100.- now sells for R
47、MB 90.- So our margin has changed from 25% to 16.6% (RMB 15/ RMB 90) .25/.166 = 1.506 Sales in RMB must go up by a bit over 50% in order to make up for the 10% decrease in price!52Marketing Math Exercise Your company has Fixed costs of $25,000,000 Gross profit margin of 34% Sales of $72,000,000 Adve
48、rtising expenditures of $12,000,000 Question: 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?53Price and ProfitCreates operating
49、 profit improvement of 11.15%7.8%3.3%2.3%price VC volumeFC1% improvement in“The job of marketing is to increase price.”54Creates operating profit improvement of 28.7%26%16.7%6.4%1% improvement in price at17.5%Philips“The job of marketing is to increase price.”Price and Profit55Jahwah Offer tactical
50、pricing suggestions to Jahwah The 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?56Price Response Estimation 1 expert judgment/Delphi method 2. customer surveys 3. experiments 4. histor
