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1、PricingBayer Chair ProfessorWillem Burgers1Course OutlineFoundationsCase: Atlantic ComputerThinking StrategicallyCase: McCawEmbedded PricingCase: SignodeTools, Tactics, and Tricks: Metrics, Fences, FramingCase: Blockbuster VideoChannels and PricingCase: Shanghai HonggongMathematics,Case: Jahwah Pric
2、e ResearchPrice WarCase: Kodak Funtime2Importance 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 Practice3Price Lev
3、el Price settingPricing PolicyNegotiation Tactics and Pricing Setting ProceduresPrice & Value CommunicationCommunication, Value Selling ToolsPrice StructureMetrics, Fences, TimingValue CreationEconomic Value, Offering Design, SegmentationThe Strategic Pricing Pyramid4What is the Right Price?1. Value
4、 to Customer2. Competition3. Our Cost4. Strategic Objectives$51.Customer Value/Willingness to PaySubstitutes/Uniqueness?Switching costs?Easy to compare price?Easy to compare quality?Price/Quality relationship?Significant expenditure?Important end-benefit? Ingredient?Does the buyer pay?Fairness?Inven
5、tory?6Value? One Barrel ofCoca ColaMilkEvian WaterOrange JuiceLemon OilScope MouthwashJack DanielVisine Eye Drops$78.83$126.00$189.90$251.16$390.88$826.65$4,133.26$32,202.2472. CompetitionHow many sellers? Monopoly OligopolyHow many buyers? Monopsony - OligopsonyHow differentiated is the product? Mo
6、nopolistic competition83. Escape the Cost Plus DelusionCost 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 costs: Our goal is to maximize gross profit94.
7、Strategic ObjectivesGrowth?Profit?Survival?StabilityCost?10Pricing Strategy AlternativesCompetition-based Cost-plusValue-in-useCustom basedAuction/LiquidationStrategic Objectives/Constraints11Business as a GameBut there are many gamesRule based games (e.g., employment contract) follow the principle
8、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 well you must maximize this value12 The Players in the
9、 Game CustomersCompetitors CompanyComplementors SuppliersParts of the Game1. 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 valueParts of the Game3. RulesCan we change the rules of the game
10、?4. TacticsCan we change perceptions of the game, using threats or promises?5. ScopeCan we go play the game somewhere else?Changing the Pricing GameConventional PricingStruggle among competing functions: marketing, sales, finance.Reactive to market conditions and customer pressureSubsequent to produ
11、ct-market decisionsStrategic PricingChanges incentives to create support across functionsPro-active, policy drivenEarly in the product development process 16Tactical Questions Commonly AskedStrategic Questions That Should be AskedWhat price do we need to cover our cost and profit objectives?What sal
12、es 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 ranges?What costs can we afford to incur, given the prices we can achieve in the marketplace, and still earn a profit?What price is
13、 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 justifying the price?What is the right price structure for the customer/for different customers?What prices do we need to meet our
14、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-effectively?Asking the Right Questions:17An unprofitable price?-Pricing error-Value communication defect-Market share delusions-Market
15、 segment error-Product/service overbuilt-Customer power-Commoditization18Market Change Dynamics Leading to CommoditizationEntry of new competitors in market or segmentImitation among competitorsBuyers develop capacity and confidence to measure functions and quality of products, services, and vendors
16、Experience and competition among suppliers reduces buyers sense of risk19The Specialty-Commodity ContinuumPriceHighLowLowHighService AdditionsSpecialtyCommoditytimeNicheExperience curveValue added strategyPrice compression/innovationBreaking the Commodity CycleFour possible strategies, Value added s
17、trategy: 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: Moving down along the arc ahead
18、of anyone else21Embedding the Strategy-Distributors/Salespeople incentives and expectations, skills, knowledge, tools.-Customer incentives and expectations22Signode1. What price strategies can you recommend to Signode?2. What suggestions do you have for compensation for the sales force?3. The sales
19、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 present allocation of its
20、marketing resources to different segments? What error do you see? What might be the explanation?5. Any brand strategy suggestions for Signode?23MetricsWhat is a metric?What is a bad metric?What is the cost of using the wrong metric?Good metrics24Good Metrics1. Are some of your customers substantiall
21、y 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 channel selling habits,
22、customer buying habits, and sense of fairness?25Quantity DiscountsTypology:No discountsAll units discountsfixed plus variablevariable 1 plus variable 2fixed 1 plus variable 1 and fixed 2 plus variable 226Why Quantity Discounts?1. keep big customers2. match competition3. save costs4. enable price dis
23、criminationLarger 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 27Product Line PricingA line of substitutes (for example car models)Image buildingMarket expansion SegmentationPrice d
24、efenseEntry point/modelA line of complements (for example restaurant + theater)Bundling/Merging demand curvesTie-ins28Price DiscriminationCapturing 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
25、 separate customers according to their willingness to pay more/lessNeed to keep your high-paying customers customers happy29FencesBuyer identificationPurchase locationPurchase timingPurchase quantityProduct bundleTie-insProduct design30Price Communication1. Percentages or numbers? 2. Dont talk price
26、, talk value3. Price cues4. Price endings5. Sale anyone?31Price FramingThe power of threeStart from the topReference pricesProspect Theory32Body of KnowledgeFocusing on losing fewer customers is the quickest road to greater profitsThe less you talk price, the higher the price you will getFinance is
27、wrong when they tell us people do not like riskMore information sells more productThe center is better33Body of KnowledgeIf 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 reduce mens ability to (dis)co
28、untGetting little favors gets you to getting big favors34Blockbuster Video1. 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 possible prices35Channel Pric
29、ing and Sub-OptimizationSub-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 36Sub-Optimal Pricing37QuestionDemand for Crocodile shirts is very p
30、rice 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 winter, and now su
31、mmer 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 price by 200 RMB i
32、f doing so will double the sales of the shirt? 38What 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 to about $65 e
33、ach, we realized we couldnt afford to buy enough tapes to sufficiently stock the shelves.”Sumner Redstone, Chairman of Blockbuster 39Pricing Policies“Pricing policies specify the circumstances under which, and the amounts by which, the company will discount its prices in exchange for specific behavi
34、ors 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.”40Price WaterfallList Price.Invoice Price.Actual PriceRMB 600RMB 578RMB 447Order size discoun
35、t 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 41Price 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 U
36、nit42Promotional Pricing PolicyNegotiated Pricing Policy Quantity Discounting PolicyBid-Loyalty Pricing PolicyPolicies“Rules for the salesforce” +“Means to manage customer expectations”43Shanghai Honggong Adv Instruments Co. Ltd. (SHAIC)1. How successful is the SHAIC JV?2. What has been the key succ
37、ess 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?44Marketing MathDivision manager Mr. Schneider is not happy with Marketing manager Mr. Zhang: He has called Mr. Zhang into his offi
38、ce. 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 is price el
39、astic (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?45Marketing Math5. Suppose Firm A raises its prices by 10%, and sales (in dollars) go down by 15%; should Firm A keep its hi
40、gher 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 wil
41、l be RMB 35.-/ RMB 110.- = .31846Marketing MathDividing 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 a
42、re at least .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.47Marketing Mathold situation: .25 x (old sales of) RMB 125,000.- = RMB 31,250.-new situation: (new margin)
43、.318 x (new sales of) .85 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.-)48Marketing MathA similar formula works also for calcula
44、ting necessary changes in sales 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 sales49Marketing MathSuppose firm A sells suits for a price of 500 RMB (and its gross profit is still 25%
45、, so firm A purchases these suits 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 .7
46、14 or 71.4%Firm A can afford to lose up to 28.6% of its sales of suits (expressed in units) when it increases its price on suits by only 10%50Marketing Math6. 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 s
47、ame)?6a The piece of clothing that sold for RMB 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!51Marketing Math ExerciseYour company has Fixed costs o
48、f $25,000,000Gross profit margin of 34%Sales of $72,000,000Advertising 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
49、) in dollars and in units?52Price and ProfitCreates operating profit improvement of 11.15%7.8%3.3%2.3%price VC volumeFC1% improvement in“The job of marketing is to increase price.”53Creates operating profit improvement of 28.7%26%16.7%6.4%1% improvement in price at17.5%Philips“The job of marketing i
50、s to increase price.”Price and Profit54JahwahOffer 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?55Price Response Estimation1 expert judgment/
51、Delphi method2. customer surveys3. experiments4. historical market data56Expert Judgment/Delphi methodDevelop 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 a
52、nd different levels of hierarchyShare the results, discuss the differences in estimates, utilize the wisdom of crowdsUse outsider to run the process/interviews/meetings57Customer SurveysAsk:“How much would you be willing to pay maximum for this product?”“What would you expect to pay for this product
53、?” How likely is it you would buy at that price?”58Experimentsnew or current productsin-laboratory, in-store, test market price levels, price metrics, discounts,advertisements, mock-ups, concepts59Historical Market DataWhat happened the last time oil prices doubles in less than a year? (demand for o
54、il for cars hardly changed, uitilities switched 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
55、the last time we (or our competitors) raised/cut prices by more than 10%? (customers reacted by ., competitors reacted by) 60Managing Price CompetitionThe pricing game is not just played between you and your competitorsWinning the peace is more important than winning the warMarket share is not a cau
56、se of profit61Compete on price? Only ifLow cost business model is your competitive strategy and advantage and/orYou can limit yourself to taking only small bites and/orYou can cross-subsidize and live to enjoy your conquests62Responding to a price challengeThreaten: communicate your resolve and reso
57、urces, in words and or deedsInvest in service/promotion/advertising/ added qualityIndirect price retaliation in the competitors home marketIntroduce a fighting brandChange the metric, the basis for pricing, the basis for competitionFocus on favored segmentCut prices63Kodak FuntimeWhat recommendation
58、s do you have for Kodak to respond to the Fuji challengeWhat color scheme do you recommend for the Funtime brand? Should the coloring remind customers that Funtime is made by Kodak? Or should the coloring perhaps be a type of Green?How could Kodakss super premium brand Ektar help defend Kodak against Fujis attack?Why does Kodak sell Funtime only in off-peak selling season?Suppose Kodak lowers the price of its Gold Plus brand of $3.49 by 20% (to match Fujis price) how much will sales have to go up to compensate for the lower price (so total profit stays the same)?64
