pricing strategy & tactics – chs. 4-6

39
Pricing Strategy & Tactics – Chs. 4-6 – Understand the role of pricing policies in developing a strategic approach to pricing – Establish the link between a firm’s pricing actions and customer expectations & future purchase behaviors – Provide frameworks for understanding customer behaviors and establishing policies to ensure profitable pricing outcomes – Understand the major stages of the price setting process and the role of value and cost at each stage – Demonstrate the three factors shaping the choice of a price point • Strategic alignment, Price-volume tradeoffs, & Customer response – Introduce dynamic pricing (Rick Lester, TRG, September 27 ) – Examine how to develop value-based communication messages to reflect key product characteristics

Upload: kairos

Post on 03-Feb-2016

104 views

Category:

Documents


0 download

DESCRIPTION

Pricing Strategy & Tactics – Chs. 4-6. Understand the role of pricing policies in developing a strategic approach to pricing Establish the link between a firm’s pricing actions and customer expectations & future purchase behaviors - PowerPoint PPT Presentation

TRANSCRIPT

Page 1: Pricing Strategy & Tactics – Chs. 4-6

Pricing Strategy & Tactics – Chs. 4-6– Understand the role of pricing policies in developing a strategic

approach to pricing– Establish the link between a firm’s pricing actions and customer

expectations & future purchase behaviors– Provide frameworks for understanding customer behaviors and

establishing policies to ensure profitable pricing outcomes– Understand the major stages of the price setting process and the

role of value and cost at each stage– Demonstrate the three factors shaping the choice of a price point

• Strategic alignment, Price-volume tradeoffs, & Customer response

– Introduce dynamic pricing (Rick Lester, TRG, September 27)– Examine how to develop value-based communication messages to

reflect key product characteristics

Page 2: Pricing Strategy & Tactics – Chs. 4-6

• Most managers have difficulty communicating their firms pricing policies… because they don’t have any….

• Lack of proactive (not reactive) pricing policies reduces firm negotiating power with potential buyers who devise purchase strategies to gain discounts. This has led to a large number of firms that have created “strategic sourcing” programs.

• One problem is that purchasers tend to research and understand the competitive landscape better than the firm’s sales representatives.

• Compounding the competitive landscape issue is the fact that many firms provide incentives based on units sold and not on margin gained off each sale.

Chapter 5 – Pricing PolicyChapter 5 – Pricing Policy(Management of customer expectations and behaviors…)

Page 3: Pricing Strategy & Tactics – Chs. 4-6

The Interaction of Expectations and Behaviors

Page 4: Pricing Strategy & Tactics – Chs. 4-6

Benefits Of Policy Driven Pricing

• Provides greater consistency across customer base

• Mitigates costs associated with ad-hoc discounting

• Forces “give-get” trade-offs & value recognition

• Increases perceptions of price integrity

• Creates more efficient selling process

Page 5: Pricing Strategy & Tactics – Chs. 4-6

How Pricing Policy Leads to Certain Behaviors

Policy:Your firm only offers discounts to customers when they have a betterprice from your competitor(s).

Behavioral Implication:Your loyal customers get nothing in return, while non-loyal customers are rewarded for searching for better deals from your competitors.

Loyal and non-loyal customers begin to develop strategic relationships with your competitor(s) to keep your firm “honest” (i.e., press for the lowest price from your firm).

Page 6: Pricing Strategy & Tactics – Chs. 4-6

Policy:Your firm offers greater than normal discounts only to achieve sales goals (usually sales quotas).

Behavioral Implication:Discounts tend to pile up at the end of a reporting period since achievement of sales goals are not clear at the beginning of the reporting period. Customers figure the timing issue out and migrate their purchases toward the end of your firm’s reporting period to secure discounts.

Inventories tend to be greater than normal since sales tend to become cyclical with the reporting period.

How Pricing Policy Leads to Certain Behaviors

Page 7: Pricing Strategy & Tactics – Chs. 4-6

Policy:Your firm provides discounts for annual volume, regardless of order volume or the share your buyer’s total need your sales represent.

Behavioral Implication:This policy tends to lead to buyers centralizing their purchases with your firm. Centralization takes the value proposition away from those who understand it and places it with those who do not (i.e., order makers).

This policy also benefits buyers by allowing them to assemble into buying groups in order to secure the discount or to hunt for better prices from your competitor(s).

How Pricing Policy Leads to Certain Behaviors

Page 8: Pricing Strategy & Tactics – Chs. 4-6

Policy:Your firm publishes list prices, but your firm’s discounting patterns are inconsistent so as to keep your competitor(s) guessing as to yoursales price(s).

Behavioral Implication:Competitors cannot benchmark prices. Instead, competitors use information from purchasing agents to determine your prices, which leaves your firm with little to no power to influence your competitors’ pricing. Consequently, your customers take advantage of the situation by manipulating information between your firm and your competitors for their own benefit.

How Pricing Policy Leads to Certain Behaviors

Page 9: Pricing Strategy & Tactics – Chs. 4-6

Structuring Your Firm’s Pricing Policies

Remove Inconsistency in PoliciesCentralize the pricing policy development and monitoring so that allsales representatives operate under the same policy and use the same metrics.

Provide IncentivesReconsider commission compensation since it tends to focus salesrepresentatives on short-term goals. Sales representatives should beinformed as to what is good/bad for the company. In general, focus on higher margin sales should be one goal for sales representatives.

Provide Analytical Performance DataData should be provided to management and sales representatives.

Page 10: Pricing Strategy & Tactics – Chs. 4-6

Buyer Types - Exhibit 5-3

Page 11: Pricing Strategy & Tactics – Chs. 4-6

• Desire for interaction• Emotional Involvement• Loyalty• Number/type of considered vendors• Involved decision-making• Fast decisions• Switching Costs• Operational importance of

differentiation

Cues for Identifying Customer TypeConsider these Characteristics in Each Case

PriceRelationship Value Convenience

Page 12: Pricing Strategy & Tactics – Chs. 4-6

See Reading on Price Positioning

Brand (Relationship) Driven

Convenience Driven

Value Driven

Price Driven

Page 13: Pricing Strategy & Tactics – Chs. 4-6

Pricing Strategy & Tactics – Chs. 5-6– Understand the role of pricing policies in developing a strategic

approach to pricing– Establish the link between a firm’s pricing actions and customer

expectations & future purchase behaviors– Provide frameworks for understanding customer behaviors and

establishing policies to ensure profitable pricing outcomes– Understand the major stages of the price setting process and the

role of value and cost at each stage– Demonstrate the three factors shaping the choice of a price point

• Strategic alignment, Price-volume tradeoffs, & Customer response

– Introduce dynamic pricing– Show how to communicate new prices to maximize perceived

fairness and minimize adverse customer response

Page 14: Pricing Strategy & Tactics – Chs. 4-6

The Price Setting Process - Exhibit 6-1

Define Price Window

Set initial price range based on differential

value & relevant costs

Key Questions:

•What is the appropriate price ceiling for this product?•How should I incorporate reference prices into my price window?•What is the role of costs in setting my initial price range?

Set Initial Price

Determine amount of differential value to be

captured

Key Questions:

•Is price point consistent with my business strategy & objectives?•What are the price-volume tradeoffs and what is their impact on profitability?•What are the non-value related determinants of price sensitivity?

Communicate Prices to MarketDevelop

communication plan to ensure prices are

perceived to be fairKey Questions:

•What is the best approach to communicate price changes to customers?•What are the considerations for implementing significantly higher prices?

Page 15: Pricing Strategy & Tactics – Chs. 4-6

Defining Price WindowsSpringfield Case: Weighted Average Economic Value

Exhibit 6-2a:Positively Differentiated Offering

Exhibit 6-2b:Negatively Differentiated Offering

Penetration pricing sets price far enough below economic value (not below cost!) to attract and hold a large base of consumers. Generates sales volume (& lower marginal costs) at the expense of higher margins.

Price skimming captures high margins at the expense of sales volume. Prices are high relative to what the “middle market” is willing to pay. Viable when the profit from the price-insensitive segment exceeds profit from sales to larger market at lower price.

Neutral Pricing

Page 16: Pricing Strategy & Tactics – Chs. 4-6

Consistent with Business Strategy? Competitive Advantage

The unique position a firm develops through resource & capability deployments that leads customers to choose the firm’s products over competitors. Advantage can be based on:•Cost Leadership (Low cost & price);•Product Differentiation – offering superior economic value by creating superior product/service features & quality through innovation & product development capabilities;•Marketing Differentiation – offering superior perceived value by developing

– Unique image (brand-centric differentiation) achieved through targeting, positioning & communication capabilities

– Close relationships with customers (customer-centric differentiation) achieved through CRM capabilities & customization

For each case, ask “What is the focal firm’s competitive advantage?”

Page 17: Pricing Strategy & Tactics – Chs. 4-6

Conditions for Alternative Pricing ObjectivesProduct Differentiation

SkimCost Leadership

PenetrationMarketing Differentiation

Neutral

COSTS

CUSTOMERS

COMPETITION

•Sufficient CM to finance advertising...

•Costs similar to competitors

•Little excess capacity•Incremental capacity is expensive

•Customers are sensitive to other elements of the marketing mix

•Large share brands w/ a lot to lose (Oligopolies)

•Sustainable mktg mix advantages

•Avoid threat of retaliation

•Changes in volume drive profitability

•High CMs•High volumes•Small BE Sales Changes•Excess capacity

•Little differentiation•High price sensitivity•Total Expend Effect•Large Part of End-Benefit

•Sustainable cost & resource advantage

•Financial strength•Competitors not willing to retaliate

•Aggressive small share brands

•Changes in Unit Price Drive Profit

•Low CMs•Low Volumes•Large BE Sales Changes•At or near capacity

•Difficult Comparison Effect

•Price Quality Effect•Low Price Sensitivity•Reference Price Effect

•Sustainable differentiation

•Limited threat of opportunism

•Limited opportunity for scale economies

•Low threat brands

Page 18: Pricing Strategy & Tactics – Chs. 4-6

SKIM•Difficult Comparison Effect•Price Quality Effect•Sustainable differentiation•Changes in Unit Price Drive Profit

PENETRATION•Little differentiation•Sustainable cost & resource advantage•Changes in volume drive profitability

NEUTRAL

•Customers are sensitive to other elements of

the marketing mix

•Large share brands w/a lot to lose (Oligopolies)

•Sufficient CM to finance advertising...

Page 19: Pricing Strategy & Tactics – Chs. 4-6

Setting Price: The Price-Volume Trade-offPrice optimization is a complex process that involves 2 distinct components: (a) the firm’s current price and cost structure, and (b) customer response to price offerings and changes. Estimating customer response requires deep understanding of customers and competitors, a difficult and imprecise problem at best. Instead, start with 2 relatively easy questions to answer:

1.How much volume could I afford to lose before a price increase would decrease my profitability?

2.How much volume would I have to gain for a price decrease to improve my profitability?

In effect, you change the customer response estimation problem from a two-tailed estimate to a one-tailed estimate.

Q ≤ QBE?

Q ≥ QBE?

Page 20: Pricing Strategy & Tactics – Chs. 4-6

Incremental Percent Breakeven Sales Change

P × CM% × Q = P (1 + P%) Q (1 + Q%) P (CM% + P%)

P (1 + P%)× ×

Current contribution New CM%× New Quantity×New Price=

CM% = ×(CM% + P%) (1 + Q%)

Q% = CM%(CM% + P%)

(CM% + P%) (CM% + P%)

(CM% + P%) – P%

Q% =

Page 21: Pricing Strategy & Tactics – Chs. 4-6

Incremental Percent Breakeven Sales Change

(P – C) Q = (P + P - C) (Q + Q) ×

Current contribution New Quantity×New Contribution Margin=

PQ – CQ = PQ +PQ + PQ + PQ – CQ - CQ

0 = PQ + PQ + PQ - CQ

0 = Q(P + P – C) + PQ

Q(P + P – C) = PQ

Q = P (P + P – C)Q

P (CM + P)

=BE

Page 22: Pricing Strategy & Tactics – Chs. 4-6

Incremental Percent Breakeven Sales Changes

Price increase: % decrease < the breakeven decrease leads to contribution increase.Price decrease: % increase > the breakeven increase leads to contribution increase.

Page 23: Pricing Strategy & Tactics – Chs. 4-6

Price Sensitivity Drivers

• Size of expenditure • Shared costs• Switching costs• Importance of end-benefits• Perceived risk• Price-Quality perceptions• Perceived fairness• Price framing• Reference prices

Relative to income

Paid by employer, parents…

Monetary & non-monetary

Economic & psychological

Receive expected benefits?

Higher price=higher quality?

Fair price range

Gains vs. losses

Gains vs. losses

Page 24: Pricing Strategy & Tactics – Chs. 4-6

Prospect TheoryPerceived Value

GainsLosses

Reference point

Objective Value

Small Gains Overvalued

Large Gains Undervalued

Small Losses Strongly Overvalued

Page 25: Pricing Strategy & Tactics – Chs. 4-6

InternalRemember their favorite brand(s) & the last price they paid.Wow! I paid $15.00 for that Franciscan yesterday and it’s on sale here for $12.99. Better get a case.

Reference Price Shoppers:

Page 26: Pricing Strategy & Tactics – Chs. 4-6

External Reference Price Shoppers: Remember their favorite brand(s) but not the last price paid.OK. The Voss brand is $16.00. Just out of curiosity, how much is the Rombauer – oh, $32. Voss it is.

Page 27: Pricing Strategy & Tactics – Chs. 4-6

Price Range Shoppers: Don’t have a favorite brand or remember prices.

Let’s see. Clos du Bois $9.99, Voss $16.00, Franciscan $12.99 & Rombauer $35...

Page 28: Pricing Strategy & Tactics – Chs. 4-6

Quantity Demanded

Pri

ce

Elasticity – a visual representation . . . .

inelasticunit elastic

elastic

(few substitutes – gemstones, transplant organs)

(many substitutes – grains,fruits and vegetables, bagged soil,paper clips, rubber bands)

Q1Q2

P1

P2

P1

P2

Q2 Q1

Page 29: Pricing Strategy & Tactics – Chs. 4-6

Elasticity – Measurement of PriceSensitivity at the Market Segment Level

We can measure or estimate price sensitivity at the market segment level by assessing the price elasticity for a particular product or service.

Elasticity = Percent Change in Unit Sales (over relevant range)

Percent Change in Price (over relevant range)

E =% in Unit Sales

% in Price

E =(22%-49%)/Average(22%,49%)

(14-12)/Average(14,12)

Single Ticket Demand in Springfield Nor’easters

Page 30: Pricing Strategy & Tactics – Chs. 4-6

How to Estimate Volume Along the Demand Curve

Use the Polynomial Trendline Function in Excel

y = -0.0225x2 + 0.34x - 0.35R² = 1

Page 31: Pricing Strategy & Tactics – Chs. 4-6

Elasticity – Measurement of PriceSensitivity at the Market Segment Level

Measure of Price Elasticity

|Price Elasticity| < 1 An increase in price within the range evaluated results in lower unit sales but higher revenue (profit?).

|Price Elasticity| > 1 An increase in price within the range evaluated results in lower unit sales and lower revenue (profit?).

|Price Elasticity| = 1 An increase in price within the range evaluated results in an identical change in unit sales and the same revenue (profit?).

Unit Elastic

Elastic

Inelastic

Page 32: Pricing Strategy & Tactics – Chs. 4-6

Elasticity Required to Breakeven

Price increase: |Elasticity| < the breakeven amount leads to contribution increase.Price decrease: |Elasticity| > the breakeven amount leads to contribution increase.

Page 33: Pricing Strategy & Tactics – Chs. 4-6

Homework for Next WeekFire Safety

Q% =(CM% + P%)

– P%

Page 34: Pricing Strategy & Tactics – Chs. 4-6

The Problem: Customer generally does not know true value unless informed by seller.

Value communication is important when your product or service creates value that is not readily apparent to potential consumers.

Value communication is nothing more than information dissemination.

• Develop value proposition (i.e., compellingly unique & distinctive economic or psychological benefits).

•Communicate the value proposition, and

•Deliver the value.

Price & Value Communication

Page 35: Pricing Strategy & Tactics – Chs. 4-6

Relative Cost of SearchT

ype

of B

enef

its

Econ

omic

Ben

efits

Psyc

holo

gica

l Ben

efits

SportsCars

SUV’sCollege

Education

InvestmentAdvice

ExoticVacations

HomeEquityLoans

Pain Medications

DigitalCameras

DesktopComputers

CommodityChemicals

AutoRepairs

LifeInsurance

BloodPressureDrugs

ManagementConsulting

Cosmetics

Hotels

FitnessEquipment

High Complex “Experience” Goods

LowSimple “Search” Goods

Adapting the Message for Product Characteristics

DesignerClothes

Greater Price

Dispersion

Unique work of Art

Page 36: Pricing Strategy & Tactics – Chs. 4-6

Strategy 1Economic Value Communication

CommunicateObjective Information That Differential Economic Value

Justifies Pricing (e.g., Computers)

Strategy 2Economic Value

Assurance

Communicate Assurances ThatDifferential Economic Value

Justifies Pricing (e.g., Investment Returns, Hotel Guarantee)

Strategy 3Psychological End-Benefit

Framing

Associate Differential Performance with Subjective Psychological Value

That Justifies Pricing (e.g., Cosmetics)

Strategy 4Psychological End-Benefit

Assurance

CommunicateAssurances That Total

Psychological ValueJustifies Pricing (e.g., Art, Exotic

Vacations, Mattresses?)

Eco

nom

ic B

enef

its

Psy

chol

ogic

al B

enef

its

High“Experience” Goods

Low “Search” Goods

Relative Cost of SearchTy

pe o

f Ben

efits

Framework of Value Communication Strategies

Page 37: Pricing Strategy & Tactics – Chs. 4-6

Art Assignment• Choose a product & identify (15 minutes)

–Your retail price position and the Value Proposition for the product; i.e., what is compellingly unique & distinctive.

–The target customers (relational, value, convenience, or price), the relative size of the market, and their desired psychological benefits.

–How you will communicate the value to customers given high experience characteristics & psychological benefits. For example, what assurances can you offer that the product will deliver the desired psychological benefits?

–Price range, pricing objective (skimming, penetration, or neutral), price point & whether you will negotiate discounts.

• Communicate value & price in 2 minutes

Page 38: Pricing Strategy & Tactics – Chs. 4-6

The Price Setting Process - Exhibit 6-1

Define Price Window

Set initial price range based on differential

value & relevant costs

Key Questions:

•What is the appropriate price ceiling for this product?•How should I incorporate reference prices into my price window?•What is the role of costs in setting my initial price range?

Set Initial Price

Determine amount of differential value to be

captured

Key Questions:

•Is price point consistent with my business strategy & objectives?•What are the price-volume tradeoffs and what is their impact on profitability?•What are the non-value related determinants of price sensitivity?

Communicate Prices to Market

Develop communication plan to

ensure prices are perceived to be fair

Key Questions:

•What is the best approach to communicate price changes to customers?•What are the considerations for implementing significantly higher prices?

Page 39: Pricing Strategy & Tactics – Chs. 4-6

Next Week

Akash RathodB2B Pricing

&Pricing Strategy Over the Life

Cycle (Chs. 7-8)