Session on Price Level

Agenda
By B Dr. Nripendra Singh

Preliminary Segment PreliminarySegment Pricing PriceOptimization ImplementingNewPrices Implementing New Prices

The Pricing Strategy Pyramid

Price Level
Price setting

Pricing Policy
Negotiation Tactics & Pricing Setting Procedures

Value Communication
Communication, Value Selling Tools

Price Structure
Metrics, Fences, Controls

Value Creation
Economic Value, Offering Design, Segmentation

Price Level
Setting the Right Price for Sustainable Profit Cos. Ste. Goals and Cost structure; Customers p preferences and actual needs; Competitors pricing ; p p g and ste. Intent. Pricing P i i as a d i driver of profitability must h f fit bilit t have coordination between sales, mktg, fin & op. Due to complexity involved in pricing, Cos take short cuts short-cuts (reduce prices) for growth and send a wrong signal to customer. (Eg. Pharma Co.)

Price Setting Process

Preliminary Segment Pricing g Optimization Implementation Set final prices and ensure acceptance among customers and organization through effective change management approach
Key Questions: How do I get sales force buy buy-in to t e new p ces the e prices and empower them to execute effectively? What is the best approach for communicating price changes to customers? What is the best approach for raising prices on undervalued products?

Set baseline prices based on type of value assessment and initial differential value capture rate
Key Questions: How much of the differential value should be captured for each segment? How much time and effort should I invest in assessing the value of my products? How should I adjust segment prices to account for different price sensitivities?

Refine preliminary prices with iterative process balancing tradeoffs between price, cost, and market response
Key Questions: What tradeoffs should I make between long-term strategic objectives and short-term market h tt k t responses to price changes? What types of analytical techniques are best suited to my product and market conditions? How can I estimate customer response to potential price changes?

Price Setting Process (3 Stages)

Preliminary Segment Pricing
Value Assessment Options Preliminary Price Range y g Pricing Strategy Options

Price Optimization
Profitability Analysis E ti ti C t Estimating Customer Response R

Implementing New Prices

Communicating New Prices to the Sales Force Communicating Price Increases to Customers

Preliminary Segment Pricing

Positive Differenti ation ti
Competitive Reference R f Negative Differentiation

Key q y question: How much differential value should be captured in each segment?

The answer to this question can differ substantially across segments based on strategic considerations and differences in price sensitivity

Preliminary Segment Pricing

A) Value Assessment Options B) Preliminary Price Range C) P i i Strategy Options Pricing St t O ti

OPTIONS/ PARAMETERS

PLC

Degree of Market Size Cust understanding of V l of f Value f Pro

Time Available for Price Setting

EVE with External Data EVE with Internal Data Willingness-topay (Mgrl Est) Current P i C t Prices

Preliminary Segment Pricing

A) Value Assessment Options
OPTIONS/ PARAMETE RS EVE with External Data PLC
Degree of Market Size Customer understanding of Value of Product

Time Available for Price Setting New Prod with time in hand New Prod with time in hand When No time for EVE When No time to launch prod

New Prod (Intro)

Exp. Goods p (advertising) Exp. Exp Goods (Pharma) Search Goods Search S Goods

Sizeable with Prod. diff. Sizeable with Prod. diff. Small with little prod diff Small with S little prod diff

EVE with Decline/ Internal Data Mature WillingnessWillingness to-pay (Mgrl Est) Current C Prices Growth

Growth G

B) Preliminary Price Range

Once we know Total Economic Value the question is: What price should we set? A firm h created a new widget th t d li fi has t d id t that delivers $100 worth of th f differentiation value to customers, over and above the competitors widget that sells for $50. Thus total economic value i l is $150. What price would they set? This depends on how much value they want to capture High value capture (price skimming leaves little incentive on the table for buyers), versus Low (penetration pricing leaves lots of incentive), and is a strategic decision. Say they determine to set a higher price, perhaps $100 (which captures 50% of differentiation value delivered). Should you set just one price of $100?

Preliminary Price Range (contd.)

No, because some buyers are more price sensitive than others. So, you set a range of prices around $100 -- this range is indicated in the slide between the two red price boundaries. p These boundaries now reflect the high and low prices that you will set to reflect segmentation pricing setting different prices for different customer segments segments, based first on economic value, and then on willingness to pay which is driven by customer price sensitivity. Some buyers may be impulse buyers that call at the last q priority service and Some buyers want y y minute and request p to purchase in high volume or order quantities. What price would you set for them? Close to the upper boundary, and Close to the lower boundary

Preliminary Price Range (contd.)

How aggressively to attempt to capture the value in Price? Will the decision yield long-term & sustainable profit? 4 considerations: 1) Price Sensitivity- How much impact Value has for the cust as purchase motivation. (Sensitivity towards Price-Value Trade-off)Eg. If expenditure is small, represents small part of large exp, or if it i shared cost; If cust f l price i U f i l is h d t t feels i is Unfair. 2) How costly or Time Consuming is it to Quantify and Communicate the Differential Value? Is it easy to Prove or Guarantee the value of costs savings? 3) How sustainable is a price differential relative to competitors? (Patent, Copyright, lock on a unique resource) 4) How Imp is Vol Vs Margin as a fin Obj? Depends on Cost Structure of the Co or CM.

C) Pricing Strategic Options

Skimming: involves setting a price to capture a product's product s economic value to relatively price-insensitive customers. It is a strategy designed to produce high margins at the expense of sales volume and is often used if consumers place exceptionally high value on the product's differentiating attributes. attributes Sequential Skimming: Sequential skimming involves setting the p price high to attract only the most lucrative segment and, once g y g that segment is penetrated, lowering the price to attract the next most lucrative segment. Penetration: involves setting a price below the product's economic value to most customers, thus enabling it to attract and hold a large base of customers. It is a strategy designed to g gy g produce sales volume, even at the expense of high margins. Neutral: involves setting a price in the range that most buyers would deem reasonable or appropriate given its economic value. It is a strategy that minimizes the role of price as a marketing tool

Conditions for Different Pricing Strategies

SKIM PENETRATION NEUTRAL

COSTS

CUSTOMERS (Price Sens ) Sens.)

COMPETITION

Conditions for Different Pricing Strategies

SKIM
Low CM L CMs Low Volumes Changes in Unit Price Drive Profit g Large BE Sales Changes

PENETRATION
High CMs Hi h CM High volumes Changes in volume drive profitability Small BE Sales Changes

NEUTRAL
Costs i il to C t similar t competitors Sufficient CM to finance adv, etc. p y Little excess capacity Incremental capacity is expensive

COSTS

CUSTOMERS

Low Price Sensitivity -Reference Price Effect -Price Quality Effect -Difficult Comparison Effect Eff t

High p g price sensitivity y -Total Expend Effect -Large Part of EndBenefit Little differentiation

Customers are more sensitive to other elements of the marketing mix

COMPETITION

Limited threat of i opportunism Limited opportunity for scale economies Sustainable differentiation Low threat brands

Sustainable cost & d resource advantage Competitors not willing to retaliate Financial strength Aggressive small gg share brands

Avoid threat of retaliation li i Large share brands with a lot to lose Sustainable mktg mix g advantages Oligopolies

Categorize These Pricing Strategies

How would you categorize the pricing strategies for the following products and retailers? (S=skim, N=neutral, P=penetration) McDonalds Dove soaps Big Bazzar Louis Phillip (Clothing) L'Oreal Hair Coloring L'O l H i C l i Mont Blanc (Ltd Ed. Pens) Emporio M ll E i Mall _______ _______ _______ _______ _______ _______ _______

PRICE OPTIMIZATION
After prices are set, it needs to be optimized, based on potential customer response to new prices and the economics of price-volume trade-offs. 3 steps: 1) Select price points within the preliminary price range to begin testing. 2) Start the optimization process to evaluate the trade-off between cust response to new prices and the lost or gained margin margin. 3) Set final prices in order to begin implementation efforts with customers and the organisation. ff ih d h i i

Analytical Approaches to Profitability Analysis

High Automated Price Automated Price Optimization p Optimization O ti i ti System System Spreadsheet Spreadsheet based Break -based Break even Analysis even Analysis

Trans sactions

Num mber of

Simulation Simulation Modeling / Risk Modeling / Risk Analysis y Analysis

Low Low High

Frequency of Price Changes

Profitability Analysis
It will depend upon the pricing environment i.e. No. of transactions Vs frequency of price changes 1) Incremental Break Even Analysis: appropriate for markets/cos. Where there are many transactions and prices change infrequently, can be implemented on a spreadsheet and easily combined with b th d t and managerial j d d il bi d ith both data d i l judgments t to make price adjustments that improve profitability. 2) Simulations: expand on a breakeven analysis by estimating the RISK of loosing cust and competitive response to a price change. The key issue is that whether demanding a higher price will RISK loosing the entire deal and a significant piece of business.

Analyzing Profitability Using the Breakeven Sales Change Approach

Contribution Margin g
5% 35% -88% 88% 10%
-78% 78% -71% -60% -33% 0% 100% NA NA NA

20% 30% 40% 50%

-64% 64% -56% -43% -20% 0% 33% 300% NA NA -54% 54% -45% -33% -14% 0% 20% 100% NA NA -47% 47% -38% -27% -11% 0% 14% 60% 167% 700% -41% 41% -33% -23% -9% 0% 11% 43% 100% 233%

60% 70% 80%

-37% 37% -29% -20% -8% 0% 9% 33% 71% 140% -33% 33% -26% -18% -7% 0% 8% 27% 56% 100% -30% 30% -24% -16% -6% 0% 7% 23% 45% 78%

90%
-28% 28% -22% -14% -5% 0% 6% 20% 38% 64%

% Chang in Price ge P

25% -83% 15% -75% 5% -50% 0%

0%

-5% NA -15% NA -25% NA -35% NA

Profitability Analysis (contd.)

3) Automated price Optimization: this is the best approach to professional analysis when a market has a High Transaction Volume, Standardized products, and Non-negotiable pricing. Also, real-time. Also in real time These S/Ws tests price points, tracks sales, points sales volume changes, and iterates quickly toward optimal price levels. Eg Dell, Wal Mart etc levels Eg. Dell Wal-Mart etc.

IMPLEMENTING NEW PRICES

1) Communicating New Prices to Sales Force 2) Communicating Price Increases to Customers

Determinants of Price Sensitivity

The Reference Price Effect (Our Price Vs Competitors Price / Substitute) The Difficult Comparison Effect (Experience Vs Search Goods) The S it hi C t Eff t (Fi Th Switching Cost Effect (Financial Bonding) i l B di ) The Price-Quality Effect ( g Price - High Qlty & Vise versa) y (High g y ) The Expenditure Effect (Small Vs Large, small of large exp) The End-Benefit Effect (prod is just a part of overall benefit) The Fairness Effect (Fair Vs Unfair perception) The Framing Effect (Loss Vs forgone gain perception) The Shared-Cost Effect (Self Vs Shared cost)

Price Sensitivity Illustration

You are considering purchasing a personal computer (e.g. Compaq, etc) and h t ( C t ) d have b begun t to shop around in order to choose one for purchase. h

What factors would affect your price sensitivity in making that decision? How would those same factors affect the p price sensitivity of some p y personal computer buyers differently?

Price Sensitivity Illustration

For each of the following purchase decisions, what factors are likely to affect the consumer's price sensitivity? consumer s A diamond engagement ring Automobile repairs Food for meals at home Which university to attend A company car Draperies for your new home Text books Health insurance plan Souvenirs Vacation resort

THANK YOU