July_19_2008_pricing.ppt

1、1,Pricing,Bayer Chair Professor Willem Burgers,2,Course Outline,Foundations Case: Atlantic Computer Thinking Strategically Case: McCaw Embedded Pricing Case: Signode Tools, Tactics, and Tricks: Metrics, Fences, Framing Case: Blockbuster Video Channels and Pricing Case: Shanghai Honggong Mathematics,

2、 Case: Jahwah Price Research Price War Case: Kodak Funtime,3,Importance of Pricing,Marketing and Pricing Where 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 Strate

3、gy and Practice,4,The Strategic Pricing 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

4、?,Significant expenditure? Important end-benefit? Ingredient? Does the buyer pay? Fairness? Inventory?,7,Value? 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 $32,202.24,8,2. Compet

5、ition,How many sellers? Monopoly Oligopoly How many buyers? Monopsony - Oligopsony How differentiated is the product? Monopolistic competition,9,3. Escape the Cost Plus Delusion,Cost Based Pricing product cost price value customers? Value Based Pricing customers value price cost product? The role of

6、 cost in pricing relevant costs, incremental costs, avoidable costs, opportunity costs: Our goal is to maximize gross profit,10,4. Strategic Objectives,Growth? Profit? Survival? Stability Cost? ?,11,Pricing Strategy Alternatives,Competition-based Cost-plus Value-in-use Custom based Auction/Liquidati

7、on ,Strategic Objectives/Constraints,12,Business 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) fol

8、low 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 value,The Players in the Game,Customers Competitors CompanyComplementors Suppliers,Parts of the Game,1. Players Who is playing? Can you add players? Do you have to play? 2. Ad

9、ded Values What amount of value disappears when you leave the game? How can you increase value,Parts 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?,16,Changing the

10、 Pricing Game,Conventional Pricing Struggle among 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

11、product development process,17,Asking the Right Questions:,18,An unprofitable price?,Pricing error Value communication defect Market share delusions Market segment error Product/service overbuilt Customer power Commoditization,19,Market Change Dynamics Leading to Commoditization,Entry of new competi

12、tors in market or segment 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 risk,The Specialty-Commodity Continuum,Price,High,Low,LowHigh,Service Ad

13、ditions,Specialty,Commodity,time,Niche,Experience curve,Value added strategy,Price compression/innovation,21,Breaking 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 re

14、ducing prices and services Market focus: 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 else,22,Embedding the Strategy,Distributors/Salespeople incentives and expectations, skills, knowledge, tools.

15、Customer incentives and expectations,23,Signode,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 wil

16、l 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 marketing resources to different segments? What error do you see? What might be the explanation? 5. Any brand str

17、ategy 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 your customers substantially more expensive to serve? 2. Can you attract additional customers at a lower price? 3. Can you link yo

18、ur 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, customer buying habits, and sense of fairness?,26,Quantity Discounts,Typology: No discounts All uni

19、ts discounts fixed plus variable variable 1 plus variable 2 fixed 1 plus variable 1 and fixed 2 plus variable 2,27,Why 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 ha

20、ve more options A second or third dress/cup of coffee/ has less value 5. block new competitive entry,28,Product 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 + the

21、ater) Bundling/Merging demand curves Tie-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 willing to pay Need to separate customers according to their willingness to pay more/less

22、Need to keep your high-paying customers customers happy,30,Fences,Buyer identification Purchase location Purchase timing Purchase quantity Product bundle Tie-ins Product design,31,Price Communication,1. Percentages or numbers? 2. Dont talk price, talk value 3. Price cues 4. Price endings 5. Sale any

23、one?,32,Price Framing,The power of three Start from the top Reference prices Prospect Theory,33,Body 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 lik

24、e risk More information sells more product The center is better,34,Body 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 yo

25、u 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 possible prices,36,Channel Pricing and Sub-Optimization,S

26、ub-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 Crocodile shirts is very price elastic. Prior e

27、xperience 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 summer is coming. Croco

28、dile 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 if doing so will doub

29、le 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 to about $65 each, we realized w

30、e 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 specific behaviors by customer

31、s 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,Order size discount 10 R

32、MB Competitive discount 12 RMB Payment terms discount 30 RMB Annual 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%,12.7%,8.6%,Actual Prices

33、 Per Unit,43,Promotional Pricing Policy Negotiated Pricing Policy Quantity Discounting Policy Bid-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? 2. What has

34、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 called

35、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,

36、 our demand 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%;

37、 should Firm A keep 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.-

38、So the new gross margin will be 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

39、 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%). 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

40、,250.- new situation: (new margin) .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.-),49,Marketing Math,

41、A similar formula works also for calculating 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 sales,50,Marketing Math,Suppose firm A sells suits for a price of

42、 500 RMB (and its gross profit is still 25%, so firm A purchases these suits for 375 RMB) Suppose firm A now raises its 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) divide

43、d 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 (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

44、 up for the lower price (so our profit stays the same)? 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 = 1.506 Sales in RMB must go up by a bit over 50% in order to make up for the 10% decrease in price!,5

45、2,Marketing Math Exercise,Your company has Fixed costs of $25,000,000 Gross profit margin of 34% Sales of $72,000,000 Advertising 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 lowe

46、rs prices by 20% how much should sales increase (at a minimum) in dollars and in units?,53,Price and Profit,Creates operating 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%

47、,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,Jahwah,Offer tactical 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

48、? What systemic suggestions do you have?,56,Price Response Estimation,1 expert judgment/Delphi method 2. customer surveys 3. experiments 4. historical market data,57,Expert Judgment/Delphi method,Develop specific questions: “what is the highest, medium, lowest realistic price and what would be the s

49、ales levels at those prices?” Use as many as ten experts, preferably from different functions and different levels of hierarchy Share the results, discuss the differences in estimates, utilize the wisdom of crowds Use outsider to run the process/interviews/meetings,58,Customer Surveys,Ask: “How much

50、 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 price?”,59,Experiments,new or current products in-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 switched to coal and natural gas, demand and prices for home insulat