Pricing Strategy Objectives Strategy Structure Levels Pricing Overview

Pricing Strategy Objectives, Strategy, Structure, Levels

Pricing Overview • How to Set Pricing – – Pricing Objectives Pricing Strategy Pricing Structure Pricing Levels • Price & Positioning • Not Price, But Cost • Price Sales Dialogues – How to sell your price All trademarks remain the property of their respective owners

One of the Four “P”s of Marketing Mix • Product • Price – One of the least understood and worst leveraged P’s among non-consumer products • Placement • Promotion

How to Set Pricing • Homework - overview – Compile competitor’s pricing • Website – Create competitive grid • Apple to apple comparison – Review prospect & customer’s expectations • Cost for alternatives (find the pain) – Review other cost – not ours • Determine price relief from other vendors, not us – Understand the overall “cost” • Software, customization, setup, support, maintenance – Review complimentary “like” products • Then determine objectives, strategy, structure & levels

How to Set Pricing • Review customer’s expectations – Cost for alternatives • Spreadsheet (development time, inefficiencies) • Find the pain • Review “other” cost – End to end system, price relief from other vendors • Motorola – Set Top Box – Content, d. Slams, Network cards, set-top – Save money on “other” products = more money for our product and we can charge more (just need a “final” cost) – Show them other supplies – save on them, total cost

How to Set Pricing • Competitor’s Pricing – Competitive Matrix • Apples to Apples (see sample) – Where to find it • • • Website Call company Call their reseller Look for analyst reports Call their customers (won or lost) Find at trade show – Rule – Never lie (integrity is worth more) “Lois, I never lie”

Systematic Pricing Approach 1. 2. 3. 4. Objectives Strategy Structure Levels

1) Price Objectives • Over 20 pricing objectives • Typically concentrate on the following: – Target Market share • Maximize market share, sometimes at expense of early profit – Target ROI • Maximizes return on investment – Sales growth • Similar to ROI, expressed in terms of sales over time – Maximize Long-term profit • Making the most over a product’s entire life cycle

2) Price Strategy • Market-based – Floor pricing – Penetration pricing – Price taker – parity (going rate) – Premium (skimming) – Stay out pricing – Bundle pricing – Value-based – Cross-benefit • Cost-based – Markup pricing – Target return pricing • Which to use? – – Determine by objectives Determined by product type Typically market-based Cost-based often leaves a LOT of money on the table • Intel COG low • Cost of development - HIGH

2) Price Strategy • Market-based – Floor pricing • Charging a price that just covers cost. Maintains a presence in a hyper-competitive market – Penetration pricing • Low relative to a) avg price of competitors, b) what customers accustomed to paying – Price taker • • Parity pricing equivalent of major competition (going rate) Natural price points (later) – Premium • • Higher than competitive or what customers accustomed to paying – skimming Usually when product is NEW (and unique), or end of life (spare parts) – Stay out pricing • Pricing lower than demand requires to discourage new competitors – Bundle pricing • Combined price is lower than each product separately (MS Office) – Value-based • Different prices for different market segments or their respective perceived value – Academic pricing vs corporate pricing – Products for kids vs for adults – Dinner prices higher than lunch prices (same item) – Cross-benefit • • Lower for one product in product line, higher for another item that compliments Inkjets are cheap, Ink is high

2) Price Strategy • Cost-based – Often used in retail – but also use market based pricing • Especially when using MAPI pricing – Price is SET by manufacture – Manufacture typically cannot lock pricing (resellers determine this) – Compliance is enforced by MDF/Co-Op funds » HP printers, Bose speakers – see sales everywhere at once – Markup pricing • Variable and fixed cost per unit are estimated and a standard markup is added • Marketing is frequently a percentage of sales or costs – Target return pricing • A rate of return is taken times the amount invested in the product • Resulting return per unit is added to the unit cost to determine price

3) Price Structure • Which products or service will be priced • How prices vary – For different customers • Robertson Packman Act – Same price for same volume (no discrimination) – By products – By services • Time and Conditions – Family Entertainment Network (example)

4) Pricing Levels • Actual price charged per product/service • Based on – – Cost variations over time (launch vs end of life) Value perception (brand) Width of gaps between price breaks Elasticity of demand • Promotions – Reduce inventory – Encourage trials and adoption • The price matrix

Price & Positioning • Brand attributes – – Quality Expensive Prestige Value of Brand • The price delta is your brand value

Pricing Positioning Mistake • Quattro Pro – Developed by Borland – Quattro (was 4), one step further than Lotus 1 -2 -3 (4) – During MS Office wars dropped price from $495 to $49 – Sales increased but it was perceived more like a last ditch fire sale • The brand perception was destroyed • How could a $49 product compete with a $495 product • Something must be “wrong” with it – Contributed to reduction in market valuation from $7 billion to $91 million (1/15 th) – Comparable to Generic Cadd ($99) against Auto. Cad ($3, 000) • The higher price attributed to the perceived brand value

Natural Price Points • Price taker – – $99 $49. 95 $29 $19. 95

Elasticity of Demand • Raise the price and the revenue increases • A point where the revenue decreases • Lower the price – volume increases, does overall revenue increase or decrease?

Elasticity of Demand • • • Total Revenue Test - if the demand is elastic, then an increase in price will lead to a decrease in total revenue. This is true because, according to the formula, the decrease in quantity sold, as a percentage, will more than counteract the increase in revenue from charging larger prices. So on the contrary, if demand is elastic, then a decrease in prices will lead to a increase in total revenue. On the other hand, if the demand is inelastic, then an decrease in price will lead to an decrease in total revenue. This is true because, according to the formula, the increase in revenue, as a percentage, is larger than the decrease in demand that will result from the price increase. So if demand is inelastic, then a decrease in price will lead to an decrease in total revenue. Remember – total revenue may increase (since you sell more units), but so will associated “support” (have to consider this for products that have increased variable support)

Learn from Competitors • Case Study – Smart. Com from Hayes • Dropped price from $99 to $49 in retail – a promotion (test) – Total revenue increased – Total # of users increased – But also consider--support cost also increases • Did it have elasticity of demand (if so, we should follow)? • 2 nd month – Total revenue leveled – moved toward previous – Market realized it was not a promotion, it was permanent • 3 rd month – Total revenue decreased – Did NOT have elasticity of demand – Customer’s responded to a deep initial promotion, but not ongoing price cut • Increased price back to original price – Smart team – they were watching the numbers – I learned from the competitor’s test as they did (I was watching also) – I also learned they had a real marketing person in place – that knew pricing

Price Sales Dialogues • Price Savings Buildup – Shows how your price is a good option when compared to the alternatives • Showing the savings, value and benefits it provides – All pricing must be sold and justified – not done ‘till this is completed – Compare your price to alternatives • Head to head (Ginsu knives) • Value based – Reduce to simple • Shows the price broken down per user, per benefit, over time – Price versus cost • Alternatives might be “priced” lower—but the overall “cost” is much higher – Cassette tapes » The initial PRICE was higher (used 2 mm tape – vs 1 mm) » But the COST was MUCH lower (lasted years, not days)

Price Savings Buildup - Examples • Contact Your Client is the price performance leader – It is much less than the combined applications it replaces—plus no double entry. – When you add the cost for accounting, mass e-mail, and marketing automation programs alone, you are about 1/3 rd the cost of other popular options. • Changes your perspective of what you get – the value “But Wait…”

Price-Positioning Case Study • Price positioning – always an objection – Arm sales with product price positioning (set-top box example) • • Companies set-top was $800 Competition was $200 Q. How can you “promote” your price? A. Change the perception. Switch the criteria from price to “cost” or “revenue potential” and promote how much more they will make. “Our” system produced up to $129/mo In revenue. Competitors generated only $59. It required $79 for their business model to work. We produced over $3, 600 more revenue/5 years—after the difference!

Not the Price – the Cost • Don’t pay the wrong price • Pay a lower price and pay for it every time it breaks • Pay the right price – Cry once, but never cry again – Or cry every time your product breaks • Or don’t get what you need for the job – 3 wheel car – much cheaper, but you can never turn

Additional Pricing Issues • Published rate card (price matrix) – MSRP – Reseller discount is from MSRP • Exception policies and examples – Forward pricing – Competitive bids • • OEM pricing Alliance pricing (to them and bundle pricing) NFR (not for resale) sample pricing - COG Upgrade pricing (existing customers) – Goldmine mistake Competitive upgrade pricing – Used to see a LOT of International pricing (and exchanges) Where and when to publish pricing (website, print, PDF) – If don’t show pricing, still having a price savings build-up – call for quote • Gratis items and pricing – Find more value, don’t discount price (dilutes brand perception)

Review Questions • • What is parity pricing? What is price skimming? Explain the Robertson Packman Act Give an example of a price savings buildup What is an NFR? What items do you need to price? Others?

Any Questions?

Pricing Strategy Objectives, Strategy, Structure, Levels