Pricing Strategy over the Life Cycle – Chs. 7-8
• Review Fire Safety Homework
• Understand how price sensitivity, costs, and
competition influence pricing strategy over the
product life cycle.
• Introduce organizational tools and diagnostic
analytics that can be used to identify and
overcome implementation challenges
Fire Safety: 1. Given overall market growth rate = 29%, Fire Safety’s 5% price
increase in FY 2011, & 2010 CM≈62%, what was Fire Safety’s incremental %
breakeven point for unit quantity and $ sales change in FY 2011? How does that
compare with actual 2011 unit quantity and $ sales changes.
-DP%
-5%
Incremental Quantity Breakeven % 2010-11:
=
=
CM% + DP% 62%+5%
(5% Price Increase; ~62% CM)
-7.5%
Breakeven Sales as a % of 2010 Sales
(1+/- Incremental Breakeven %)
92.5%
Expected 2011 Sales as a % of 2010 Sales
(No price change; Market Growth = 29%)
129%
Breakeven 2011 Sales as a % of 2010 Sales
(5% Price Increase; Growth = 29%)
119.4%
Actual 2011 Sales as a % of 2010 Sales
107.8%
Quantity % Above/Below Breakeven (2010
basis)
-11.6%
Quantity % Above/Below Breakeven (2011
basis)
-9.7%
Fire Safety: 2. Given the expected market growth rate of 44%, Fire Safety’s proposed
5% price increase in FY 2012, & 2011 CM ≈ 64%, what is Fire Safety’s incremental
percentage breakeven point for unit quantity and $ sales change in FY 2012?
Incremental Quantity Breakeven % 2011-12:
(5% Price Increase; ~64% CM)
-5%
64%+5%
-7.2%
Breakeven Sales as a % of Sales
(1+/- Incremental Breakeven %)
92.8%
Expected 2012 Sales as a % of 2011 Sales
(No price change; Growth = 44%)
144%
Breakeven 2012 Sales as a % of 2011 Sales
(5% Price Increase; Growth = 44%)
133.6%
Breakeven Elasticity =
-1.45
Would you recommend the 5% price increase to FSI management for FY 2012?
Why (not)? What would you recommend?
Observed Elasticity =
%DQ
(107.8-129)
-16.44%
%DP
129
5.00%
The Final Requires Calculating Breakeven Volumes &
Expected Volumes based on Elasticities
-3.29
Elasticity Required to Breakeven
The Final Requires Calculating Breakeven Volumes &
Expected Volumes based on Elasticities
Current Contribution Margin
% Change in Price
5% 10% 20% 30% 40% 50% 60% 70% 80% 90%
20%
15%
10%
5%
0%
-5%
-10%
-15%
-20%
-4.00 -3.33 -2.50 -2.00 -1.67 -1.43 -1.25 -1.11 -1.00 -0.91
-5.00 -4.00 -2.86 -2.22 -1.82 -1.54 -1.33 -1.18 -1.05 -0.95
-6.67 -5.00 -3.33 -2.50 -2.00 -1.67 -1.43 -1.25 -1.11 -1.00
-10.00 -6.67 -4.00 -2.86 -2.22 -1.82 -1.54 -1.33 -1.18 -1.05
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
-20.00 -6.67 -4.00 -2.86 -2.22 -1.82 -1.54 -1.33 -1.18
-10.00 -5.00 -3.33 -2.50 -2.00 -1.67 -1.43 -1.25
-6.67 -4.00 -2.86 -2.22 -1.82 -1.54 -1.33
-5.00 -3.33 -2.50 -2.00 -1.67 -1.43
Price increase: |Elasticity| < the breakeven amount leads to contribution increase.
Price decrease: |Elasticity| > the breakeven amount leads to contribution increase.
Sales and Profits Over the PLC
Product Adoption Curve
Innovators
3-5%
Early
Adopters
10-15%
Early
Majority
34%
Percent Adoption
90
50
20
5
0
Time
Late
Laggards or
Majority Nonadopters
34%
5-16%
Market Dynamics over the PLC
INTRODUCTION
MATURITY
DECLINE
Growing customer base
Early adopters
Little product knowledge
Moderate knowledge buyers
Increasing brand loyalty
Large segmented market
Late adopters/Laggards
High knowledge buyers
Repeat purchasers
Comparison shopping
Declining customer base
High knowledge buyers
Familiar with all suppliers
and options
Low threat of competitive
rivalry
Gains from market
development are high
Increased competitive entry
Brand proliferation &
confusion
Differentiation vs. Cost
leadership
Shakeout to stable # of
competitors
Homogeneous dominant
brands
Market share defense
Gains from competitors
Increased price
competition to fill
capacity
Exiting of weak
competitors
COSTS
High incremental costs of
production and promotion
Low contribution margin
External sourcing
Declining unit variable costs
through volume;
Increasing contribution
margins
Low variable costs
High contribution margins
Cost controls
Asset utilization
Excess capacity
High average costs, due to
low capacity utilization
PRICE
SENSITIVITY
Reference value effect
Price quality effect
Difficult comparison &
Fairness effect
LOW SENSITIVITY
Reference value effect
Price quality effect
Difficult comparison effect
Switching cost effect
Expenditure effect
End benefit effect
MORE SENSITIVITY
Switching cost effect
Expenditure effect
End benefit effect
Lower risk
HIGH SENSITIVITY
MARKETING
OBJECTIVES
Generate primary demand
Customer awareness
Market education
Buyer frames of reference
Information diffusion
Brand positioning
Differentiation
Brand loyalty
Defensible competitive
position
Market share defense
Marketing and production
efficiency
Profitable market
segmentation
Retrench, & defend
strongest product lines
Harvest the business
Consolidation to small #
of competitors
PRICING
STRATEGIES
Establish value and worth
Bundled pricing to simplify
segmented pricing according
to buyer knowledge (HiMod-Lo)
Expansion of product line and
price points
Multiple pricing channels
Segmentation pricing
Price to maintain margins,
but signal intent to defend
Price for max. cash flow
Predatory pricing
CUSTOMERS
Small customer base
Innovators
Little product knowledge
Low knowledge buyers
GROWTH
COMPETITION Few competitors
HIGH SENSITIVITY
Market Dynamics over the PLC
CUSTOMERS
COMPETITION
INTRODUCTION
Little product
knowledge
Low knowledge
buyers
GROWTH
Moderate knowledge
buyers
Increasing brand
loyalty
MATURITY
High knowledge buyers
Repeat purchasers
Comparison shopping
Few competitors
Brand proliferation &
Gains from market
confusion
development are high Differentiation vs.
Cost leadership
Homogeneous dominant
brands
Market share defense
Gains from competitors
COSTS
High incremental
costs of production
and promotion
Declining unit variable High contribution
costs through volume margins
Asset utilization
PRICE
SENSITIVITY
Difficult comparison
& Fairness effect
Difficult comparison & Switching cost effect
Price quality effect
Expenditure effect
MARKETING
OBJECTIVES
LOW SENSITIVITY
Generate primary
demand
Customer awareness
Market education
PRICING
STRATEGIES
Establish value and
worth
MORE SENSITIVITY
Brand positioning &
loyalty
Brand differentiation
Defensible competitive
position
Simplify segmented
pricing according to
buyer knowledge (HiMod-Lo)
HIGH SENSITIVITY
Market share defense
Marketing & production
efficiency
Profitable market
segmentation
Expansion of product
line and price points
Segmentation pricing
PLC & Brand Strategies
Product Category Life Cycle
Growth
Brand Stage Introduction
Price to establish, Based on LT
Launch
Maturity
Decline
Use aggressive pricing Not
to dominate based on
recommended.
cost advantage or target
Cost leadership strategy
underserved niches w/a
service advantage.
communicate & strategy, identify
promote value of appropriate
the product
segment(s) before
commercialization
Product differentiation strategy
Segment & target
Unbundle. Price
Maintenance N/A
for LT advantage.
products & services
Lower price as
separately. Rationalize
necessary to
product line &
maintain market
distribution strategy.
growth. Price
Price to maximize profit,
compete only to
not market share or
gain cost advantage. growth.
Marketing differentiation (&
product proliferation)
N/A
Price to clear
Slowly pricestrategy
yourself
Retirement
inventory quickly
out of business.
while launching new
models
Only with
strong
advantage.
Consolidate to
solidify cost or
service
leadership.
Withdraw cash
w/incrementally
higher prices.
PLC & Brand Strategies
Product Category Life Cycle
Brand Stage Introduction
Price to establish,
Launch
communicate &
promote value of
the product
Growth
Based on LT strategy,
identify appropriate
segment(s) before
commercialization
Maturity
Use aggressive pricing to
dominate based on cost
advantage or target
underserved niches w/a
service advantage.
Maintenance N/A
Segment & target for
LT advantage. Lower
price as necessary to
maintain market
growth. Price compete
only to gain cost
advantage.
Unbundle. Price products
& services separately.
Rationalize product line &
distribution strategy. Price
to maximize profit, not
market share or growth.
Retirement
N/A
Price to clear inventory Slowly price yourself out
quickly while
of business.
launching new models
Product differentiation
Marketing differentiation Cost leadership
(& product proliferation)
Illustrative Customer Profitability Map
High
“Gold”
“Platinum”
 
  
 
 


  
Price

 


   
  

“Silver”
Low
 
 
“Lead”
High
Low
Cost to Serve
Price Banding Output
At Risk
Fair Price
Actual Price
Outlaws
Fair Price
Customer Lifetime Value (CLV)
Useful Analysis at the Individual Customer & Segment
CLVinfinite lifetime
= CM/(i* + 1 – r) – AC
where
CM = average annual contribution for the customer (segment)
i* = i (=the risk-free discount rate) × risk factor
r
= retention rate for the customer (segment)
AC = acquisition costs
How valuable/profitable is each customer (segment) given
prices & variable costs (i.e., contribution), retention rates,
discount rate, risk level & acquisition costs?
How valuable/profitable is an acquisition or retention campaign
given prices & variable costs (i.e., contribution), retention rates,
discount rate, risk level & acquisition costs?
Customer Equity
Facebook April/May 2012
Customer Equity
= # Customers × CLV
At Facebook
• April 2012 Unique Users: 900,000,000
• Revenue ≈ 3.7 B; CM (90%) ≈ $4; i* = .05;
• CLV ≈ $40
• Customer Equity = #Users × CLV = $36 B
External Valuation May 2012: ~$100 B
r = .95
Customer Equity
Facebook July/August 2012
Customer Equity
= # Customers × CLV
At Facebook
• July 2012 Unique Users: 955,000,000
• Revenue ≈ 4.7 B; CM (90%) ≈ $4.4
• CLV ≈ $44
• Customer Equity = $42 B
External Valuation August 2012: ~$50 B
Price Waterfall Example
800
620
600
45
1
67
507
15
Price ($)
25
1
5
6
455
Debit
Backs
Pocket
Price
400
200
0
Transaction
Price
Major
Opportunity
Ordersize Upcharges MCP / Bid Invoice
Discount
Discounts
Price
and Waived
Upcharges
Credits
Discount / Misc.
Rebates
Terms Charges /
Allowances
Next Week
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