Pricing for Profit:
A Scientific Approach
Mike Pritchard & Dan DeVries
Pricing Is Simple – Isn’t It?
JCP vs. S&P 500
“Pricing is actually a pretty simple and straightforward thing. Customers will not pay literally a
penny more than the true value of the product. “
Ron Johnson, Ex-CEO, J.C. Penney
AP Interview, Jan 30, 2012
Left JCP in April 2013
$1B in losses
Interim CEO left
Board Member/Investor Ackerman Left
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Pricing Drives Profitability
Increase
Price
by 1%
Increase
Profit
by 8.7%
Profit
Profit $12.50
$11.50
Variable Cost,
$68.00
Price, $101.00
Price, $100.00
Fixed Cost
$20.50
S&P Global 1200 average income
statements 2010, trailing 5 years
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… and Loss
Volume
increase to
break even
17.50%
Decrease
Price 5%
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Traps to Avoid
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Trap - Racing to the Bottom
Market share unchanged - Profits down
Typical order $15
Typical order $10
Any Size, Any Topping $10
Any Size, Any Topping $10
Any Size, Any Topping $10
Week 1
Week 2
Any Size, Any Topping $10
Week 3
Week 4
Week 5
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Trap – Basing Price on Cost
Manufacturer is giving away profits
Pricing Framework:
Cost based: 3x the cost
Customer Survey:
Better than competitors
with lower price
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Trap – Features That Aren’t Valued
What’s in your product that customers don’t value
Blue Ocean Strategies – Kim and
Mauborgne
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Value Based Pricing
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Value Based Pricing Framework
Acme Smart Motor
Lowers
Maintenance
Value = $150
Reduces Power
Costs
Value = $150
Skimming
Strategy
$600
$450
Value
Based
Pricing
Zone
$300
Competitors Base
Price $300
(Dumb Motor)
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Market
Penetration
Strategy
10
Buyers Can Understand Value
But you need to communicate it
$54,760
Maintenance
Energy
Purchase
$18,400
$55,196
$89,884
$103,490
Incandescent
$146,800
LED
From Dec. 9th 2011
Portland Business Journal Wal-Mart
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… For Services As Well
Value based pricing still applies
Price Per Hour
Price Per Repair
“Safe” (for seller)
“Risky” (for seller)
Profits fixed by hourly rate
Can yield higher profits
Profits driven by time taken
Profits driven by value delivered
How could you take advantage of a different
pricing scheme?
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Value Doesn’t Have to be Physical
$0.07 / Pill
$0.02 / Pill
Don’t underestimate the power of a brand
How does your brand influence your pricing?
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Get in Touch with the Market
Chris Shinouskis
“Engineering
Specialist for
Storage” - GM
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Get in Touch with the Market
• Factor in “big-picture”
issues
• Deliver features
customers want
How do you determine what your customers want ?
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Ask People about Price
• Bargain?
• Getting expensive, but would still
consider?
• Too expensive to consider?
• Too cheap?
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Van Westendorp Analysis
100%
Not a Bargain
90%
80%
70%
Cumulative percentages
Too Expensive
60%
50%
40%
30%
20%
Not Expensive
10%
Too Cheap
0%
$1
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$6
$11
$16
$21
$26
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$31
$36
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Van Westendorp Analysis
100%
Not a Bargain
90%
80%
Range of acceptable prices
70%
Cumulative percentages
Too Expensive
60%
50%
40%
30%
20%
Not Expensive
10%
Too Cheap
0%
$1
© 5 Circles Research
$6
$11
$16
$21
$26
© 2013, all rights reserved,5 Circles Research and Wild Horse Strategies
$31
$36
19
Demand and Revenue Modeling
At a price between [bargain] and [getting expensive] how
likely are you to buy … within the next six months?
Would you say you are:
o
o
o
o
o
Very likely
Somewhat likely
Neither likely nor unlikely
Somewhat unlikely
Very unlikely
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Demand and Revenue Modeling
Higher volume isn’t necessarily higher revenue
12%
1.0
0.9
0.8
Revenue indexed against maximum
Percentage likely to purchase
10%
0.7
8%
Model generates
believable results
within range of
acceptable prices
6%
4%
0.6
0.5
0.4
0.3
2%
0.2
Revenue
0.1
0%
0.0
$-
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
$4.00
$4.50
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Communicate the Value
Investors
Customer
Service
Sales
Training
Integrated
Communications
Social
Media
Images from www.emcoutdoor.com
Ads
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Web
Media
PR
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•
Pricing Approaches:
–
–
–
–
–
–
•
Differentiation Aided by Price
–
–
–
–
–
–
•
Customer segment pricing (students, Sr. Citizens)
Product form pricing – Single application vs. 6 month supply, subscriptions
Image pricing – same perfume – different bottle
Channel pricing – Coke in restaurant, store, vending
Location pricing – better seats in a theatre
Time pricing – early bird specials, airlines
Other Factors:
–
–
–
–
–
–
–
•
Survival
Maximize Cash Flow
Value Based Pricing
Market Penetration
Market Skimming
Product Quality Leadership
Approval Threshold
Competition
Category Expectations
Psychology
Reference Pricing (online comparison)
Open Source
Freemuim
Sales Channels:
–
–
Commissions and Discounts
Waterfall / Pocket Pricing
by Uwe Kils, Wiska Bodo via Wikimedia Commons
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Getting Started
Research
•
•
•
Industry demand
Product value
Prices customers will pay
+
Strategy
•
•
•
Product positioning
Branding
Communications
Staging Process
1. Evaluate current situation
2. Work on individual components
3. Develop a comprehensive pricing strategy
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The Pricing Gurus
Dan DeVries is a seasoned executive with a strong
background in marketing, business development,
engineering and new product development. He has a
successful track record at leading organizations such as
Microsoft, AT&T Wireless and Honeywell, and currently
focuses on helping small businesses and start-ups bring
new products to market and achieve profitability and
growth. Dan holds a MS/BS in Electrical Engineering
and an MBA in Marketing. He has taught marketing at
the University of Washington and Keller Graduate
School.
dan@wildhorsestrategies.com, (425) 891-5163
Mike Pritchard’s senior marketing and engineering
positions at Intel, ICL and Sperry Gyroscope include
running a leading industrial computing business. Mike
has consulted for leaders such as Microsoft, Amazon,
Sharp, IBM, Netgear and Hewlett-Packard, as well as
startups. Mike’s worldwide pricing research experience
includes online services, industrial and consumer
products. He holds a BSc in Electronics and an MBA.
Mike’s teaching experience includes Northwest
Entrepreneurs Network and the University of
Washington.
mikep@5circles.com, (425) 968-3883
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