Pricing for Profit:
A Scientific Approach
Mike Pritchard
Pricing Gurus
(a division of 5 Circles Research)
Pricing Is Simple – Isn’t It?
“Pricing is actually a pretty simple and
straight-forward 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
© 2014, Pricing Gurus. All rights reserved
2
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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4
Traps to Avoid
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5
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
Any Size, Any Topping $10
Week 1
Week 2
Week 3
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Week 4
Week 5
6
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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Pricing Approaches
•
•
•
•
Survival – Over capacity, new models coming out.
Cost-based – Often a mistake
Maximum Current Profit – Max cash flow
Value Based Pricing
– Maximum Market Share – Market penetration strategy
– Maximum Market Skimming – HDTV – Early adopters
• Product Quality Leadership – BMW
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Value Based Pricing
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Value Based Pricing Framework
Acme Smart Motor
Skimming
Strategy
$600
Lowers
Maintenance
Value = $150
$450
Reduces Power
Costs
Value = $150
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
$18,400
$55,196
Maintenance
$89,884
Energy
Purchase
$146,800
$103,490
Incandescent
LED
From Dec. 9th 2011
Portland Business Journal Wal-Mart
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11
… 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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Sellers Overestimate Importance of Price
Technology Services
Accounting and Financial Services
Buyers
Sellers
Team Expertise/Skills
30%
55%
Good Reputation
Their Flexibility/
Responsiveness
Good Customer Service
Experience /
Past Performance
Cost/Terms
8%
54%
Existing Personal
Relationships
Management Consulting
Good Fit/Share Our Values
Top 10 Buyer Selection Criteria
Make My Life Easier
28%
Ongoing Involvement of
Senior People
53%
Hinge Research Group "How Buyers Buy Professional Services" 2013
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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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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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Trap – Price Waterfall
Source: www.public-domain-image.com/
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Price Waterfall
$6.00
$0.10
Dealer
List
Price
Order Size
Discount
$0.12
$5.78
Competitive
Discount
Invoice
Price
Pricing:
Pricing: Strategy
Strategyand
andTactics
Tactics
University
UniversityofofChicago:
Chicago: Dhar,
Dhar,Hogan,
Hogan,Nagle
Nagle––2006
2006
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Exercise: Discounts at your company
Discount name
Amount (range) Notes
• For your company, what discounts are applied
from the list price to get to the invoice price?
• How do the discounts differ between customers?
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Waterfalls don’t stop at the invoice
Source: www.public-domain-image.com/. Carley, Cutis J, U.S. Fish and Wildlife Service
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Price Waterfall: Pocket Price
Leakages
$6.00
$0.10
$0.12
$5.78
$0.30
$0.37
$0.35
$0.20
$0.09
Dealer
List
Price
Order Size
Discount
Competitive
Discount
Invoice
Price
Payment
Terms
Discount
Annual
Volume
Bonus
Pricing: Strategy and Tactics
University of Chicago: Dhar, Hogan, Nagle – 2006
© 2014, Pricing Gurus. All rights reserved
Invoice
Promo
Co-op
Ads
Freight
$4.47
Pocket
Price
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Exercise: Leakages at your company?
Leakage name
Amount (range)
Notes
• For your company, what are the leakages that apply
between the price invoiced and the price you receive (the
pocket price)?
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Research
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Get in Touch with the Market
Chris Shinouskis
“Engineering
Specialist for
Storage” - GM
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23
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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Features
• Supplying features desired by customers means:
–
–
–
–
Products & services more likely to sell
Features are valued (prices can be higher)
Development is faster
Testing the right things
• Applies to products you distribute as well as manufacture
– Different perceptions based on geography
– Different factors from legislation
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Exercise: Prioritize Features of Countertop Blender
Which features are most important?
• Reliability
• Capacity
• Power
• Cost
• Looks
• Touch controls
• Multiple speeds
• Brand
• ???
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Exercise: Rank Features
1 (top)
2
3
4
5
6
7
8
9 (last)
Capacity
Jar
Base
Controls
Speeds
Brand
Durability
Puree
Crush Ice
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What is important to customers and prospects?
Which features are most important?
• Choice of materials
• Longevity
• Environmental impact
• Pre-sales consulting
• Installation time
• Price
• Post-installation
• Experience of company
• Testimonials
• Other ___________
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YOU CAN ASK
ABOUT PRICES
Bargain?
Getting expensive but
would still consider?
Too expensive to
consider?
Too cheap?
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Exercise: Van Westendorp Pricing
• At what price would the Blender be a Bargain?
• At what price would the Blender be getting expensive, but you
would still consider buying it?
• At what price would the Blender be too expensive to consider?
• At what price would the Blender be too cheap, such that you
would question that it could do what it is supposed to, or that it
would not last long?
© 2014, Pricing Gurus. All rights reserved
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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
$6
$11
$16
$21
$26
$31
$36
© 5 Circles Research
© 2014, Pricing Gurus. All rights reserved
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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%
Not Expensive
20%
10%
Too Cheap
0%
$1
$6
$11
$16
$21
© 5 Circles Research
© 2014, Pricing Gurus. All rights reserved
$26
$31
$36
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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
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
include 70%
include 50%
ignore
ignore
ignore
© 2014, Pricing Gurus. All rights reserved
34
Demand and Revenue Modeling
Higher volume isn’t necessarily higher revenue
12%
1.0
0.9
10%
0.7
8%
0.6
Model generates
believable results
within range of
acceptable prices
6%
Revenue
0.5
0.4
4%
0.3
Revenue indexed against maximum
Percentage likely to purchase
0.8
0.2
2%
0.1
0%
0.0
$-
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
© 2014, Pricing Gurus. All rights reserved
$3.50
$4.00
$4.50
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Getting Started
Research
•
•
•
+
Industry demand
Product value
Prices customers will pay
© 2014, Pricing Gurus. All rights reserved
Strategy
•
•
•
Product positioning
Branding
Communications
37
© 2014, Pricing Gurus. All rights reserved
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Mike Pritchard
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.
mike@pricinggurus.com, www.5circles.com
mikep@5circles.com, mike@pricinggurus.com
(425) 968-3883
This presentation includes material jointly
developed with Dan DeVries, Wild Horse Strategies
© 2014, Pricing Gurus. All rights reserved
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