The Pricing Strategy Pyramid
Price
Level
Price setting
Pricing
Policy
Negotiation Tactics &
Pricing Setting Procedures
Value Communication
Communication, Value Selling Tools
Price Structure
Metrics, Fences, Controls
Value Creation
Economic Value, Offering Design, Segmentation
© 2003 Strategic Pricing Group, Inc.
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Price Setting Process
Preliminary Segment
Pricing
Optimization
Implementation
Set baseline prices based
on type of value
assessment and initial
differential value capture
rate
Refine preliminary prices
with iterative process
balancing tradeoffs between
price, cost, and market
response
Set final prices and ensure
acceptance among
customers and organization
through effective change
management approach
Key Questions:
Key Questions:
What tradeoffs should I make
between long-term strategic
objectives and short-term market
responses to price changes?
What tradeoffs should I make
between long-term strategic
objectives and short-term market
responses to price changes?
What types of analytical
techniques are best suited to my
product and market conditions?
What types of analytical
techniques are best suited to my
product and market conditions?
How can I estimate customer
response to potential price
changes?
How can I estimate customer
response to potential price
changes?
Key Questions:
How much of the differential
value should be captured for
each segment?
How much time and effort should
I invest in assessing the value of
my products?
How should I adjust segment
prices to account for different
price sensitivities?
© 2003 Strategic Pricing Group, Inc.
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Economic Value Estimation® Framework
Your Unique
Value
Delivery
Price of Next
Best
Competitive
Alternative
© 2003 Strategic Pricing Group, Inc.
Negative
Differentiation
Value
Positive
Differentiation
Value
Value Capture
Total
Economic
Value
Competitive
Reference Value
3
Sample Differential Value Capture Rates
Market
Differential Value Capture Rate
Enterprise Software
20 - 50%
Heavy Manufacturing
10 - 30%
Process Manufacturing
10 - 20%
Computers
20 - 40%
High Technology
5 - 50%
Professional Services
10 - 40%
Distribution
5 - 20%
Pharmaceuticals
30 - 50%
© 2003 Strategic Pricing Group, Inc.
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Preliminary Price Worksheet
Economic Value
Baseline Value Split
Starting Price
Price Sensitivity Factors
$ XXX
YY%
$ZZ
+
Expenditure Effect
--
Fairness affect
-
Preliminary Price
© 2003 Strategic Pricing Group, Inc.
Second, determine the baseline
value capture rate based on
similar products in the market to
set a starting point for price.
+/=/-
Product performance risk
Total adjustments
First, start with the value
calculated from either the EVE or
the WTP assessment.
Third, adjust the starting price up
or down depending on the
relevant price sensitivity factors.
Finally, set the preliminary price
by determining determine the
percentage of the economic
value you will attempt to capture.
(- 10% )
$ NNN
This preliminary price will be the
starting point for considering
strategic factors and conducting
breakeven analysis.
5
The Goal of Strategic Pricing: Align Price with Value
high
A
Price Paid
Missed
Opportunities
B
medium
Unharvested
Value
low
low
medium
high
Value Received
© 2003 Strategic Pricing Group, Inc.
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Pricing Strategies
•
•
•
•
© 2003 Strategic Pricing Group, Inc.
SKIM
SEQUENTIAL SKIM
PENETRATION
NEUTRAL
7
Pricing Strategy
SKIM
PENETRATION
NEUTRAL
COSTS
CUSTOMERS
COMPETITION
© 2003 Strategic Pricing Group, Inc.
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Pricing Strategy
SKIM
COSTS
CUSTOMERS
COMPETITION
© 2003 Strategic Pricing Group, Inc.
PENETRATION
NEUTRAL
Low CMs
Low Volumes
Changes in Unit
Price Drive Profit
Large BE Sales
Changes
At or near capacity
High CMs
High volumes
Changes in volume
drive profitability
Small BE Sales
Changes
Excess capacity
Costs similar to
competitors
Sufficient CM to
finance adv, etc.
Little excess capacity
Incremental capacity
is expensive
Low Price Sensitivity
-Reference Price
Effect
-Price Quality Effect
-Difficult Comparison
Effect
High price sensitivity
-Total Expend Effect
-Large Part of EndBenefit
Little differentiation
Customers are more
sensitive to other
elements of the
marketing mix
Limited threat of
opportunism
Limited opportunity
for scale economies
Sustainable
differentiation
Low threat brands
Sustainable cost &
resource advantage
Competitors not
willing to retaliate
Financial strength
Aggressive small
share brands
Avoid threat of
retaliation
Large share brands
with a lot to lose
Sustainable mktg mix
advantages
Oligopolies
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Categorize These Pricing Strategies
•
How would you categorize the pricing strategies for the following
products and retailers? (S=skim, N=neutral, P=penetration)
Pepperidge Farm Cookies
Almost Home Cookies
Suave Shampoo
ARCO Gasoline
Land O' Lakes Butter
T.J. Maxx (Clothing)
L'Oreal Hair Coloring
Bloomingdales
Sears
© 2003 Strategic Pricing Group, Inc.
_______
_______
_______
_______
_______
_______
_______
_______
_______
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Illustrating Setting Price
Ajax Manufacturing has developed a new type of seat belt that is easier to
install and more comfortable to wear than the seat belts now in use.
Standard seat belts sell to automobile manufacturers for $5.00 each. The
labor cost to install the belts is $3.00 each. The new belts take 10% less time
to install with a resulting labor cost of $2.70 per belt. Marketing research
performed by Ajax has determined that car buyers would be willing to pay
$50.00 more for a car equipped with the new belts. Since car manufacturers
normally earn a 50% mark-up, this equals an added profit of $25.00 per car.
The cost to Ajax of the new belt is $10.00 per car and the current strategy
calls for a price of $15.00 each. A typical car requires five seat belts.
(a)
What is the economic value of the new seat belt to
automobile manufacturers?
(b)
What type of pricing strategy does Ajax appear to be following?
What other options are available?
© 2003 Strategic Pricing Group, Inc.
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Analytical Approaches to Profitability Analysis
High
Number of
Transactions
Automated Price
Automated Price
Optimization
Optimization
System
System
Spreadsheet
Spreadsheet- based
basedBreak
Break- even
Analysis
even Analysis
Volume of
Transactions
Simulation
Simulation
Modeling
Modeling/ /Risk
Risk
Analysis
Analysis
Low
High
Low
Frequency of
Price Changes
© 2003 Strategic Pricing Group, Inc.
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Analyzing Profitability Using the
Breakeven Sales Change Approach
Contribution Margin
% Change in Price
5%
10%
20%
30%
40%
50%
60%
70%
80%
90%
35%
-88%
-78%
-64%
-54%
-47%
-41%
-37%
-33%
-30%
-28%
25%
-83%
-71%
-56%
-45%
-38%
-33%
-29%
-26%
-24%
-22%
15%
-75%
-60%
-43%
-33%
-27%
-23%
-20%
-18%
-16%
-14%
5%
-50%
-33%
-20%
-14%
-11%
-9%
-8%
-7%
-6%
-5%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
-5%
NA
100%
33%
20%
14%
11%
9%
8%
7%
6%
-15%
NA
NA
300%
100%
60%
43%
33%
27%
23%
20%
-25%
NA
NA
NA
NA
167%
100%
71%
56%
45%
38%
-35%
NA
NA
NA
NA
700%
233%
140%
100%
78%
64%
© 2003 Strategic Pricing Group, Inc.
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Risk Analytic Approach to Profitability Analysis
Overlay Chart
Comparative Risk Profiles
Frequency Comparison
.036
Premium
Branding
Premium
Branding
Strategy
Strategy
.027
.018
.009
Discount
Pricing
Discount Pricing
Strategy
Strategy
.000
19,000,000.00
© 2003 Strategic Pricing Group, Inc.
21,500,000.00
24,000,000.00
26,500,000.00
29,000,000.00
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Determinants of Price Sensitivity
1.
2.
3.
4.
5.
6.
7.
8.
9.
The Reference Price Effect
The Difficult Comparison Effect
The Switching Cost Effect
The Price-Quality Effect
The Expenditure Effect
The End-Benefit Effect
The Fairness Effect
The Framing Effect
The Shared-Cost Effect
© 2003 Strategic Pricing Group, Inc.
15
Price Sensitivity Illustration
You are considering purchasing a personal
computer. What factors would affect your price
sensitivity in making that decision? How would
those same factors affect the price sensitivity of
some personal computer buyers differently?
© 2003 Strategic Pricing Group, Inc.
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Price Sensitivity Illustration
For each of the following purchase decisions, what factors are likely
to affect the consumer's price sensitivity?
A diamond engagement ring
Food for meals at home
A company car
Text books
Souvenirs
© 2003 Strategic Pricing Group, Inc.
Automobile repairs
Which university to attend
Draperies for your new home
Health insurance plan
Vacation resort
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Price Sensitivity Discussion Questions
What can a company do to decrease its customer's
price sensitivity? Would all of the company's
customers be likely to react in the same way?
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Price Sensitivity Discussion Questions
Would a company ever want to do anything to
increase its customers' price sensitivity? Why?
What steps might it take?
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Price Sensitivity Discussion Questions
Which of the following statements are always true, sometimes true,
never true? Why?
(a)
Price elasticity is generally the same for all brands in a
product category.
(b)
Advertising increases price sensitivity.
(c)
As a product category matures, the consumers become
more price sensitive.
(d)
Each consumer has different price sensitivities for different
products.
© 2003 Strategic Pricing Group, Inc.
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Price Sensitivity Discussion Questions
The gasoline service stations in Rochester, New York
convinced the City Council to ban signs displaying gasoline
prices. Why would they want to do this? What effect do you
think this law had on gasoline prices? Why?
© 2003 Strategic Pricing Group, Inc.
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Price Sensitivity Discussion Questions
Despite the fact that rental rates for commercial space and
labor costs are generally higher in big cities than in small
towns, the prices of many products--such as stereo
equipment and clothing--are higher in small towns than in
large cities. Can you explain this?
© 2003 Strategic Pricing Group, Inc.
22
Price Sensitivity Discussion Questions
Many local rental car agencies rent late model cars at substantially lower
prices than national companies such as Hertz and Avis. Despite their higher
prices, the national companies still retain most of the market. Explain why
most renters patronize the national car rental companies despite their higher
prices. How have the national companies encouraged this price
insensitivity?
(a)
If you were a small, local company, what factors would you
look for to identify the price-sensitive segment of renters likely to
be attracted to your lower price?
(b)
If you were a small company trying to become national, how
might you overcome the low price sensitivity of customers to
induce them to try your cars and evaluate the quality of your service?
© 2003 Strategic Pricing Group, Inc.
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The Elements of the Price Setting Process
Price Sensitivity Factors
Value Estimation
1. The Fairness Effect
2. The Perceived Risk Effect
3. The Switching Cost Effect
4. The Difficult Comparison Effect
5. The Price-Quality Effect
6. The Expenditure Effect
7. The End-Benefit Effect
8. The Shared-Cost Effect
9. The Reference Effect
10. The Framing Effect
Negative
Differentiation
Positive
Differentiation
Competitive
Reference
Total
Economic
Value
Price
Levels
Breakeven Sales Analysis
Risk Analysis
Contribution
Dollars ($)
1mm
Overlay Chart
Comparative Risk Profiles
Frequency Comparison
.036
Premium
Branding
Premium
Branding
Strategy
Strategy
.027
.018
.009
0
Discount
Pricing
Discount
Pricing
Strategy
Strategy
.000
19,000,000.00
21,500,000.00
24,000,000.00
26,500,000.00
29,000,000.00
Unit Sales Gain
© 2003 Strategic Pricing Group, Inc.
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