Auto F-05 814 Pricing Strategy

8/11/2019 Auto F-05 814 Pricing Strategy

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2003 Strategic Pricing Group, Inc. 1

The Pricing Strategy Pyramid

Price

LevelPrice setting

PricingPolicy

Negotiation Tactics &Pricing Setting Procedures

Value CreationEconomic Value, Offering Design, Segmentation

Value CommunicationCommunication, Value Selling Tools

Price StructureMetrics, Fences, Controls


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Price Setting Process

Preliminary Segment

Pricing

Set baseline prices based

on type of value

assessment and initial

differential value capture

rate

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 ofmy products?

How should I adjust segment

prices to account for different

price sensitivities?

Optimization

Refine preliminary prices

with iterative process

balancing tradeoffs between

price, cost, and market

response

Key Questions:

What tradeoffs should I make

between long-term strategic

objectives and short-term market

responses to price changes?

What types of analyticaltechniques are best suited to my

product and market conditions?

How can I estimate customer

response to potential price

changes?

Implementation

Set final prices and ensure

acceptance among

customers and organization

through effective change

management approach

Key Questions:

What tradeoffs should I make

between long-term strategic

objectives and short-term market

responses to price changes?

What types of analyticaltechniques are best suited to my

product and market conditions?

How can I estimate customer

response to potential price

changes?


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Economic Value EstimationFramework

PositiveDifferentiation

Value

Your Unique

Value

Delivery

CompetitiveReference Value

Price of Next

Best

Competitive

Alternative

NegativeDifferentiation

Value

TotalEconomic

Value

Value Capture


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Sample Differential Value Capture Rates

Market Differential Value Captur e 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%


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The Goal of Strategic Pricing: Align Price with Value

Price

Paid

MissedOpportunities

UnharvestedValue

high

low

low medium high

medium

Value Received

B

A


7/24 2003 Strategic Pricing Group, Inc. 7

Pricing Strategies

SKIM

SEQUENTIAL SKIM

PENETRATION

NEUTRAL



Pricing Strategy

SKIM PENETRATION NEUTRAL

COSTS

CUSTOMERS

COMPETITION



Pricing Strategy

SKIM PENETRATION NEUTRAL

COSTS

CUSTOMERS

COMPETITION

Costs similar tocompetitors

Sufficient CM tofinance adv, etc.

Little excess capacityIncremental capacityis expensive

Customers are moresensitive to otherelements of themarketing mix

Avoid threat ofretaliation

Large share brandswith a lot to lose

Sustainable mktg mixadvantages

Oligopolies

High CMsHigh volumesChanges in volumedrive profitability

Small BE SalesChanges

Excess capacity

High price sensitivity-Total Expend Effect-Large Part of End-Benefit

Little differentiation

Sustainable cost &resource advantage

Competitors notwilling to retaliate

Financial strengthAggressive smallshare brands

Low CMsLow VolumesChanges in UnitPrice Drive Profit

Large BE SalesChanges

At or near capacity

Low Price Sensitivity-Reference PriceEffect

-Price Quality Effect-Difficult ComparisonEffect

Limited threat ofopportunism

Limited opportunityfor scale economies

Sustainabledifferentiation

Low threat brands



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 _______



Illustrating Setting Price

Ajax Manufacturing has developed a new type of seat belt that is easier toinstall and more comfortable to wear than the seat belts now in use.Standard seat belts sell to automobile manufacturers for $5.00 each. Thelabor cost to install the belts is $3.00 each. The new belts take 10% less timeto install with a resulting labor cost of $2.70 per belt. Marketing researchperformed 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 manufacturersnormally 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 toautomobile manufacturers?

(b) What type of pricing strategy does Ajax appear to be following?

What other options are available?



Analytical Approaches to Profitability Analysis

Automated Price

Optimization

System

Automated Price

Optimization

System

Spreadsheet -

based Break -

even Analysis

Spreadsheet -

based Break -even Analysis

Simulation

Modeling / Risk

Analysis

Simulation

Modeling / Risk

Analysis

Frequency of

Price Changes

Num

berof

Tran

sactions

Low

Low

High

High

Automated Price

Optimization

System

Automated Price

Optimization

System

Spreadsheet -

based Break -

even Analysis

Spreadsheet -

based Break -even Analysis

Simulation

Modeling / Risk

Analysis

Simulation

Modeling / Risk

Analysis

Frequency of

Price Changes

Num

berof

Tran

sactions

Low

Low

High

High

Volume of

Transactions


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Analyzing Profitability Using theBreakeven Sales Change Approach

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%

%C

hangeinP

rice

Contribution Margin


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Risk Analytic Approach to Profitability Analysis

Frequency Comparison

.000

.009

.018

.027

.036

19,000,000.00 21,500,000.00 24,000,000.00 26,500,000.00 29,000,000.00

Premium Branding St rategy

Discount Pricing Strategy

Ov erlay Chart

Premium BrandingStrategy

Discount Pricing

Strategy

Comparativ e Risk Profiles


15/24


Determinants of Price Sensitivity

1. The Reference Price Effect2. The Difficult Comparison Effect

3. The Switching Cost Effect

4. The Price-Quality Effect

5. The Expenditure Effect6. The End-Benefit Effect

7. The Fairness Effect

8. The Framing Effect

9. The Shared-Cost Effect


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Price Sensitivity Illustration

You are considering purchasing a personal

computer. What factors would affect your pricesensitivity in making that decision? How wouldthose same factors affect the price sensitivity ofsome personal computer buyers differently?


17/24


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 Automobile repairs

Food for meals at home Which university to attend

A company car Draperies for your new home

Text books Health insurance planSouvenirs 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'scustomers be likely to react in the same way?


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Would a company ever want to do anything to

increase its customers' price sensitivity? Why?What steps might it take?


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Which of the following statements are always true, sometimes true,

never true? Why?

(a) Price elasticity is generally the same for all brands in aproduct category.

(b) Advertising increases price sensitivity.

(c) As a product category matures, the consumers becomemore price sensitive.

(d) Each consumer has different price sensitivities for differentproducts.


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The gasoline service stations in Rochester, New York

convinced the City Council to ban signs displaying gasolineprices. Why would they want to do this? What effect do youthink this law had on gasoline prices? Why?


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Despite the fact that rental rates for commercial space and

labor costs are generally higher in big cities than in smalltowns, the prices of many products--such as stereoequipment and clothing--are higher in small towns than inlarge cities. Can you explain this?


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Many local rental car agencies rent late model cars at substantially lower

prices than national companies such as Hertz and Avis. Despite their higherprices, the national companies still retain most of the market. Explain whymost renters patronize the national car rental companies despite their higherprices. How have the national companies encouraged this priceinsensitivity?

(a) If you were a small, local company, what factors would youlook 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, howmight you overcome the low price sensitivity of customers to

induce them to try your cars and evaluate the quality of your service?


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2003 Strategic Pricing Group Inc 24

Breakeven Sales Analysis

Unit Sales Gain

Contribu

tion

Dollars($)

0

1mm

Price Sensitivity Factors1. The Fairness Effect

2. The Perceived Risk Effect3. 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

The Elements of the Price Setting Process

PositiveDifferentiation

CompetitiveReference

NegativeDifferentiation

TotalEconomic

Value

Value Estimation

Frequency Comparison

.000

.009

.018

.027

.036

1 9, 00 0, 00 0. 00 2 1, 50 0, 00 0. 00 2 4, 00 0, 00 0. 00 2 6, 50 0, 00 0. 00 2 9, 00 0, 00 0. 00

Premium Branding Strategy

Discount Pricing Strategy

Overlay Chart

Premium Branding

Strategy

Discount Pricing

Strategy

Comparative Risk Profiles

Risk Analysis

PriceLevels

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