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PricingMaking Profitable Decisions
Tutorial
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REVIEW
What Have Been
Introducedon the Course?
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Introduction
Price defined
Profit impact of price change
Pricing strategy in brief
Factors influencing the pricing decision
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Factors Affecting Pricing
Internal company factors
External environment factors
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Pricing Strategy DefinitionValue creation
Price structure
Price and value communication
Pricing policy
Price level
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CustomerV
alue ManagementPrinciples
Perceived value for the customers
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General Approac
hes to Pricing
Cost based approach
Buyer approach
Competition based approach
Product mix pricing
Price adjustment strategy
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Customers Perception of PriceReference prices
Price quantity inference
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SOMETHINGTO BE
FOCUSED
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DeterminingRelevant Costs
Incremental costs
are the costs associated with change in
pricing and sales.
= Variable costs + Some fixed costs (that
directly results from implementing a price
change or from offering a version of theproduct at a different price level)
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Determining Relevant Costs
(cont.)Avoidable costs
are those that either have not yet been
incurred or that can be reversed, for
example, the costs of selling a product,
delivering it to customer and replacing the
sold item in inventory
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Determining Relevant Costs
(cont.)Sunk costs: those costs that a company is
irreversibly committed to bear. For example,
the past expenditure on research anddevelopment, the rent on building and
equipment within the term of current lease.
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Estimating
Relevant Costs
Beware of averaging total variable costs toestimate the costs of the single unit
Beware of accounting depreciation formulasBeware of treating a single costs as either allrelevant or all irrelevant for pricing
Beware of overlooking opportunity costs
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Financial Analysis in Pricing
Key questions
How much would the sales volume have to
increase to profit from a price reduction?
How much would the sales volume decline
before a price increase becomes
unprofitable?
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Breakeven Analysis:Th
e Basis Case
A
B
P
P
C
(Q
(P
0
% Breakeven sales change =- (P
CM + (P
(P = P PC: Average variable Costs, C= AVC
CM: Contribution Margin, CM = P C
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Breakeven Sales Incorporating
a Change in Variable Costs
% Breakeven sales change =- (CM
New CM
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Breakeven Sales with
Incremental Fixed Costs
% Breakeven sales change =- (CM
New CM
Change in fixed costs
New CM x Initial Unit Sales
+
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Breakeven Sales Analysis for
Reactive Pricing
% Breakeven sales change
for reactive price change
(P
CM=
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Customer
Use value refers to the total savings orsatisfaction that the customer receives from theproduct
A products economic value is the price of the
customers best alternative (called thereference value) plus the value of whateverdifferentiates the offering from the alternatives(called the differentiation value)
Total economic value is the maximum price thata smart shopper fully informed about themarket and asking the best value would pay
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Economic Value Analysis
Positive
Differentiation
Value
Reference
Value
Negative
Differentiation
Value
Total
Economic
Value
Differentiation value is the value to the
customer (both positive and negative) of
any difference between your offering and
the reference product
Reference value is the cost (adjusted fordifference in units) of the competing
product that the customer views as the
best alternative for this one
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Factor Affecting Price
Sensitivity1. Perceived substitutes effect
2. Unique value effect
3. Switching cost effect
4. Difficult comparison effect
5. Price quality effect
6. Expenditure effect
7. End Benefit effect
8. Shared Cost effect
9. Fairness effect
10. Inventory effect
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Perceived SubstitutesEffect
What alternatives are buyers typically aware
of when making a purchase?
To what extent are buyers aware of the pricesof those substitutes?
To what extent can buyers price expectation
to influenced by the positioning of one brand
to particular alternatives or by the alternatives
offer them?
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UniqueV
alueEffect
Does the product have any unique attributesthat differentiate it from competing products?
What attributes do customer believe areimportant when choosing a supplier?
How much do buyers value unique,differentiating attributes? How can one
increase perceived importance ofdifferentiating attributes and/or reduce theimportance of those offered by thecompetition?
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Difficult Comparison Effect
How difficult is it for to compare the offer of differentsupplier?
Can the attributes of the product be determined byobservation or must the products be purchased and
consumed to learn what it offers?What portion of the market has positive pastexpenditure with your products? With the brands ofthe competition?
Is the product highly complex requiring costlyspecialists to evaluate its differentiating attributes?
Are the price of different suppliers easily comparableor are they stated for different sizes and combinationthat make comparison difficult?
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Price qualityEffect
Is a prestige image an important
attribute of the product?
Is the product enhanced in value when
its price excludes some consumer?
Is the product of unknown quality and
are there few reliable cues forascertaining quality before purchase?
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Expenditure
Effect
How significant are buyers
expenditures for the product in absolute
dollar terms (for business buyers) and aportion of income (for end consumer)?
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End BenefitEffect
What end benefit do buyers seek from theproduct?
How price sensitive are buyer to the cost of
the end- benefit?What portion of the end-benefit does the priceof the product account for?
To what extent can the product be
repositioned in customers minds as relatedto an end-benefit for which the buyer is lesscost sensitive or which has a larger totalcosts?
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Shared Cost
Effect
Does the buyer pay the full cost of the
product?
If not, what portion of the cost does the
buyer pay?
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Fairness
Effect
How does the products current price
compare with prices people have paid in the
past for product in this category?What do buyer expect to pay for similar
product in similar purchase contexts?
Is the product seen as necessary to maintain
a previously enjoyed standard of living or is it
purchased to gain something more out of life?
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Inventory
Effect
Do buyer hold inventories of the
product?
Do they expect the current price to be
temporary?
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Switching Cost
Effect
To what extent have buyers already
made investment in dealing with one
supplier that they would need to incuragain if they switched supplier?
For how long are buyers locked in by
those expenditure?
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Understanding PricingG
amesPricing is a game because success
depends not only on a companys own
pricing decision but also on howcustomers and competitors respond to
them
Pricing is a Negative sum game
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Plan for Managing
CompetitionSegmentA Segment B Segment C Segment D
Our company
CompetitorA
Competitor B
Fringe
CompetitorsConsumers
Segments
attractiveness
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Life Cycle Pricing
Pricing the innovation for market
development
Pricing the new product for growth
Pricing the established product in
maturity
Pricing a product in market decline
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Pricing the Innovations for
Market DevelopmentShould be set to communicate the
products value to marketplace.
Marketing innovations through price-
induced sampling
Marketing innovations through direct sales
Marketing innovations through distribution
channel
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Pricing the New Product for
GrowthPricing the differentiated product
Pricing the low-cost product
Price reductions in growth
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Pricing the Established
Product in MaturityIncreasing price competitions as the market
moves from growth to maturity
The buyers are able to evaluate and comparecompeting product, reducing brand loyalty and the
value of a brands reputation
The imitation of the most successful product design,
technology and marketing strategies reduces
product differentiation, making the various brands
more directly competitive with one another
New competitors be attracted
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Pricing the Established
Product in Maturity (cont.)Some options
Unbundling related products and services
Improved estimation of price sensitivity
Improved control and utilization of costs
Expansion of the product line
Reevaluation of distribution channels
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Pricing a Product in Market
DeclineAlternative strategies in decline
Retrenchment strategy involves either partial or
complete capitulation of some market segmentsto refocus resources on others where the firmhas a stronger position
Harvesting strategy is a phased withdrawal
industry to maximise income Consolidation strategy is an attempt to gain a
stronger position in the decline industry
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Segmented PricingSegmenting by buyer identification
Segmenting by purchase location
Segmenting by time of purchaseSegmenting by purchase quantity
Segmenting by product design
Segmenting by product bundling
Segmenting by tie-ins and metering
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Segmenting by Time of
PurchasePeak-load pricing: segmentation based
on different cost of serving consumers
Yield management: simultaneously
integrates differences both in the costs
and in price sensitivity.
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Segmenting by Purchase
QuantityVolume discounts most common when sellingproducts to business consumers.
Order discounts to encourage customers toplace large orders.Step discounts (or block discounts) commonfor public utilities from which customers buywater and electricity for multiple uses and
place a different value on it for each use.Two-part pricing involve two separate chargeto consume a single product.
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Segmenting by Product
BundlingOptimal bundling: often used by
supermarkets in the form of special
promotions
Value-added bundling to attract price-
sensitive buyer without reducing prices to
those who are relatively price sensitive
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Segmenting by Tie-ins and
MeteringTie-in sales. Along with the purchase or
lease of a machine, a buyer
contractually agreed to purchase acommodity used with the machine
exclusively from the seller
Metering
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What Could be futher
Pricing in marketing-mix Pricing and the product line
Pricing substitute products
Pricing complementary products
Pricing and promotion Pricing tactics to induce trial
Trial offers
Coupon
Rebates
Defensive dealing
Trade dealingPricing and distribution Maintaining minimum resale prices
Limiting maximum resale prices
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And three more should be
studiedCustomerNegotiation
Pricing Psychology
The law and ethics in pricing
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Th
ank you for attention!
Vu Minh Duc(MS, PhD)
Deputy Dean of Marketing FacultyNational Economics University
Cell phone: 091 262 1346
Email: [email protected]
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W
ays to Ch
ange PriceChange the quantity of money or goods andservices to be paid by the buyer
Change the quantity of goods and servicesto be provided by the seller
Change the quality of goods and servicesprovided
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More Ways to Change Price
Change the premiums or discounts to beapplied for quantity reasons.
Change the time and place of transfer ofownership.
Change the place and time of payment.
Change the acceptable form of payment.
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Faster Technological Progress
HasReduced the gap between invention
and innovation
Reduced the average age of products
Intensified competition from alternative
uses of income
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Proliferation ofNew Products
Population explosion of new products
Product lines have widenedBlurred market segments
Small price differentials may producerelatively large shifts in demand
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Increased Demand for
Services
Increase in demand for services has led
to an increase in prices, which have ledto public concern and governmental
activity
There is also an increase in demand for
services built into products
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Increased Global Competition
Increased foreign trade around the
world has increased the amount of pricecompetition faced by domestic
producers
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The Changing Legal
Environment
Deregulation and privatization of
companies have resulted in morecomplex, more difficult, and more
important pricing decisions
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Economic Uncertainty
Slowed or stopped inflation rates in
other countries economies has led tothe need for new approaches to
developing pricing strategies
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Five Factors to Consider
Demand
Costs
Competitive factors
Corporate profit and market objectives
Regulatory constraints
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Demand Implications
Market versus product elasticity
Derived demand for buyers output
Likelihood of competitive entry
Demand consequences of a product
line
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CostImplications
Cost-plus pricing
Maximizing margins
Pricing with scarce resources
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Marketing and Distribution
Strategy Implications
The product life cycle
Sales force management
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How To Become a Proactive
Pricer
1. Understand how pricing works
2. Understand how customers perceive
prices and price changes
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The Three Levels of Pricing
Management1. Understanding the economic and
competitive environment
Factors that influence supply and demand
2. Developing product and market
pricing strategy
Benefits, costs, and prices
3. Administering the pricing process
Tactical pricing decisions
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Level One1. Traditional Economic1. Traditional Economic
How will current and future supply and
demand dynamics affect overall marketprice levels?
Economic/market environment
Changes in competition, supply, capacity
Shifts in demand
New product developments
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Level Two
2. Product and Market Strategy2. Product and Market Strategy
Within each market segment, what is
the correct list or target price for each
product?
Customers perceptions of price and value
Price research
Profitability analysis
Pricing strategy
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Concept Of Benefits
A product or service must promise to:
Perform identified functions,
Solve identified problems, or
Provide specified pleasure.
Thus, a product or service is bought forwhat it does, notwhat it is made of.
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Customers Perceptions AreImportant!
The relative benefits customers perceive the
product or service provides;
The relative total costs of acquiring, installing,and using the product or service over its
lifetime;
The tradeoff that customers perceive between
receiving the perceived benefits compared tothe total costs - perceived value
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Model Of Price-valueRelations
hip
Willingnessto buy
Perceivedvalue
Perceivedmonetarysacrifice
Perceivedquality
ActualPrice
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Level
Three
3. Price Structure Management3. Price Structure Management
How to determine the actual price to receivefrom each transaction?
Organizing for price administration
Transaction management: setting discounts,
allowances, rebates Establishing pricing tactics
Maintaining feedback and control
Legal and ethical issues
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Tactical Pricing Decisions
Tactical pricing decisions concern day-to-day management of the pricing function,
including: Timing of price changes
Amount of price changes
Direction of price changes
Administering price changes
Communicating price changes to sales force
customers