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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
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Pricing Strategies
SKIM
SEQUENTIAL SKIM
PENETRATION
NEUTRAL
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Pricing Strategy
SKIM PENETRATION NEUTRAL
COSTS
CUSTOMERS
COMPETITION
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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
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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 _______
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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?
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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
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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?
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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 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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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 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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Price Sensitivity Discussion Questions
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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Price Sensitivity Discussion Questions
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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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 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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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