A brief introduction to Pricing Strategies

1. Pricing Strategy: A focus on profit, not sales

2. Supply & Demand Price supply demand Quantity

3. “Making it up on quantity” Required increase in sales volume (%) 100 80 60 40 20% price 20 decrease 20 40 60 80 20% price 20 Variable unit cost increase as % of price 40 60 80 Acceptable decrease in Sales Volume (%) 100

4. Pricing over Product Life Cycle Introduction Growth Maturity Decline

5. Differences in pricing strategies In a “dumb industry” Operators fight with price Customers become more price sensitive In a “smart industry” Operators fight with… More complex pricing More varied pricing plans Greater subtlety of pricing options Greater use of techniques from other fields

6. PRICINGSTRATEGY How companies make pricing decisions… “Pricing strategy always has been more of a poker game than a science.” William T. Moran, Admar Research “Successful pricing is an art, not a science.” John I. Leahy, Black & Decker “Pricing decisions are not easy to make; they are often inherently ‘soft’.” William E. Johnson, William E. Johnson Assoc.

7. Pricing Strategy Pricing Objectives Pricing Concerns: 4 C’s Pricing Models Price Bundling Price Segmentation Price Plan

8. 1. Objectives in Setting Price Increase profits Attract new customers Maintain current customers Increase profit per customer Introduce new product Generate cash Improve ROI

9. Attract New Customers Introductory coupons / discounts provide incentive maintain reference price Trial offers increase familiarity reduce risk Problem perceived as unfair

10. Maintain Current Customers Meet competition matching prices add to bundle (as long as customers want it!) Create barriers to exit contracts / subscriptions automatic billing phone numbers (no longer in the U.S.) family plans Provide loyalty programs frequent flyer Starbuck cards

11. Increase Profit per Customer Increase prices reduce product? (candy bar pricing) justify/ notify / base on costs Adjust product mix sales incentives for more profitable business Adjust customer mix teenagers vs. seniors Charge for extras what’s valuable to customer and cheap to company Get money up front Prepaid subscriptions

12. Introduce New Product Skimming: Adjusts prices down over time: PROS: skims off maximum profit for each segment establishes high reference price CONS: attracts competition difficult to administer Penetration: Starts at lowest possible price PROS: penetrates market quickly keeps out competition CONS: creates low reference price misses full profit potential

13. 2. Concerns in setting price: 4C’s Competition Customer Cost Custom

14. 3. Pricing Models Cost-based Pricing Value-based Pricing Flat-Rate Pricing Ala-Carte Pricing Two-Part Pricing Peak Load / Congestion Pricing Dynamic Pricing

15. Cost-based vs. Value-based Cost-based most common pricing method easiest pricing method considered fair difficult to allocate fixed costs sub-optimal profits Value-based optimal profits requires research complicated to administer can be considered unfair

16. Flat-Rate Pricing Single rate per time period: PROS: provides unlimited use increases use simple to explain & bill popular with customers / low risk CONS: difficult to predict average price unfair in that some people subsidize others fair in that charges are predictable

17. Ala-Carte Pricing Variable rate depending on use: PROS: considered fair greater choice greater control CONS: more difficult to explain more difficult to bill more risk

18. Two-part Pricing I Combines flat rate plus variable: e.g., monthly fee plus cost per minute (declining?) PROS spreads costs more fairly CONS perceived as hassle unpredictable

19. Two-Part Pricing II Combines down-payment & flat rate per month: PROS: covers fixed costs immediately spreads customer’s costs fits customer’s monthly budget generates financing revenues predictable / low risk CONS: increases total cost to customer requires long-term billing

20. Peak Load / Congestion Pricing Variable rate depending on time of day or week: PROS: spreads use encourages use in unpopular time considered fair easy to explain CONS: difficult to bill

21. Dynamic Pricing Variable rate for each customer: PROS: maximizes profit per customer CONS: difficult to implement requires detailed demand schedule difficult to explain considered unfair

22. 4. Price Bundling / Unbundling With own products / services bikini top with bottom seats in car training with purchase McDonalds’ Happy Meals season tickets

23. With other products / services discount cost of buns with hot dog purchase “free” parking lot with grocery store “free” Microsoft software with computer include airline tickets with tour

24. Benefits of Bundling/Unbundling Bundling provide unique assortment sell unpopular with popular provide added incentive to purchase or to stay hide / disguise price Unbundling competitive defense better serve customer increase revenues Mixed

25. 5. Price Segmentation Big opportunity: Computer allows finer discrimination Customers want choice but not confusion

27. sex

28. income

29. education

31. financial reports

32. information, etc.

33. Service level

34. speed

35. quality

36. 7/24/365

37. options / content

38. Urgency of need

39. immediate

40. soon

42. special extras for longevity

43. loyalty programs

44. Length of contract

45. 1, 2, 3 year sliding scale

46. Attitudes

47. high tech (image)

48. utility

49. Finances

50. flush

52. Summary of Strategy Objectives of price vary; profit is #1 Pricing concerns are the 4C’s cost / competition / customer / custom Pricing models can be mixed and matched Bundling can be with both self & others Segmentation should be fine tuned Plan should be based on each market segment

53. Thank You!