© 2003 Strategic Pricing Group, Inc. 1 The Pricing Strategy Pyramid Price Level Price setting Pricing Policy Negotiation Tactics & Pricing Setting Procedures

1© 2003 Strategic Pricing Group, Inc.

The Pricing Strategy Pyramid

PriceLevel

Price setting

Pricing Policy

Negotiation Tactics &Pricing Setting Procedures

Value CreationEconomic Value, Offering Design, Segmentation

Value CommunicationCommunication, Value Selling Tools

Price StructureMetrics, Fences, Controls


Price Setting ProcessPrice 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 of my 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 analytical techniques 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 analytical techniques are best suited to my product and market conditions?

How can I estimate customer response to potential price changes?


Economic Value Estimation® FrameworkEconomic Value Estimation® Framework

PositiveDifferentiation

Value

PositiveDifferentiation

Value

Your UniqueValue

Delivery

Competitive Reference

Value


Value

Price of Next Best

CompetitiveAlternative

Negative Differentiation

Value


Value

Total Economic

Value

Value Capture


Sample Differential Value Capture RatesSample 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%


Preliminary Price WorksheetPreliminary Price Worksheet

First, start with the value calculated from either the EVE or the WTP assessment.

Second, determine the baseline value capture rate based on similar products in the market to set a starting point for price.

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.

This preliminary price will be the starting point for considering strategic factors and conducting breakeven analysis.

YY%Baseline Value Split

Starting Price

Price Sensitivity Factors

Product performance risk

Preliminary Price $ NNN

$ Z Z

+

+ / = / -

Expenditure Effect --

Fairness affect -

Total adjustments (- 10% )

$ XXXEconomic Value


The Goal of Strategic Pricing: Align Price with Value P

rice

Pai

dP

rice

Pai

d

Missed Opportunities

Price - V

alue

UnharvestedValue

highhigh

lowlow

lowlow mediummedium highhigh

mediummedium

Value ReceivedValue Received

B

A


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 to competitors

Sufficient CM to finance adv, etc.

Little excess capacityIncremental capacity is expensive

Customers are more sensitive to other elements of the marketing mix

Avoid threat of retaliation

Large share brands with a lot to lose

Sustainable mktg mix advantages

Oligopolies

High CMsHigh volumesChanges in volume drive profitability

Small BE Sales Changes

Excess capacity

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

Little differentiation

Sustainable cost & resource advantage

Competitors not willing to retaliate

Financial strengthAggressive small share brands

Low CMsLow VolumesChanges in Unit Price Drive Profit

Large BE Sales Changes

At or near capacity

Low Price Sensitivity-Reference Price Effect

-Price Quality Effect-Difficult Comparison Effect

Limited threat of opportunism

Limited opportunity for scale economies

Sustainable differentiation

Low threat brands


Categorize These Pricing StrategiesCategorize 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 PriceIllustrating 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?


Analytical Approaches to Profitability AnalysisAnalytical Approaches to Profitability Analysis

Automated Price Optimization

System


System

Spreadsheet -based Break -even Analysis


Simulation Modeling / Risk

Analysis


Analysis

Frequency of Price Changes

Num

ber

ofT

rans

actio

ns

Low

Low

High

High


System


System




Analysis


Analysis

Frequency of Price Changes

Num

ber

ofT

rans

actio

ns

Low

Low

High

High

Volume ofTransactions


Analyzing Profitability Using theBreakeven Sales Change ApproachAnalyzing 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

ha

ng

e i

n P

ric

e

Contribution Margin


Risk Analytic Approach to Profitability AnalysisRisk 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 Strategy

Discount Pricing Strategy

Overlay Chart



Comparative Risk Profiles


Determinants of Price SensitivityDeterminants of Price Sensitivity

1. The Reference Price Effect2. The Difficult Comparison Effect3. The Switching Cost Effect4. The Price-Quality Effect5. The Expenditure Effect6. The End-Benefit Effect7. The Fairness Effect8. The Framing Effect9. The Shared-Cost Effect


Price Sensitivity IllustrationPrice 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?


Price Sensitivity IllustrationPrice 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 plan

Souvenirs Vacation resort


Price Sensitivity Discussion QuestionsPrice 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?



Would a company ever want to do anything to increase its customers' price sensitivity? Why? What steps might it take?



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.



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?



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?



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?


Breakeven Sales Analysis

Unit Sales Gain

Co

ntr

ibu

tio

nD

olla

rs (

$)

0

1mm

Price Sensitivity Factors1. 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

The Elements of the Price Setting ProcessThe Elements of the Price Setting Process

PositiveDifferentiati

on

PositiveDifferentiati

on





Total Economic

Value

Value Estimation

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



Overlay Chart



Comparative Risk Profiles

Risk Analysis

PriceLevels

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© 2003 Strategic Pricing Group, Inc. 1 The Pricing Strategy Pyramid Price Level Price setting Pricing Policy Negotiation Tactics & Pricing Setting Procedures