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Fundamentals of Strategic Pricing
1
Ed Kless@edkless
© 2015 Sage Software, Inc. All rights reserved.
“The customer never buys a product. By definition the customer buys the satisfaction of a want. He buys value.”
-Peter F. Drucker
© 2015 Sage Software, Inc. All rights reserved.
THE two (count ‘em two and only two) marketing strategies
• Be moderately appealing to a larger group of people
• Be intensely appealing to a smaller group of people
5/13/16 3
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THE three (yes, only three) pricing strategies
• Skim
• Penetration
• Neutral5/13/16 4
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Two Basic Pricing Methods
Cost-led pricingProduct à Cost à Price à Value à Customer
Value-led pricingCustomer à Value à Price à Cost à Product
© 2015 Sage Software, Inc. All rights reserved.
A 1% Improvement in:
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
- Fixed Costs + Revenue - Variable costs + Price
2.7%3.7%
7.3%
11.0%
1.5%2.5%
4.6%
7.1%
McKinsey AT Kearny
“The single most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by 10 percent, then you’ve got a terrible business.”
-Warren Buffet
© 2015 Sage Software, Inc. All rights reserved.
1%
© 2015 Sage Software, Inc. All rights reserved.
About Sage Summit 2016
http://sagesummit.comEd Kless’ Sessions
• Fundamentals of Strategic Pricing – Tuesday at 2pm
• The Invisible Handshake (with Ron Baker) –Tuesday at 4:45pm
• Communicating with Your Customers – Wednesday at 11am
• Asking Effective Questions – Wednesday at 2pm
• Again with the Trusted Advisor‽ – Thursday at 11am
• Innovating Beyond Technology – Thursday at 12:30pm
Dates and time subject to change5/13/16 9
© 2015 Sage Software, Inc. All rights reserved.
Factors affecting price sensitivity
• Perceived substitutes• Unique value• Switching costs• Difficult comparison• Price quality
• Expenditure• End benefit• Shared costs• Fairness• Inventory
5/13/16 10
© 2015 Sage Software, Inc. All rights reserved.
© 2015 Sage Software, Inc. All rights reserved.
Dan Ariely – The Economist sets price
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The Numbers
Two options Three options
Selected Price Revenue Selected Price Revenue
One year, print only 68 59 4,012 16 59 944
One year, web only - - - - 125 -
One year, print and web 32 125 4,000 84 125 10,500
Total Revenue 8,012 11,444 43%
Production costs 32 30 960 84 30 2,520
Profit 7,052 8,924 27%
© 2015 Sage Software, Inc. All rights reserved.
© 2015 Sage Software, Inc. All rights reserved.
© 2015 Sage Software, Inc. All rights reserved.© 2015 Sage Software, Inc. All rights reserved.
The majority of pricing mistakes are the result
of underpricing, not overpricing.