Pricing Strategy:

A focus on profit, not sales

Supply & Demand

Price supply

demand

Quantity

“Making it up on quantity”Required increase in sales volume (%) 100 80 60 40

20% price 20decrease 20 40 60 80 20% price 20 Variable unit

costincrease as % of

price 40

60

80 Acceptable decrease in Sales Volume (%) 100

Pricing over Product Life Cycle

Introduction Growth Maturity Decline

Differences in pricing strategies

In a “dumb industry”Operators fight with priceCustomers 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

PRICING STRATEGYPRICING STRATEGY

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.

Pricing Strategy

1. Pricing Objectives

2. Pricing Concerns: 4 C’s

3. Pricing Models

4. Price Bundling

5. Price Segmentation

6. Price Plan

1. Objectives in Setting Price Increase profits

Attract new customersMaintain current customersIncrease profit per customerIntroduce new product

Generate cash Improve ROI

Attract New Customers Introductory coupons / discounts

provide incentivemaintain reference price

Trial offersincrease familiarityreduce risk

Problemperceived as unfair

Maintain Current Customers Meet competition

matching prices add to bundle (as long as customers want it!)

Create barriers to exit contracts / subscriptionsautomatic billingphone numbers (no longer in the U.S.) family plans

Provide loyalty programs frequent flyerStarbuck cards

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

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

2. Concerns in setting price: 4C’s

Competition Customer

Cost Custom

3. Pricing Models

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

Cost-based vs. Value-based Cost-based

most common pricing method

easiest pricing method

considered fairdifficult to allocate

fixed costssub-optimal profits

Value-based optimal profits requires researchcomplicated to

administercan be considered unfair

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

Ala-Carte Pricing

Variable rate depending on use: PROS:

○ considered fairgreater choicegreater control

CONS:○ more difficult to explain○ more difficult to bill○ more risk

Two-part Pricing I

Combines flat rate plus variable: e.g., monthly fee plus cost per minute (declining?)PROS

○ spreads costs more fairlyCONS

○ perceived as hassle○ unpredictable

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

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

Dynamic Pricing

Variable rate for each customer:PROS:

○ maximizes profit per customerCONS:

○ difficult to implement○ requires detailed demand schedule ○ difficult to explain○ considered unfair

4. Price Bundling / Unbundling

With own products / servicesbikini top with bottomseats in cartraining with purchaseMcDonalds’ Happy Mealsseason tickets

With other products / servicesdiscount cost of buns with hot dog purchase“free” parking lot with grocery store“free” Microsoft software with computerinclude airline tickets with tour

Benefits of Bundling/Unbundling

Bundlingprovide unique assortmentsell unpopular with popularprovide added incentive to purchase or to stayhide / disguise price

Unbundling competitive defensebetter serve customerincrease revenues

Mixed

5. Price Segmentation

Big opportunity:Computer allows finer discriminationCustomers want choice but not confusion

SegmentsConsumer type- age- sex- income- education- geography, etc.

Use of product- sports information- financial reports- information, etc.

• Service level– speed– quality– 7/24/365– options / content

• Urgency of need– immediate– soon– overnight

Segments Volume of use:

emergency only limited usage quantity discount unlimited usage

Time of use: off-peak normal working hours unrestricted

• Length of contract– 1, 2, 3 year sliding scale

• Longevity of customer– special extras for

longevity – loyalty programs

• Attitudes– high tech (image)– utility

• Finances– flush– tight

6. Pricing Plan Determine target market(s). What do those consumers want? What can you give them that

competitors cannot? (or haven’t thought of yet)

What are their financial impediments? How can you structure your pricing to

solve their problems? How profitable will that be?

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

Thank You!