the price is right! is it? martin boehm, ie business school

The Price is Right! Is it?Slovenian Marketing Conference 2014

The Price is Right! Is it? by Martin Boehm 2

Why is pricing so important? Pricing pressure is all around us


Why is pricing so important? In Europe companies focus on two growth drivers…

9%

29%

52%

59%

75%

Reducednumber of

competitors

Priceincrease

Innovation

Costreductions

Increase insales volume

Key drivers to increase profits in the next three years (% of respondents)

Does this prioritization

make any sense?

Source: IE Business School (2011) European Pricing Study


2,3%

3,3%

7,8%

11,1%

Fixed Cost

Units

Variable Cost

Price

1% improvement in…

Why is pricing so important? Price is the single most important profit lever…

…creates Operating Profit Improvement of


Why is pricing so important? The relationship between pricing focus and profit

3,71

3,83

3,83

3,88

4,07

4,08

4,27

4,58

StrategicPriorties

Strategic priorities and EBITDA

>35%

Source: IE Business School (2011) European Pricing Study

28%Balanced priorities

55%Cost

management

17%Price management

30-35%

25-30%

20-25%

15-20%

10-15%

5-10%

<5%

Cost management focus

Price management focus

The Price is Right! Is it? by Martin Boehm 8Estudio Mundial de Pricing 2012

1:

3: 4:

2:

15 SMC 201514 € 500.00013 € 125.00012 € 64.00011 € 32.00010 € 16.000

9 € 8.0008 € 4.0007 € 2.0006 € 1.0005 € 5004 € 3003 € 2002 € 1001 € 50

50:50

5: 6:- 8 -

The Price is Right! Is it? by Martin Boehm 9Estudio Mundial de Pricing 2012

With a contribution margin of 20%, by what percentage would the sales volume have to increase to make a 10% price decrease still profitable?

1:

3: 4:

2:

15 SMC 201514 € 500.00013 € 125.00012 € 64.00011 € 32.00010 € 16.000

9 € 8.0008 € 4.0007 € 2.0006 € 1.0005 € 5004 € 3003 € 2002 € 1001 € 50

50:50

5: 6:- 9 -

0%

30-60%

0-30%

60-90%

90-120% >120%


Why is pricing so important? How to compensate for a 10% price decrease?

Contribution Margin

Variable Cost

20 €

80 €

100 €Price

Profit Contribution

100 x 20€ =2,000€

-10 €

10 €

80 €

90 €

100 x 10€ =1,000€

200 x 10€ =2,000€


Why is pricing so important? 9 out of 10 underestimate impact of price reduction

89%

5%

5%

0%

1%

Highunderestimation

Lowunderestimation

Right estimation

Lowoverestimation

Highoverestimation

Do you know the needed sales volume increase?

Estimated impact of price reduction

Estimated right!

83%Yes

17%No


2,5

2,9

3,0

3,4

3,5

3,8

4,3

0 1 2 3 4 5

Advertising

After-Sales Service

Distribution

New Competitors

Product Quality

Prodct Differentiation

Price

Why is pricing so important? Pricing causes headache for marketing managers

Question: What are your biggest worries? Sample: 187


Cost-based pricing?Cost-based pricing is the dominant method in industry

69%

37%30%

Cost-Based Competitor-Based Customer-Based


Cost-based pricing? What is the cost of garbage?


Cost-based pricing? Would you pay 80€ for an ashtray?

Weber One-Touch Silver 57cm Weber One-Touch Gold 57cm

179,90 € 259,90 €


Cost-based pricing? Cost is a matter of fact. Price a matter of policy*

Internal Cost Perceived Value

Source: Pratt, R, Australian Entrepreneur


The Demand Curve What are you willing to pay for these tickets?

I would like to sell:

Two tickets

Game:Real Madrid vs.FC Barcelona

Venue: Santiago Bernabeu


The Demand Curve Demand is dependent on price

Price

QuantityQ2

P2

P3

P4

Q3Q4 Q1

P1


The Demand CurveValue is relative!


The Demand Curve Price discrimination: extracting different prices

“If I have 2000 customers on a given route and 400 different prices, I am obviously short 1600 prices.”

Robert L. CandallFormer CEO of American Airlines


150150

The Demand CurveWhy price discriminate?

Price

Quantity

15€

30€

50 200

10€

No price discrimination: 15€ * 150 units = 2250€

With price discrimination: 30€ * 50 units = 1500€

15€ * 100 units = 1500€

10€ * 50 units = 500€

TOTAL: …………………………………………........= 3500€


0,64 € 0,69 €0,80 €

0,90 €

1,20 €

1,60 €

2,00 €

Supermarket Grocery Store Bakery VendingMachine

Gas Station Newsstand -Street

Newsstand -Airport

Price Discrimination Is price discrimination already being practiced?

Note: Prices for a 0.33l Coca Cola can


The Demand CurveWhat are the limits of price discrimination?

0.50€

1.00€

1.50€

Source: K@W (2007) The Price is Right, but Maybe It’s Not, and How Do You Know?


SummaryWhat did we learn so far?

Pricing is the most important profit driver. Don’t neglect it when trying to grow the business.

Pricing – a managers nightmare!

Cost-based pricing is overrated. Focus on value and the consumer’s willingness-to-pay to set prices.

Value is relative! The perceived value drives the willingness-to-pay of consumers. Thus manage a consumer’s perceptions!

Price discrimination can drive profits. However, there are limits to the pricing game.

Thank you very much for your attention!

Martin [email protected]