Lecture 1: Introduction to Pricing
Lecture 1: Introduction to Pricing Definition The price of a product or service is the number of monetary units a customer has to pay to receive one unit of that product or service.
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Example of a price war- Coles targeting Woolworths Fresh Food Price- Value Relationship
1
Pricing in Balance •
Pricing needs to find the balance between value delivery and value extraction
The Role of Price in the Strategic Triangle
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Remember: A customer will buy a product or service if its perceived value (measured in monetary units) is greater than the price. …..The customer will mostly prefer the product with the highest net value, i.e. the greatest differential between perceived value & price.
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Price as a Profit Driver
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Variable Costs: Costs that change with the quantity of output Fixed Costs: Costs that do not change with the quantity of output
Profit = (Price x Sales Volume) - Total costs Price Broken Down – based on Aggregation of 1,200 Companies
3
Comparison of Drivers •
Price is the most effective driver of profit
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In this study, an increase of 1% in price leads to a 8.7% increase in profit, given that all other drivers remain constant
Multidimensionality of Price Impact: Volume, Costs and Price
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Multidimensionality of Price Impact: Break-Even Price / Volume Trade-off
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Lecture 2: Strategy and Price Positioning The Context of Strategy
Different Levels of Strategy
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Five Major Elements of Strategy
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Statements to the following topics/questions are needed to develop a strategy Necessity for professional pricing: Clearly defined strategy Strategy in turn needs a clearly defined company mission Price Positioning
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Price positioning is the effort of a company to design its’ products so that they deliver the highest perceived value to customers and differ from competitors’ offers.
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The goal is to position each product at exactly the right spot to capture the greatest reward for the benefits”* based on customers’ perceived benefits and prices of your products and your main competitors. Given the price frame defined by the strategy, price positioning further narrows the range of prices for your price decision. Price Position Categories
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Three main price positions o Premium price position o Middle price position o Low price position
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Increasing Importance of targeted price positioning due to o Hybrid customers: ▪ Consumers nowadays often switch between price positioning categories dependent on the product category o Shrinking middle price position segment: Many companies have introduced different brands to target different segments o More price and value transparency through technology How to Find the Appropriate Price Position?
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Creating value maps
Steps in Getting Your Price Position Right • • •
Rough classification of your market- e.g. Car brand Price positioning of your choice- e.g. Porsche- premium price position Differentiate further, based on performance attributes- e.g. Porsche with speed and comfort Benefits Offered By Suppliers
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The benefits that suppliers provide to their customers fall into three categories: functional, process, and relationship. Functional benefits relate to the physical nature or performance of the product. Process benefits are those that make transactions between buyers and sellers easier, quicker, more efficient, or even more pleasant. Relationship benefits are those that accrue to the customer from entering into a mutually beneficial relationship with the seller. They include both softer relationship benefits like a customer’s emotional connection to a brand or personalized service, as well as more tangible relationship benefits like differentiated loyalty rewards or 8
exchanges of information that provides benefits to both customer and supplier. In many markets, these relationship benefits are becoming increasingly powerful drivers of actual buying behaviour. Results of Conjoint Study – Relative Performance
Low Price Position • •
Definition: Products/services create low value and are offered with low prices in comparison to average market numbers Management: Cost advantages in comparison to competitors are needed to survive in the long term
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Medium Price Position • •
Definition: Products/services create middle value and are offered with middle prices in comparison to average market numbers Management: Clear brand image (e.g. proof of origin, quality insurance)
Premium Price Position • •
Products/services create high value and are offered with high prices in comparison to average market numbers Management: Focus on small and exclusive target group; beneficial for companies from “high-cost” countries; emotional benefits
10
Luxury Price Position • •
In some markets exists an additional price position above the premium price position Marketing Mix instruments similar to premium price position
Summary •
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Strategy and company aims o Basis for professional pricing is a pricing strategy which fits into the company strategy and which defines the frame for pricing decisions o Defining a company strategy needs a clear definition of company aims o Companies often follow more aims at the same time Price positioning o Price positioning (after strategy definition) further narrows the decision space for the final price decision o The goal is to position each product at the value equivalent line Price positioning and management o Design of all marketing mix instruments strongly depends on strategy and price positioning
11
•
Example of a price war- Coles targeting Woolworths Fresh Food Price- Value Relationship
1
Pricing in Balance •
Pricing needs to find the balance between value delivery and value extraction
The Role of Price in the Strategic Triangle
•
Remember: A customer will buy a product or service if its perceived value (measured in monetary units) is greater than the price. …..The customer will mostly prefer the product with the highest net value, i.e. the greatest differential between perceived value & price.
2
Price as a Profit Driver
• •
Variable Costs: Costs that change with the quantity of output Fixed Costs: Costs that do not change with the quantity of output
Profit = (Price x Sales Volume) - Total costs Price Broken Down – based on Aggregation of 1,200 Companies
3
Comparison of Drivers •
Price is the most effective driver of profit
•
In this study, an increase of 1% in price leads to a 8.7% increase in profit, given that all other drivers remain constant
Multidimensionality of Price Impact: Volume, Costs and Price
4
Multidimensionality of Price Impact: Break-Even Price / Volume Trade-off
5
Lecture 2: Strategy and Price Positioning The Context of Strategy
Different Levels of Strategy
6
Five Major Elements of Strategy
• • •
Statements to the following topics/questions are needed to develop a strategy Necessity for professional pricing: Clearly defined strategy Strategy in turn needs a clearly defined company mission Price Positioning
•
Price positioning is the effort of a company to design its’ products so that they deliver the highest perceived value to customers and differ from competitors’ offers.
•
The goal is to position each product at exactly the right spot to capture the greatest reward for the benefits”* based on customers’ perceived benefits and prices of your products and your main competitors. Given the price frame defined by the strategy, price positioning further narrows the range of prices for your price decision. Price Position Categories
•
Three main price positions o Premium price position o Middle price position o Low price position
7
•
Increasing Importance of targeted price positioning due to o Hybrid customers: ▪ Consumers nowadays often switch between price positioning categories dependent on the product category o Shrinking middle price position segment: Many companies have introduced different brands to target different segments o More price and value transparency through technology How to Find the Appropriate Price Position?
•
Creating value maps
Steps in Getting Your Price Position Right • • •
Rough classification of your market- e.g. Car brand Price positioning of your choice- e.g. Porsche- premium price position Differentiate further, based on performance attributes- e.g. Porsche with speed and comfort Benefits Offered By Suppliers
• • • •
The benefits that suppliers provide to their customers fall into three categories: functional, process, and relationship. Functional benefits relate to the physical nature or performance of the product. Process benefits are those that make transactions between buyers and sellers easier, quicker, more efficient, or even more pleasant. Relationship benefits are those that accrue to the customer from entering into a mutually beneficial relationship with the seller. They include both softer relationship benefits like a customer’s emotional connection to a brand or personalized service, as well as more tangible relationship benefits like differentiated loyalty rewards or 8
exchanges of information that provides benefits to both customer and supplier. In many markets, these relationship benefits are becoming increasingly powerful drivers of actual buying behaviour. Results of Conjoint Study – Relative Performance
Low Price Position • •
Definition: Products/services create low value and are offered with low prices in comparison to average market numbers Management: Cost advantages in comparison to competitors are needed to survive in the long term
9
Medium Price Position • •
Definition: Products/services create middle value and are offered with middle prices in comparison to average market numbers Management: Clear brand image (e.g. proof of origin, quality insurance)
Premium Price Position • •
Products/services create high value and are offered with high prices in comparison to average market numbers Management: Focus on small and exclusive target group; beneficial for companies from “high-cost” countries; emotional benefits
10
Luxury Price Position • •
In some markets exists an additional price position above the premium price position Marketing Mix instruments similar to premium price position
Summary •
•
•
Strategy and company aims o Basis for professional pricing is a pricing strategy which fits into the company strategy and which defines the frame for pricing decisions o Defining a company strategy needs a clear definition of company aims o Companies often follow more aims at the same time Price positioning o Price positioning (after strategy definition) further narrows the decision space for the final price decision o The goal is to position each product at the value equivalent line Price positioning and management o Design of all marketing mix instruments strongly depends on strategy and price positioning
11
