Pricing Strategies bruTutorial

Tutorial 1

1. Discuss the impact/implications of the five key elements of strategic pricing.

Value creation

Total savings or satisfaction that the customer receives

Economic value: Offer true differentiation value to customers, over and above what

your competitors offer.

Offering design: “Value packages” for customers — combination of products and

services that refine value creation to match closely what each customer receives.

Segmentation: Segment and compare based on value drivers and economic value

estimation to find most profitable opportunities given your capabilities

Implications

Create a good value that you can sell profitably, not great products and services

that maximise creative potential.

Value creation requires deep understanding of customer needs and how it creates

value from them and which customer segments are high value segments

When price is factored into the decision, many customers are willing to give up in

exchange for lower prices.

Price structure

Tactics for pricing across segments

Metrics: The basis for tracking the value customers receive and how they pay for it

Fences: Policies, rules, programs and structures that customers must follow to

qualify for price discounts or rewards.

Controls

Implications

Make pricing align with value delivered and costs to serve, not products sold.

More complicated price structure is to reflect di&erences in the potential

contribution that can be captured from di&erent customer segments by capturing

the best possible price from each segment, making the sale at the lowest positive

cost or both.

Price and value communication

Strategies to influence willingness to pay

Communication

Criteria for discounting

Implications

Justify prices in terms of customer economics

Understanding the value your products create for customers and translating that

understanding into a value-based price structure can still result in poor sales

unless customers recognise the value they are obtaining

Pricing policy

Setting prices based on economic value, pricing strategy, and pricing structure.

Negotiation tactics

Criteria for discounting

Implications

Manage pricing proactively to influence expectations, not in relation to them.

Success of a pricing strategy depends upon customers being willing to pay the

price you exchange

Rationale for value based pricing is that a customer’s relative willingness to pay for

one product versus another should track closely with di&erences in the relative

value of those products

Price level

Setting the right price level for sustainable profit

Implication

Set price levels to maximise long-term profitability, not margin or market share.

2. “Price cu ng is a useful marketing tool for gaining sales.” Explain this statement.

Lecture 1 Page 3 Slide 10

Certainly, this approach to pricing has been the key to success for warehouse

supermarkets and Asian textile manufacturers.

Price cu2ng through trial o&ers and couponing is a very successful way to induce

people to try a new product

Yet many airlines have become less profitable as they used price cu2ng to expand

Coke and Pepsi have converted markets of loyal customers into price conscious

brand switchers due to frequent price promotions to grab market share

Price cu2ng as a marketing tool is a double-edged sword. If competitors can

match your prices quickly and there is li4le ability to stimulate market demand,

price cu2ng may simply cut profitability.

3. Identify the problem with cost-driven pricing.

Sep 2013 Question 4 (b)

September 2013 Question 4 (b)

September 2012 Question 2 (a)

Impossible to determine a product’s unit cost before determining its price as unit

costs change with volume

A price increase to “cover” higher fixed costs reduces sales further and causes unit

cost to rise even higher (price increases actually reduce profits)

Cost-plus pricing leads to overpricing in weak markets and underpricing in strong

markets

4. Identify the problems with customer-driven pricing.

Lecture 1 Page 5 Slide 20

September 2013 Question 1 (c)

Sophisticated buyers are rarely honest about how much they are actually willing

to pay for a product. Professional purchasing agents conceal the true value of a

product to their organisations.

Customers’ willingness to pay. The job of marketers is not simply to process orders

at whatever price customers are currently willing to pay but rather to raise

customers’ willingness to pay a price that be4er reflects the product’ true value.

In conclusion, understand the value of the product to satisfied customers and

communicate that value to others.

5. Explain the two most important problems when prices re+ect the amount buyers

seem willing to pay.

Ignorance of the value of the product

May depress profits

6. Explain the goals of companies pricing objectives.

Lecture 1 Page 7 Slide 26

Survival: Companies may set survival as their main objective if they are troubled

by too much capacity, heavy competition, or changing consumer wants. To set a

plant going, a company may set a low price, hoping to increase demand.

Current profit maximisation: Companies may use current profit maximisation as

their objective. They estimate what demand and costs will be at di&erent prices

and choose the price that will produce the maximum current profit, cash %ow, or

return of investment.

Market-share leadership: Companies might use market-share leadership as their

objective. They believe that the company with the largest market share will enjoy

the lowest costs and highest long-run profit. Prices are usually set as low as

possible.

Product-quality leadership: This normally calls for charging a high price to cover

higher performance quality and the high cost of Research and Development.

Tutorial 2

1. Evaluate the possible ways a marketer can achieve pricing advantage.

Lecture 2 Page 1 & 2 Slides 4 & 5

Value refers to the total savings or satisfaction that the customer receives from the

product

Value creation focuses on three key strategic areas:

Economic value: This is the source of pricing advantage. If you o&er true

di&erentiation value to your customers, over and above what your competitors

o&er, you have the latitude and %exibility to craC creative pricing strategies that

build upon and leverage your ability to set prices that truly reflect the value you

create.

offering design: This refers to the “value packages” you design for customers —

combinations of product and services, that refine value creation to match more

closely what each customer receives. Some customers prefer to receive an

augmented value package with lots of service and support, while others prefer to

receive the basic value package for a lower price.

Segmentation: This refers to value-based segmentation — based on di&erences in

economic value among buyers in the marketplace. A key way to distinguish among

di&erent segments based on economic value is to identify di&erences in value

drivers.

2. Discuss the principles of value-based market segmentation with appropriate

examples.

Lecture 2 Page 5 Slides 19 & 20

Di&erences

Most segmentation criteria correlate poorly with di&erent buyer’s motivations to

pay higher or lower prices

Needs-based segmentations give priority only to those di&erences that are

important to the customer

Value-based segmentations also uncover why customers find certain product

benefits appealing

Steps for value-based segmentation

1. Determine basic segmentation criteria

2. Identify discriminating value drivers

3. Determine your operational constraints & advantages

4. Create primary & secondary segments

5. Create detailed segment descriptions

6. Develop segment metrics & fences

3. Discuss the various possible pricing strategies with appropriate examples.

Pricing at a premium

Businesses set costs higher than their competitors

Most e&ective in the early days of a product’s life cycle, and ideal for small

businesses that sell unique goods.

Because customers need to perceive products as being worth the higher price tag,

a business must work hard to create a value perception.

Pricing for market penetration

Aim to attract buyers by o&ering lower prices on goods and services

Many new companies use this technique to draw attention away from their

competition, penetration pricing does tend to result in an initial loss of income for

the business.

Over time, however, the increase in awareness can drive profits and help small

businesses to stand out from the crowd.

In the long run, aCer suIciently penetrating a market, companies oCen wind up

最終 raising their prices to be4er reflect the state of their position within the

market.

多用於新推出成熟的 mature phrase 產品，例：新飲料

Economy pricing

Aims to attract the most price-conscious of consumers

Businesses minimise the costs associated with marketing and production in order

to keep product prices down

As a result, customers can purchase the products they need without frills 虛飾.

The technique can be dangerous for small businesses. Because small businesses

lack the sales volume of larger companies, they may struggle to generate a

suIcient profit when prices are too low.

Price skimming

Help businesses maximise sales on new products and services