PRODUCT PRICING

PRICING IT RIGHT

AGENDA
Product Pricing Why? Pricing & Product Value Pricing & Place (Margins, MDF, Incentives, Landing Price)

Pricing & Positioning (Price Leadership, Premium Pricing)

Pricing & Piracy Pricing & Volume Purchase

Pricing Mirrors Business Model

WHY PRODUCT & PRICING?

PRODUCT & PRICING GO HAND IN HAND

PRICING BASICS

Anyone Can Compete On Price (Myth?)

If your value to customer is

merely a low price, you either keep an eye for a new job (or) ensure all other parameters are tuned to deliver price leadership.

WHY PRODUCT PRICING?

WHY PRODUCT?
Ready to Satisfy (or) to Create a Need Core Product Actual Product Augmented

WHY PRICING?
How much? in exchange of Need satisfying

Product

Product
Either has a Utility (or) kindles a Desire Finished to Buy (or) to Resell Solutions Packaged

Monetize by Pricing to match Product layers

Transparency to enable Decisions Amplify Engagement Velocity Minimize Post Purchase Dissonance

Can be Tangible (or) Intangible

Sticky Products = Customer Retention

Elongate with Retainer-ship pricing

This is how your Organization makes profits

NEW PRODUCT PRICING

Two types of products

Imitative products

Innovative products

Requires different approaches

PRICING & PRODUCT VALUE

VALUE BASED PRICING

PRICING & PRODUCT VALUE

Moderate Value: Low Pricing

Big Value: Premium Pricing

PRODUCT VALUE MAP

TCO Fair-Value Line Prod 4 Prod 7 Prod 5 Prod 1 Prod 9

High

Prod 10
Prod 6 Prod 2 Prod 3 Low Prod 11 Low Performance Index High Prod 8

Cost Plus

approach meeting Market Driven Pricing

Essential for

Profits; Breakeven understanding

PRICING EXERCISE 1: PLOT THESE COMPANIES IN THE GRAPH

TCO Fair-Value Line Prod 4 Prod 1 Prod 7 Prod 5 Prod 9

High

Intl Airlines: Emirates, British Airways, Lufthansa

Airlines: Jet Airways, Indigo, GoAir, SpiceJet,

JetLite
Prod 10
Prod 6 Prod 2 Prod 3 Low Prod 11 Low Performance Index High Prod 8

PRICING & PLACE ALIGNMENT

SCALABLE CHANNEL PRICING

PRICING & PLACE

Surround supply Chain

Traditional supply Chain

-20% -5% -2%

+2% +20%

+5%

Functional Role + Risk Levels + Assets Used

SUPPLY CHAIN : WHY CHANNEL PRICING?

Value added Reseller (VAR) impact in 3 ratings viz., Quality, Delivery (Stock keeping/Logistics/credit days),

Service =

Pv

Pq [1+(+Q + D + S)]

Where Pv = VAR Price

Pq = Quoted Price Q = Quality Rating D = Delivery Rating

S = Service Rating

+Q +D +S = Vendor Rating

CHANNEL FUNCTION & PRICING DECISIONS

Pepsi Bottling Plant Vending Machines Resellers / Online Distributors Call Center / Web Service Providers

SC PRICING METHODS: CUP, RPM

Comparable Uncontrolled Pricing

Method

Resale Price Method

Resale Price(RSP): Price at which Product Owner can sell (to end Customer) GPM: Gross Profit Margin needed for the Reseller, to cover

OECD Prescribed

CUP RPM

Functions performed (eg., Sales/Payment period/Market Dev) Risks Undertaken (eg., Inventory Held) Assets Used

Cost Plus
Transactional Net Margin Method (TNMM) Transactional Profit Split Method (TPSM)
Organization for Economic Cooperation & Development

TP: Transfer Price for the Reseller

MULTI CHANNEL PRICING

http://hbsp.harvard.edu/multimedia/flashtools/channelmargins/

Sequence the Channel based on,

Customer Buying Behavior Your Business Priorities / Preferences Competition Methods

Channel Sequence may be 1,2,3.n (or) 1, 2, 2, 2, 3n, n Per the Channel Sequence, the Value Add differs

Functions performed (e.g., Sales/Payment period/Market Dev) Risks Undertaken (e.g., Inventory Held) Assets Used Feeder to next Channel Levels

Maintain the Price Levels ~ Channel Sequence (unless market dynamics change)

http://www.scribd.com/doc/28578846/Pepsi-Distribution-Channel

PRICING & SUPPLY CHAIN (PEPSI INDIA CHANNEL)

Direct Store Distribution (DSD)

PRICING & POSITIONING

PREMIUM PRODUCTS WITH PREMIUM PRICING

PRICING & PRODUCT POSITIONING

Waste of money Cool!

US$ 27,000

Knowing what your target customer perceives as valuable is essential to setting a price

PRICING & POSITIONING

Segmenting Targeting Positioning (STP Price Leader (Low Price Strategy to address Price Conscious

Buyers)
Premium Provider (High Price & Quality strategy to attract cream)
Me-Too Pricing (across all segments spreads thin)

Process) &
Pricing

PRICING TO COUNTER PIRACY

PIRACY STAGES & PRICING STRATEGIES

PRICING & PIRACY

PIRACY STAGES & PRICING IMPACT MODEL

Stage 1: Want to use/know before buying Stage 2: Cost of Pirating ~ Price of Product

PRICING TO COUNTER PIRACY

PRODUCT EDITION PRICING
Editioning involves

PRODUCT SAMPLE PRICING

PRICING STRATEGIES
Penetration Pricing Loss-Leader Pricing Price Skimming (Generate

creating the complete product and degrading it?

Is this OK? Yes, if it improves

Customers will buy at Price (P) if their utility is non-negative Customer has 2 choice: Pirate (or) Use Legal Samples Free/Low cost Samples to get them taste the utility (Freemium Model) Customer save on Moral Cost of Pirating (internal cost of committing an illegal activity Chellappa & Shivendu 2003a) Sampling cost < Cost of difficulty of pirating (tech & legal factors)

consumer satisfaction
Helps Consumer to not to

fall victim to Counterfeit

Premium before Counterfeit hits release next product version at high price reduce the prices for earlier version)

PRICING & VOLUME PURCHASES

EARN MORE BY SELLING MORE FOR LESS

PRICING & VOLUME PURCHASE

Why Volume Pricing?
Price Advantage for Customers buying in

volume
Passing Economies of Scale benefits to

Customers for increase in volume

Large Customers to get better prices (expected

to buy large quantities) compared to small Customers

Increase Demand for higher quantity Upselling Opportunities Customers to increase the size of their orders Gets incremental profits for Sellers

ENABLE VOLUME PRICING

Volume Pricing Types
Multi-Step Quantity Discounts Two Part Tariff Discount Pricing Time & Loyalty Based Pricing Multi-Product Pricing Multi-Person Pricing Price Guarantees

TWO-TARIFF VOLUME PRICING CASE STUDY

German National Railroad
Standard price per mile using the train is

24
BahnCard is sold for a flat fee of $220

User gets a 50% discount in all trains for 1 yr Breakeven point (total savings = $220 card fee) is 1833 miles

Once spent the $220 for the card are sunk

cost and there is a strong incentive to maximize its use as this means saving more money
3.1million cards are sold per year, revenues

are over1.3billion USD

http://www.buildingkeystones.com//

VOLUME PRICING MODELS

All Units Discounting Incremental Pricing Model

While enticing the customer to buy 10 instead of nine, it actually results in you making less money

Advantages There are no step-down points. where you are selling more, but less revenue
All-Units Volume Discount - Per Unit Price Incremental Volume Pricing - Price Per Unit

Disadvantages The pricing logic is more difficult for customers to understand The per-unit price displayed to customers will not be a marketingfriendly price.

All-Units Volume Pricing - Total Price by Volume

Incremental Volume Pricing - Total Price

PRICING TO MIRROR BUSINESS MODEL

PRICELIST REFLECTS BUSINESS

PRICING TO MIRROR BUSINESS MODEL

PRICING IS ALMOST NEVER ABOUT THE NUMBER. ITS ABOUT THE MODEL

WHERE DOES PRICING FIT?

Part of the Business Model
How do we make money? How much money we can make? Revenue / Profit / Forecast (Pricing is the base Unit)

Pricing Supports Core Value Prop

Our Product saves you $$$ and we want 15% of that savings (our Price!)

Who are our Customers & how to reach them?

Direct Selling? Incentives / Price discounting levels / Pricing term flexibilities Indirect Selling? Margins / Rebates / Special Pricing Requests How quickly we can close a deal? How can we make our Partners to sell quicker?

SERVICES APPROACH TO PRODUCT

Forcing Service approach to Product Market? Square peg in a round hole.

PRICING EXERCISE 2: 15 MINUTES

Take a sample product

Tell your Product Story

What is the Customer Value? How did you validate Customer Value?
Who is your competition? What relative value your product has more than competition? Specify & Justify your Product Price (quantitative) Explain your Organizations business model & pricing alignment (Discounting / Promotions / Budling)

SUMMARY
Product Value Map helps setting the right price Channel Pricing to scale your Product Adoption Multi-Channel Pricing enables channel layers to feed Opportunities to other layers Pricing aligns and confirms Product Positioning Right Product Strategies & Pricing effectively counters Piracy Volume Pricing and discounting retains Customers and boosts revenue

Pricing complements Business Model

Your results: Business Growth

THANK YOU
SHIV.M@MICROSOFT.COM

All information contained in this presentation are based on the personal research & experience of the presenter. The deck is prepared for presenting at IPMA, Bangalore for its members, solely for knowledge purposes only.