CHAPTER ONE Strategic Pricing

The Harvest of Your Profit Potential

Why Pricing is Often Ineffective

The difference between price setting and Strategic Pricing is the difference between reacting to market conditions and proactively managing them.

Considerations in setting prices

Other Internal and External Considerations

Customer Perceptions of Value

Product Costs

Price Ceiling
No demand above this price

Marketing strategy, objectives and product mix Nature of the market and demand Competitors strategies and prices

Price floor
No profits below this price

STRATEGIC PRICING

Strategic Pricing Requires:

A change in attitude A change in when, how and who Management responsibility Setting pricing policies and procedures New relationship between marketing and finance
(anticipating price levels before beginning product development)

STRATEGIC PRICING

Balance not conflicts in price setting; Incentives and constraints for marketing and sales people

STRATEGIC PRICING

The Cost-Plus Delusion Historically, most common procedure Pricing every product/service yield fair Return Over Cost
Fundamental problems with cost driven Pricing: Determining a unit cost before price Unit costs change with volume Significant portion of costs are fixed

STRATEGIC PRICING
The Cost-Plus Delusion (e.g. Wang Lab vs. Personal Computers) 1976
Growth till 1980s

Mid 1980s Personal Computers>potential competitor

Competition increased, growth slowed Price increased to reflect rising overhead allocation Result, sales decreased further Loyal customers began switching to alternative

STRATEGIC PRICING

The Cost-Plus Delusion Leads to over-pricing in weak markets Under-pricing in strong markets
Blame culture Finance blame marketing for cutting the price Marketing blame finance for excessive costs

Customer-Driven Pricing

Companies realized the fallacy of cost based; Result, pricing authority taken away from

financial managers Consistency in trend with value based pricing? The purpose of value based pricing is not to create satisfied customers. In practice : misuse of pricing Short term sales and targets

Customer-Driven Pricing cont.

Two fundamental problems with this approach:
First;

Sophisticated buyers are rarely honest about how much they are willing to pay. Professional purchasing agents in B2B Once realize that the sales agent is flexible then> Undermine the sales persons ability to establish PR

Second;

Job of sales and marketing is not simply to process order but raise customer willingness to pay the value reflects the true value of the product Customers ignorant of true value of the product

Customer-Driven Pricing cont.

Forget what customers who have never used your product are initially willing to pay.
Communicate value to other customers Do not sell new products at low price (Comp, Photocopiers) Low pricing is never a substitute for an adequate marketing and sales effort

Competition-Driven Pricing

Consider the policy of letting pricing be dictated by competition.

In this view pricing is a tool to achieve sales objectives In the mind of some managers this method is pricing strategically.

Competition-Driven Pricing cont.

Why should an organization want to achieve market share goal? More market share= more profits

Priorities are confused//\\!! When managers reduce the profitability of each sale simply to achieve market share goal Prices should be lowered only when they are no longer justified by the value

Competition-Driven Pricing cont.

Price cutting is probably the quickest way to achieve sales objectives, its a poor financial decision.
Price cut can easily be matched, provides short term competitive edge at the expense of permanently lower margins

Product differentiation, distribution, advertising do not increase sales quickly, their benefit is more sustainable

Value based-Pricing
Pricing more profitably Capturing more value; Not necessarily by making more sales
Forget, what customers who have never used your product are

initially willing to pay! Instead, understand the value of the product to satisfy customers and communicate that value to others.

Value Based versus Cost Based

Cost Based Pricing
Product Cost Price Value customers

Value Based Pricing

customers

Value

Price

Cost

Product