PRICING STRATEGIES

FAHIM.T MBA T.T SMS

WHAT Mr. ROBSON WALTON CHAIRMAN OF WAL-MART ATTRIBUTES THE SUCCESS OF HIS COMPANY TO ??

Wal-Mart's success in low-price strategy

Wal-Mart's strategy of offering "everyday low prices" sets it apart and has propelled the retail giant's astronomical growth.Wal-Mart does not offer loyalty cards, special sales, promotions or coupons "Everyday low price is why have grown from one store in a small town to thousands of stores in this country," he said. "While some retailers have picked up the concept on a limited scale, Wal-Mart remains the most dedicated practitioner of everyday low price." Wal-Mart stands out because it's a price leader, is perceived to offer the lowest price, and its stores are prevalent nationwide. Wal-Mart's success is linked to its goal to drive cost out of its business at every step along the supply chain.

Wal-Mart's success in low-price strategy

While other retailers attract customers by offering discounts on selected items, the Bentonville-based retailer's customers "always get a low price on our full selection of products day in and day out," Under the "high-low" pricing strategy practiced by competitors, customers often find sale items are sold out, available only for a few days, or can be purchased in a limited quantity, Walton said. He said that strategy creates inefficiencies, builds obstacles to bringing new products to the marketplace, distracts buyers and makes it harder to manage the supply chain. "Dad's idea was to build a relationship of trust so that the customer didn't have to wait for the advertising circular to get the best price,"

WHY ALL THIS BUZZ ABOUT PRICING STRATEGIES??

Price is the pivot of business, the ultimate leverage

One of the most powerful ways a company can its performance

improve

Delicate art of finding the balance(when prices go up, buyers go down.)

PRICING IT RIGHT
Price, without a doubt, is the single most critical driver for managing profits. Yet pricing continues to be one of the least understood profit levers.

Raising the top line and increasing profits by managing prices is a challenge. This is because of the sheer number of variables that need to be factored into the pricing decision, the lack of a single point price ownership within organizations, the inability to have timely visibility into market dynamics, and the lack of an integrated tool that supports complex disaggregated pricing processes.

MANAGING PRICES -IN THEORY AND REALITY

Price is set where demand intersects supply, in theory, but reality has proven to be a lot messier.

Almost any factor can influence the price of a good or service, ranging from a salesperson's negotiating prowess to space availability in certain shipping lanes.

For sellers, there are untold negative consequences to pricing mistakes: money left on the table, for example, when customers might have been willing to pay more; or erosion of market share when prospects reject offerings that are priced too high.

PRICING MANTRAS!!
According to Tom Jacobson, senior vice president at Manugistics,the problem is that companies can get sidelined by any number of extraneous issues when deals are being fashioned.

To get to the optimal price, a host of factors have to be considered, including the competitive situation in the particular industry, the capacity in the system, underlying costs and the estimated buyers' price sensitivity

Only when this process is automated and integrated into the supply chain can a company truly determine, on a customer-by-customer basis, who is really profitable -- and who should get the best deal, Jacobson said.

SHOULD PRICING BE HIGH OR LOW ??

Pricing too low initially can cause stock outs across the supply chain and can create margin erosion by losing customers who are less price sensitive and would have paid a higher price than offered.

On the other hand, pricing too high, especially as a product matures, can lead to lower revenue and excess inventory buildup that needs to be later discounted or written off as obsolete inventory.

However, most companies do not have sufficient information about the real demand elasticity of their products and thereby continue to struggle with identifying and isolating segments with differing price elasticity that could allow them to bring intelligence into pricing practices.

PRICING Some STRATEGIES EMPLOYED IN THE SUPPLY

Strategies CHAIN!! in the supply chain

1. CHANNEL PRICING
Involves pricing for each of multiple channels, serving various customer segments by the suppliers (deciding the amount of compensation -discounts, rebates, commissions, allowances and special deals) Suppliers have different costs to serve each channel and partner.

Roles that partners perform are changing and, therefore, the compensation that they should earn. Furthermore, distributors, retailers, and other channels have unique cost structures and value propositions of their own.Channel power, conflict, and competition further complicate the development of effective strategies.

MAGIC OF CHANNEL PRICING !!

Channel pricing can have a dramatic impact on behavior. For example: y After years of trying to convince resellers to place orders electronically, a 0.5% discount more than tripled a suppliers EDI orders in the first year y For a leading supplier of technical products, a 1% discount resulted in over 1,000 trained channel salespeople in less than four months y A 2% discount increased a suppliers average order size by 32% y A 1% discount increased distributor promotional activity by 15%

HOW EFFECTIVE ARE THE FINACIAL INCENTIVES ??

Channel partners, like most organizations or individuals, respond to financial incentives. Channel pricing motivates partners just as sales force compensation motivates the behavior of a suppliers sales force.

It establishes whether distributors, retailers, resellers, or other channels will focus on a suppliers brand or, conversely, seek alternatives.

It drives the channels behavior to take costs out of the supply chain or invest in activities that generate demand.

HOW EFFECTIVE ARE THE FINACIAL INCENTIVES ??

Suppliers must utilize channel pricing to pay for functions performed, motivate behavior, manage conflict, and take costs out of the supply chain.

Distribution channels are consolidating to take advantage of economies of scale and to leverage volume purchasing power. This consolidation enables them to extract ever-increasing concessions from their suppliers

PERILS OF CHANNEL PRICING!!

Channel pricing programs, including discounts, rebates, commissions, allowances, and special deals, are very costly.

 Rebates average 15% to 25% in certain industrial markets  Distributor discounts of 90% off list price in segments of the building material industry  Promotional funds average 12% of sales for consumer packaged goods manufacturers

Most suppliers do not realize that after making the product, their highest cost of doing business is the discount that they pay to their distributors.

2.FUNCTIONAL DISCOUNTS
Historically, distributors, retailers, or other channel partners would perform a fairly consistent bundle of functions.

Today, however, new entities in the supply chain perform subsets of these functions far more efficiently than traditional distributors. In many cases, a third-party logistics provider can manage inventory, a rep can provide sales support, a call center can provide technical support, and a credit agency can hold receivables at substantially lower costs than traditional distributors. i .e suppliers are unbundling functions to utilize the most efficient service providers.

UNBUNDLING THE DISCOUNTS !!

When suppliers unbundle functions to utilize the most efficient service providers, unbundle the compensation in the price that they offer to their channel partners. pay channel partners for the functions that they perform.

the supplier breaks its traditional discount into discrete functional components. For example, a manufacturer that formerly offered a 50% discount could offer a base discount of 25% and additional discounts of 10% for logistics, 5% for presale support, 5% for post sale support, and 5% for credit and transaction processing.

3.ACTIVITY-BASED PRICING
Similar to functional discounting except it focuses on motivation rather than compensation.

Based on how effectively the different channel partners perform each of the value-added activities such as logistics, order processing, sales, or service.

Used to motivate a wide array of value-added activities. These activities generally fall into two categories activities that generate demand activities that reduce a suppliers retained costs

MOTIVATING RETAILERS TO GENERATE DEMAND & REDUCE COSTS!!

In consumer markets, for example, suppliers use promotional allowances to motivate retailers to generate demand through advertising, display, and promotion.

In business-to-business markets, suppliers pay to motivate specification work, lead follow-up, promotional frequency, and technical support.

From a cost savings standpoint, suppliers use order quantity, EDI, prompt payment discounts, and other cost-to-serve incentives to motivate channels to lower the suppliers sales, order processing, logistics, credit, and other costs.

4.RESULTS-BASED PROGRAMS
Suppliers pay for results instead of activities

Provide rewards to channels / partners that attain the desired results(supplier is charged with achieving 15% growth)

Need to consider the impact on overall channel compensationCan unwittingly result in lower margins for distributors who then stop supporting the product line.

5.MULTI-PRICE STRATEGIES
Suppliers utilize multi-price strategies to manage channel conflict. A multi-price strategy enables a supplier to sell to one partner at multiple prices under different circumstances.

Two common approaches are

1) TARGET REBATES 2) REGISTRATION PROGRAMS

i. TARGET REBATES SYSTEMS

A supplier sells to a partner at a relatively high price. This price enables the partner to mark up and earn an adequate return when selling to higher-priced segments.

To some customers( low-priced segments), the partner sells below cost. The supplier rebates the partner back to the selling price.

Prevalent in healthcare, graphics arts, and certain industrial markets.

ii. REGISTRATION PROGRAMS

Protects channels that invest in demand generating activities over a long sales cycle (A partner that specifies a manufacturers brand for a large job would earn a larger commission on that job than partners that were not involved in the up-front selling. )

Without this type of program, channel partners would not invest in selling activities because they know that they would be undercut on price when it comes time to bid the job.

Common in high tech markets.

6.RESALE PRICE SETTING

Suppliers dictate minimum resale prices to their channel partners/resellers to eliminate destructive channel pricing conflict.

Under this approach, a high-support channel does not have to worry about being undercut by a low-cost reseller.

Minimum resale pricing is useful for high-share, premium brand suppliers that require high support from their distribution channels.

Companies that are utilizing minimum resale pricing policies include Whirlpool and other high-end appliance manufacturers.

7.Everyday Low Pricing (EDLP) and Hi-Low Pricing (HLP)

The most common retail pricing strategies are "Everyday Low Pricing" (EDLP) and "Hi-Low Pricing" (HLP). EDLP retailers charge a constant low price, avoiding temporary price discounts. Appeals to risk-averse consumers , avoids amplifying the inherent variance in demand . In turn, this simplifies forecasting, achieves better customer service, and reduces labor and promotion costs. HLP retailers set prices that straddle the EDLP price. They temporarily discount selected items below the EDLP level to clear slow moving inventory or increase store traffic. At other times, prices are set slightly above their EDLP competitors. .

It happens all the time !!

You walk into your favorite clothing store and discover that the jacket you just paid $155 for is now on sale for $79.99. Or even more painful, you go online and see that your new "state-of-the-art" laptop is not only no longer state of the art, it's $1,200 cheaper than it was when you bought it six weeks ago.

Nothing brings on buyer's remorse in consumers faster than the realization that they've paid more than they had to. So after being frustrated enough times, some consumers get savvy and change their buying behavior to accommodate the new realities of dynamic pricing

8.DYNAMIC PRICING
A business strategy in which prices are varied frequently by channel, product, customer and time With lower menu costs (that is, the cost of displaying prices to customers), companies can have multiple prices for different channels and product configurations and can change those prices more frequently Can give their customers exactly what they want, at exactly the price they are willing to bear. Amazon -Charging different customers different prices for the same DVD movies Coca-Cola - Vending machines that adjust the prices of soft drinks according to the surrounding temperature

HOW DELL PRICES ITS HIGH-END PERSONAL COMPUTERS

Unlike many of its competitors, the computer maker changes its prices frequently, sometimes up and sometimes down.

Because of its knowledge of its supply chain and the information it gleans from customer visits to its website, Dell can predict its near-term sales and adjust prices to maximize its revenues.

It can also moderate demand so as not to overburden its supply chain, and encourage buyers to purchase systems built to order based on committed supplies.

Dynamic pricing is merely a new version of the age-old practice of price discrimination Movie theaters, buses, trains, airlines, and even amusement parks and restaurants, engage in a form of price discrimination when they offer discounts for children, students, or senior citizens. Price discrimination may perhaps promote an efficient use of a societys resources. For high fixed cost/low marginal cost industries, price discrimination is not just a boon; it is a necessity Made possible by recent advances in information technology With the new technology supporting e-commerce, companies are able to obtain all sorts of information provided by Internet users and some information not explicitly provided at a minimal cost. Similarly, new technology allows e-commerce companies to change prices with only a minimal amount of time and effort.

Online-based companies are not subject to the menu costs of price changes associated with designing new advertising, creating new catalogues and retagging current merchandise. Now, with a few clicks of a mouse, all this and more can be done merely by updating a Web page. New technology also permits online companies to customize their marketing and pricing to fit particular market segments. Mail-order catalogue companies have long relied on the subtle meanings behind postal addresses to adjust prices based on the presumed affluence of consumers residing in particular postal zones The speed with which information can now be gathered, processed, and analyzed has led to a paradigm shift in marketing (customize nearly every sales offer)

ONLINE MICRO-MARKETING
Computer cookies, for instance, allow Web sites to record on to an Internet users own hard drive the information about the users past interactions with the Web site Click-stream technology allows a Web site to track the paths that users take as they view advertisements, different Web pages on the site, and even links to other sites The explosion of shopping comparison Web sites and the prevalence of shopping bots used by consumers to track competitive prices are just two examples of how technology can be used by consumers to combat the potentially exploitive practices of dynamic pricing

THREE DIFFERENT DYNAMIC PRICING STRATEGIES

Time-Based Pricing Segmentation and Rationing Dynamic Merchandising

i. TIME-BASED PRICING Exploits the different prices customers are willing to pay at different times Peak-load pricing - when supply is inflexible, which allows suppliers to systematically increase prices with predictable increases in demand Clearance Pricing - when demand is uncertain and products lose value in the eyes of the customer with timethey simply go out of fashionor with the change in season

ii. SEGMENTATION AND RATIONING

Exploit the difference in the willingness of customers to pay through different channels, at different times and with different levels of effort

Airlines may have as many as 15 different prices for the same seat, depending on whether it is a restricted or unrestricted fare, when it's booked (say, a 14-day advance purchase versus a one-week advance purchase) or other factors Most airlines ration the number of seats they offer at different prices and across different categories. Airlines analyze demand patterns and refine their pricing strategies to maximize their yields across channels.

iii. DYNAMIC MERCHANDISING

Exploits the Internet-enabled capacity to change prices rapidly and frequently to offer customers different products, promotions, delivery options and pricing as supply and inventory change. It allows Internet sellers to clear excess inventories without always having to lower their prices and potential profits. For example, Amazon.com makes personalized buying suggestions every time a return customer logs on to its site. That way it can clear inventory and gain sales based on each customer's particular interests.

OTHER COMMON PRICING STRATEGIES ??

9.VALUE PRICING
Price should reflect the value of a product as customers perceive it (thewillingness-to-pay)

Involves quantifying perceived value and increasing it whenever possiblei.e., when the customers willingness to pay for the increased value exceeds the cost of delivering it.

10.GEOGRAPHICAL PRICING
Pricing products to different customers in different geographical locations and countries And how to get paid(barter, compensation deals, buyback agreements and offset.)

11.PRICE DISCOUNTS AND ALLOWANCES

Like Cash discounts, Quantity discounts, Functional discounts ,Seasonal discounts, Allowances For early payment, volume purchases, and off-season buying

13.PROMOTIONAL PRICING
Loss-leader pricing, Special -event pricing, Cash Rebates, Lowinterest financing, Longer payment terms, Warranties and service contracts, Psychological discounting etc.

14.DISCRIMINATORY PRICING
Selling a product or service at two or more prices that dont reflect a proportional difference in costs. It takes several forms like Customer-segment pricing, Product form pricing , Image Pricing, Location pricing , Time pricing etc.

15.PRODUCT MIX PRICING

Product line Pricing ,Optional pricing, Captive Product Pricing, Two Part Pricing ,By-product Pricing ,Product Bundling Pricing

16.PRESTIGE PRICING
Setting a high price for an product, throughout its entire life cycle To evoke perceptions of quality and prestige with the product or service.

17.PRE-EMPTIVE PRICING
Setting low prices in order to discourage or deter potential new entrants to the suppliers market Especially suited to markets in which the supplier does not hold a patent, or other market privilege and entry to the market is relatively straightforward.

18.EXTINCTION PRICINGInvolves setting very low prices in the short term in order to under-cut competition, or alternatively repel potential new entrants. Set at a level lower even than the suppliers own cost of production, but once competition has been extinguished, prices are raised to profitable levels.

19.NEW PRODUCT PRICING

 Market-Skimming: Initially set high prices to "skim" revenue layer by layer from the market.  Market Penetration: Set a low initial price in order to penetrate the market quickly and deeply to win a large market share.

20.COMPETITION BASED PRICING

  Setting the price based upon prices of the similar competitor products Depending on whether products have lasting, parishable or little distinctiveness from competitor's product.

NEW ERA OF SCIENTIFIC PRICING

Shaped by a new set of insights into business strategy and human behavior, and these insights are turbocharged with software, mathematics, and rapid experimentation.

Some companies using the new techniques -Best Buy, DHL, Ford Motor Co., the Home Depot, Safeway, Staples, UPS, and WinnDixie, General Electric etc.

Need for companies to incorporate Revenue Management

Revenue Management is about maximizing revenue from existing business (systematic and comprehensive approach )

Originally known as yield management and developed in the airline industry in the wake of deregulation in the late 1970s, revenue management controlled the price of seats.

Providing increased revenue and profitability in the airline, hospitality, car rental, cruise line, railroad, and television broadcast industries.

REVENUE MANAGEMENT IS CRITICAL TO SUCCESSFUL PRICING DEPLOYMENT!!

It's a hard management science that employs rocket-science mathematical concepts and high-powered computers to crunch gigabytes of marketing information

Determine the most effective way to price and allocate inventory to reach and every future consumer, each and every day, making realtime adjustments as market conditions change, with the consumer in real-time

Major consulting/software firms such as PROS, Sabre and Tallus (now merged with Manugistics)

PRICING AND REVENUE OPTIMIZATION

Formulation and solution of tactical pricing decisions using constrained optimization. All about integrating supply chain management strategies with supplier relationship management efforts to drive accuracy into pricing and revenue optimization decisions . Best-known example of pricing and revenue optimization is revenue management whereby airlines, hotels, and other companies seek to maximize operating contribution by opening and closing fare classes. However, a number of other important business problems including markdown management, dynamic pricing for e-commerce, and customized pricing are also parts of pricing and revenue optimization.

By factoring in capacity, willingness to pay, brand equity, application/end-use, and channel effectiveness, a company can predict the impact of pricing actions on demand. Dynamically predicting and recalibrating pricing results in top-line benefits and greater stability in the supply chain. The use of such strategies has transformed the transportation and hospitality industries, and has become increasingly important in retail, telecommunications, entertainment, financial services, health care and manufacturing. Manugistics and i2, the two vendors that most often go head to head in the supply chain software space, both offer PRO software. Increasingly, this best-of-breed application is being incorporated into ERP (enterprise resource planning) packages; the new version of mySAP Retail, for example, includes a pricing optimization module.

USE OF IT IN PRICING
i2s Demand Planner provides the historic pricing data used by its Revenue Price Optimization solution to determine the products price elasticity or sensitivity to price changes. i2s software can go far beyond simple yield optimization. It takes into account other factors, including such long-term objectives by asking whether it is best to maximize price with a limited number of customers at the expense of growing the customer base. It also considers cross-elasticity of demand, or if price and demand of one product is tied to another. Manguistics offers Networks Profitability Demand. It calculates willingness to purchase goods at various prices. The software generates a pricing curve that predicts the chances of a sale at particular prices over a range.

DemandTec of San Carlos, Calif., provides enterprise-wide price optimization software for manufacturers and retailers, most selling consumer packaged goods. It consists of three modules:The first analyzes POS data to determine price elasticity and cross-elasticity for every item in every store.  The optimization module determines the optimal balance of pricing and promotion to maximize sales and profit.  Finally, the financial engine helps retailers match strategies to business rules and financial goals.

Metreo is the leading provider of comprehensive pricing intelligence, optimization and execution solutions that demystify and add discipline to the entire pricing process, enabling manufacturers and distributors to drive more profit to the bottom line. Customers include industry leaders such as Eaton Corp., Essex Electric, Hewlett-Packard, Honeywell, Oncology Therapeutics Network and Owens Corning. The Metreo Smart Pricing Suite helps customers identify profit improvement opportunities. The suite enables companies to capture these opportunities by setting prices at the optimal levels and ensuring that those prices are consistently executed in every deal. Metreo's Smart Pricing Suite can be deployed modularly, and provides a complete closed-loop solution, enabling companies to see returns in as little as two to three months. Other components can be added as customers' needs grow.

INTEGRATING THE PRICING SOLUTIONS WITH SUPPLY CHAIN!!

 Integration is the key because of the complexity of pricing processes and the strong relationship between supply chain efficiency and pricing.

Although some vendors today offer stand-alone pricing and revenue optimization solutions, these solutions by themselves have limited usability unless integrated with enterprise supply chain, demand, and cost management solutions.

BUILDING A BETTER PRICE IMAGE

In the end, pricing strategies will only be successful if they are designed in a consistent way with all other merchandising and operational elements that provide value to the consumer. Top retailers establish a relevant point of differentiation to provide distinct value to their target audience. Base prices, promotions, assortment, service, private labels and visual merchandising all combine to create a value-to-price relationship.

PRICING ANALYTIC
Pricing Analytics captures your historical marketing and corporate transaction data and compiles it into actionable information. Pricing Executives and Managers then use this to gain insight into how pricing affects their operations. Insights that otherwise may have been difficult to identify. Trends like slowly eroding profit margin or an unnoticed change in segment purchasing patterns are displayed in clear, configurable graphs and tables. Changes in critical metrics such as competitor price or supplier prices are instantly identified and users notified. Powerful what-if simulations allow Pricing Executives and Managers to quantify the risk and reward of a strategic or tactical price changes. Armed with this collection of knowledge, Pricing Executive and Managers then make educated decisions on pricing that will improve the top line financial results.