1,Pricing,Bayer Chair Professor Willem Burgers,2,Course Outline,Foundations Case: Atlantic Computer Thinking Strategically Case: McCaw Embedded Pricing Case: Signode Tools, Tactics, and Tricks: Metrics, Fences, Framing Case: Blockbuster Video Channels and Pricing Case: Shanghai Honggong Mathematics, Case: Jahwah Price Research Price War Case: Kodak Funtime,3,Importance of Pricing,Marketing and Pricing Where does pricing reside in an organization? “Pricing gets caught between the cracks. Everybody wants to be a part of it. Yet, nobody really owns it. Pricing is ad hoc.” G. Smith, Pricing Strategy and Practice,4,The Strategic Pricing Pyramid,5,What is the Right Price?,1. Value to Customer,2. Competition,3. Our Cost,4. Strategic Objectives,$,6,Customer Value/ Willingness to Pay,Substitutes/Uniqueness? Switching costs? Easy to compare price? Easy to compare quality? Price/Quality relationship?,Significant expenditure? Important end-benefit? Ingredient? Does the buyer pay? Fairness? Inventory?,7,Value? One Barrel of,Coca Cola Milk Evian Water Orange Juice Lemon Oil Scope Mouthwash Jack Daniel Visine Eye Drops,$78.83 $126.00 $189.90 $251.16 $390.88 $826.65 $4,133.26 $32,202.24,8,2. Competition,How many sellers? Monopoly Oligopoly How many buyers? Monopsony - Oligopsony How differentiated is the product? Monopolistic competition,9,3. Escape the Cost Plus Delusion,Cost Based Pricing product cost price value customers? Value Based Pricing customers value price cost product? The role of cost in pricing relevant costs, incremental costs, avoidable costs, opportunity costs: Our goal is to maximize gross profit,10,4. Strategic Objectives,Growth? Profit? Survival? Stability Cost? ?,11,Pricing Strategy Alternatives,Competition-based Cost-plus Value-in-use Custom based Auction/Liquidation ,Strategic Objectives/Constraints,12,Business as a Game,But there are many games Rule based games (e.g., employment contract) follow the principle that for every action there is a reaction and to play well you must look ahead and reason backward Freewheeling games (e.g., contract negotiation) follow the principle that you can not take away more from the game than you bring to it and to play well you must maximize this value,The Players in the Game,Customers Competitors Company Complementors Suppliers,Parts of the Game,1. Players Who is playing? Can you add players? Do you have to play? 2. Added Values What amount of value disappears when you leave the game? How can you increase value,Parts of the Game,3. Rules Can we change the rules of the game? 4. Tactics Can we change perceptions of the game, using threats or promises? 5. Scope Can we go play the game somewhere else?,16,Changing the Pricing Game,Conventional Pricing Struggle among competing functions: marketing, sales, finance. Reactive to market conditions and customer pressure Subsequent to product-market decisions Strategic Pricing Changes incentives to create support across functions Pro-active, policy driven Early in the product development process,17,Asking the Right Questions:,18,An unprofitable price?,Pricing error Value communication defect Market share delusions Market segment error Product/service overbuilt Customer power Commoditization,19,Market Change Dynamics Leading to Commoditization,Entry of new competitors in market or segment Imitation among competitors Buyers develop capacity and confidence to measure functions and quality of products, services, and vendors Experience and competition among suppliers reduces buyers sense of risk,The Specialty-Commodity Continuum,Price,High,Low,Low High,Service Additions,Specialty,Commodity,time,Niche,Experience curve,Value added strategy,Price compression/innovation,21,Breaking the Commodity Cycle,Four possible strategies, Value added strategy: Moving along the diagonal to increase price and service Price compression/innovation: Moving along the diagonal reducing prices and services Market focus: Staying up along the arc focusing on the clients only who would pay an additional price Experience curve: Moving down along the arc ahead of anyone else,22,Embedding the Strategy,Distributors/Salespeople incentives and expectations, skills, knowledge, tools. Customer incentives and expectations,23,Signode,1. What price strategies can you recommend to Signode? 2. What suggestions do you have for compensation for the sales force? 3. The sales force offers to increase sales by 5-10% if we allow additional price flexibility. Assume the price flexibility will reduce prices by 4% on average, should you accept the offer? Show with calculation why you should accept the offer or not. 4. Do you see any error in Signodes present allocation of its marketing resources to different segments? What error do you see? What might be the explanation? 5. Any brand strategy suggestions for Signode?,24,Metrics,What is a metric? What is a bad metric? What is the cost of using the wrong metric? Good metrics,25,Good Met