Pricing
Bayer Chair Professor Willem Burgers
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Course Outline
• Foundations
– Case: Atlantic Computer
• Thinking Strategically
– Case: McCaw
• Embedded Pricing
• Switching costs?
• Important end-benefit?
• Easy to compare price?
Ingredient?
• Easy to compare quality? • Does the buyer pay?
• Price/Quality
• Fairness?
relationship?
• Inventory?
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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
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2. Competition
• How many sellers? Monopoly – Oligopoly • How many buyers? Monopsony - Oligopsony • How differentiated is the product? Monopolistic
– Case: Signode
• Tools, Tactics, and Tricks: Metrics, Fences, Framing
– Case: Blockbuster Video
• Channels and Pricing
– Case: Shanghai Honggong
• Mathematics,
competition
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3. Escape the Cost Plus Delusion
Cost Based Pricing product – cost – price – value – customers?
Value Based Pricing customers – value – price – cost – product?
• Growth? • Profit? • Survival? • Stability • Cost? • …?
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Pricing Strategy Alternatives
• Competition-based • Cost-plus • Value-in-use • Custom based • Auction/Liquidation •…
– 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
G. Smith, Pricing Strategy and Practice
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The Strategic
Pricing Pyramid
Price Level
Price setting
Pricing Policy
Negotiation Tactics and Pricing Setting Procedures
– Case: Jahwah
• Price Research • Price War
– Case: Kodak Funtime
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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.”
Strategic Objectives/ Constraints
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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
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What is the Right Price?
1. Value to Customer
2. Competition $
3. Our Cost
4. Strategic Objectives
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1. Customer Value/ Willingness to Pay
• Substitutes/Uniqueness? • Significant expenditure?
Price & Value Communication
Communication, Value Selling Tools
Price Structure
Metrics, Fences, Timing
ቤተ መጻሕፍቲ ባይዱ
Value Creation
Economic Value, Offering Design, Segmentation
• The role of cost in pricing
– relevant costs, incremental costs, avoidable costs,
opportunity costs: Our goal is to maximize gross
profit
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4. Strategic Objectives