• 2. Added Values
– What amount of value disappears when you leave the game?
– How can you increase value
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Parts of the Game
• 3. Rules
– Can we change the rules of the game?
G. Smith, Pricing Strategy and Practice
3
The Strategic Pricing Pyramid
Price Level
Price setting
Pricing Policy
Negotiation Tactics and Pricing Setting Procedures
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The Players in the Game
Customers Competitors Company Complementors
Suppliers
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Parts of the Game
• 1. Players
– Who is playing? – Can you add players? – Do you have to play?
Specialty
High
Niche
Value added strategy
Price
time
Price compression
Commodity
Experience
Low /innovation
curve
Low
h
Service Additions
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– 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
measure functions and quality of products, services, and vendors • Experience and competition among suppliers reduces buyers' sense of risk
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The Specialty-Commodity Continuum
• 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
• Growth? • Profit? • Survival? • Stability • Cost? • …?
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Pricing Strategy Alternatives
• Competition-based • Cost-plus • Value-in-use • Custom based • Auction/Liquidation •…
• Conventional Pricing
– Struggle among competing functions: marketing, sales, finance.
– Reactive to market conditions and customer pressure – Subsequent to product-market decisions
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Market Change Dynamics Leading to Commoditization
• Entry of new competitors in market or segment
• Imitation among competitors • Buyers develop capacity and confidence to
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
– 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.”
Tactical Questions Commonly Asked
What price do we need to cover our cost and profit objectives?
What price is the customer willing to pay?
What prices do we need to meet our sales and market share objectives?
Is our price justifiable given the objective value of our product or service to the customer? How can we better communicate that value, thus justifying the price? What is the right price structure for the customer/for different customers?
• $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
• 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
Strategic Questions That Should be Asked
What sales changes would be necessary or tolerable for us to profit from a price changes? Can we deploy a marketing strategy that will keep those sales changes within acceptable ranges? What costs can we afford to incur, given the prices we can achieve in the marketplace, and still earn a profit?
What level of sales or market share can we most profitably achieve? What marketing tools should we use to win market share most cost-effectively?
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An unprofitable price?
Price & Value Communication
Communication, Value Selling Tools
Price Structure
Metrics, Fences, Timing
Value Creation
Economic Value, Offering Design, Segmentation
– Case: Signode
• Tools, Tactics, and Tricks: Metrics, Fences, Framing
– Case: Blockbuster Video
• Channels and Pricing