63612434 Pricing Strategy

PowerPoint Pack NameThis toolkit provides an in depth discussion on Pricing Strategy, including Skimming vs. Penetration, Pricing Tactics, Product Adoption Lifecycle, Price Curve Analysis, and Price Sensitivity Analysis. Includes a Pricing Sensitivity Financial Model.
Check out our site for all your PowerPoint needs!
http://learnppt.com – Find our ebook on creating effective and professional presentations. Covers basic to advanced concepts, including storyboarding, diagramming, and the Consulting Presentation Framework.
http://learnppt.com/powerpoint -- Shop our catalog of Diagram Packs. We try to add more Packs monthly. All of our diagrams are professionally designed by ex-management consultants from top firms.
PRICE
REVENUES
*
Questions & feedback? Email me – [email protected] The diagrams in this pack are to be used by the original buyer only.
learnppt.com
Contents
SD_TOOLKIT_FS_V5.PPT
93
09/15/98
11
25
*
learnppt.com
To determine the optimal Pricing Strategy, we need to look at things within the context of the product’s adoption lifecycle
Product Adoption Lifecycle
Number of customers
INNOVATORS
EARLY
ADOPTORS
EARLY
MAJORITY
LATE
MAJORITY
LAGGARDS
These people are committed to new products (particularly in technology) with the belief that sooner or later it is bound to improve our lives
Often known as technology enthusiasts, or “techies”
Represents 2.5% of market
Source: Crossing the Chasm and Beyond, Moore and McKenna, 1999
Early adopters are visionaries
These people are true revolutionaries in business and government who want to use the discontinuity of any innovation to break from the past into a new future
It is said there is a “chasm” marking needs to overcome in this segment
13.5% of market
The believe in evolution, not revolution
These people will adopt new products only after a proven track record
Represents 34% of market
They are very price sensitive, highly skeptical, and demanding
These customers usually like very simple products—they only want the
basic functionality
34% of
This segment is the very last to buy any product
The goal is not to sell to this group, but to sell around them
Represents 16% of market
You can preview the full PowerPoint document and
download it at http://learnppt.com/powerpoint/
*
learnppt.com
Pricing Skimming works best when introducing a new product with no competitive peers to capture the Early Market
When to Skim the Market
Number of customers
INNOVATORS
EARLY
ADOPTORS
EARLY
MAJORITY
LATE
MAJORITY
LAGGARDS
It is typical to use a Price Skimming Pricing Strategy at the beginning of a product’s adoption lifecycle. This is because the initial buyers are not as price sensitive and more apt to purchasing new products.
The risk is the “the chasm,” which is threshold that many new products fail to cross. Many new product are successful in selling to the Early Market. However, they never achieve the critical mass needed for mass consumer adoption. We say these products fell into a chasm.
Many marketers try to bridge the chasm by dropping prices. This is often not the solution, because the issue is not of price, but the product itself. Consumers may be waiting for the product to prove itself or be more fully developed.
Early Market
*
learnppt.com
Penetration Pricing works best as the product reaches the Mainstream Market and it becomes a race to grab share
When to Penetrate the Market
Number of customers
INNOVATORS
EARLY
ADOPTORS
EARLY
MAJORITY
LATE
MAJORITY
LAGGARDS
Pricing Penetration Strategy is often adopted as the new product is about to reach the Mainstream Market. At this point, adoption it at its highest rate. Copy cat companies are quickly entering into the market, increasing supply, thus also putting pricing pressure on the product.
At this point, this is a race to capture market share and become a market leader. Therefore, many companies, incumbents and new entrants will adopt pricing Penetration Strategy to absorb share. Large companies may engage in predatory pricing to increase barriers to entry and drive out smaller players.
Mainstream Market
*
learnppt.com
A key reason to skim the Early Market is to capture as much consumer surplus as possible—there is no reason to leave money on the table
Price Skimming – Advantages & Disadvantages
Likewise, inventory turnover will be lower
Encourages competition from new entrants because of the high margins and uncaptured market share
High margins may result in operational inefficiencies, since there will be less incentive to keep costs low
Allows us to capture as much consumer surplus as possible
Maximizes margins, receiving “monopoly profits”
Builds a high quality brand image, since consumers associate high price with better quality
Skimming can be used to segment the market—and reduce the price for lower, more price sensitive segments
ADVANTAGES
DISADVANTAGES
Consumer surplus is the difference between the highest price the consumer is willing to pay and the price they are actually paying
Pricing Skimming Pricing Strategy works well when introducing a new product where there are no or few competitive products. A high price point allows us to capture the early adopters, who are not price sensitive.
EXAMPLE
This strategy is typically used for high-end electronics, e.g. high definition TVs.
THIS IS A PARTIAL PREVIEW
*
learnppt.com
Tabulate your pricing data to show the relationships among price point, market share, and sales
Pricing Data Collection (2 of 2)
ILLUSTRATIVE DATA
Note that there may be limits to how much share you can actually capture and still remain profitable—at a certain point of lowering your price, you will be losing money
In this data set, notice how sales from just the Early Market exceed sales for someone owning 95% of the market
*
learnppt.com
Pricing Curve Analysis – Example 3
PRICE
REVENUES / PROFITS
MARKET SHARE
The price associated with the highest peak of the Profit Curve (orange) is about $3,800, which translates to about a 47% market share
Plot based on illustrative data from previous slide
*
learnppt.com
Price Sensitivity Analysis – Step 1
There are 9 drivers to Price Sensitivity. However, depending your offering(s), only a subset of these drivers are relevant. Determine the drivers that are most relevant.
Source: The Strategy and Tactics of Pricing, Nagle and Holden
1
2
3
4
5
6
7
8
9
Reference Price Effect
Buyer’s price sensitivity for a given product increases the higher the product’s price relative to perceived alternatives. Perceived alternatives can vary by buyer segment, by occasion, and other factors.
Difficult Comparison Effect
Buyers are less sensitive to the price of a known / more reputable product when they have difficulty comparing it to potential alternatives.
Switching Costs Effect
The higher the product-specific investment a buyer must make to switch suppliers, the less price sensitive that buyer is when choosing between alternatives.
Price-Quality Effect
Buyers are less sensitive to price the more that higher prices signal higher quality. Products for which this effect is particularly relevant include: image products, exclusive products, and products with minimal cues for quality.
Expenditure Effect
Buyers are more price sensitive when the expense accounts for a large percentage of buyers’ available income or budget.
End-Benefit Effect
The effect refers to the relationship a given purchase has to a larger overall benefit, and is divided into two parts: Derived demand: The more sensitive buyers are to the price of the end benefit, the more sensitive they will be to the prices of those products that contribute to that benefit. Price proportion cost: This refers to the percent of the total cost of the end benefit accounted for by a given component that helps to produce the end benefit (e.g. think CPU and PCs). The smaller the given components share of the total cost of the end benefit, the less sensitive buyers will be to the component's price.
Shared-cost Effect
The smaller the portion of the purchase price buyers must pay for themselves, the less price sensitive they will be.
Fairness Effect
Buyers are more sensitive to the price of a product when the price is outside the range they perceive as “fair” or “reasonable” given the purchase context.
The Framing Effect
*
learnppt.com
Step 2. Score the impact of each relevant Price Sensitivity driver
Continuing on our example from the previous slide, we have down-selected to the 4 Price Sensitivity drivers listed below (in green). In this next step, we score the impact of driver on a scale from 1-3, with 3 being the most impactful.
TOTAL SCORE: 8
Reference Price Effect
Buyer’s price sensitivity for a given product increases the higher the product’s price relative to perceived alternatives. Perceived alternatives can vary by buyer segment, by occasion, and other factors.
Switching Costs Effect
The higher the product-specific investment a buyer must make to switch suppliers, the less price sensitive that buyer is when choosing between alternatives.
Price-Quality Effect
Buyers are less sensitive to price the more that higher prices signal higher quality. Products for which this effect is particularly relevant include: image products, exclusive products, and products with minimal cues for quality.
Fairness Effect
Buyers are more sensitive to the price of a product when the price is outside the range they perceive as “fair” or “reasonable” given the purchase context.
1 (Minimal impact)
*
learnppt.com
Step 3. Determine the Point of Perfect Elasticity and map the score to a pricing sensitivity elasticity factor
Once we have a Pricing Elasticity “score,” we need to translate this score to an elasticity factor. This factor represents the relationship between pricing change and the resulting demand change. To determine this factor, we need to create a translation table that maps the score to a factor. This mapping is anchored by 3 key values: the upper bound, the lower bound, and the point of perfect elasticity.
SCORE
ELASTICITY
FACTOR
Anchor the upper bound elasticity factor against the highest score—in this case 12. The value of this factor should be greater than 100%.
You should anchor the lowest possible score (i.e. the number of drivers) against the lower bound factor of 0%.
The Point of Perfect Elasticity is the 100%. This means, for every percentage change in price, there is the same percentage change in units sold. For companies with a stronger brand, the Point of Perfect Elasticity should be anchored higher than the mid-point score (e.g. 7 or higher in this example); and vice versa for weaker brands.
SCORE
ELASTICITY
FACTOR
Once you have picked your 3 anchor points, the remaining elasticity factor values should fall into place.
*
learnppt.com

SCENARIO B
If < threshold_of_no_elasticity ,
SCENARIO C
We have converted these formulas into an Excel model, embedded into the following slide
*
learnppt.com
The first step is to decide on your high level pricing strategy—to skim or to penetrate?
Price Sensitivity Model Documentation (1 of 2)
Modify the assumptions in the yellow cells.
Total Possible Score
Lowest Possible Score
Price Elasticity Score
Elasticity Factor Upper Bound
Point of Perfect Elasticity
Threshold of No Elasticity
These values drive the model are defined in the previous slides
*
learnppt.com
OVERVIEW
EXAMPLE(S)
Movie theatres sell tickets using a price discrimination tactic at 2 levels—1), different prices to different ages groups (e.g. student discount) and 2) different prices for movies held at different times (e.g. Matinee special).
RELATED PRICING TACTIC(S)
Loss Leader Pricing
*
learnppt.com
OVERVIEW
EXAMPLE(S)
Microsoft has often been criticized in using predatory pricing to maintain dominant market share. An example would be Microsoft offering Internet Explorer for free when competing with Netscape (back in 1996).
Similarly, when new versions of Microsoft Windows are released, Microsoft provides the latest operating system to computer manufacturers for free. This is why, when a new version of Windows is released, you will often machines with the newer version to be cheaper than machines with the previous version.
Loss Leader Pricing
*
learnppt.com
OVERVIEW
EXAMPLE(S)
Online hotel reservation services, like PriceLine, encourage hotels to adopt marginal cost pricing for unsold rooms. In other words, hotels can offer last minute deals to sell unfilled rooms at cost.
Airlines sometimes also use this tactic to fill unsold seats.
Loss Leader Pricing
*
learnppt.com
*
learnppt.com
http://learnppt.com/
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
5%10%15%20%25%30%35%40%45%50%55%60%65%70%75%80%85%90%95%100%
-$40,000,000,000
-$20,000,000,000
$0
$20,000,000,000
$40,000,000,000
$60,000,000,000
$80,000,000,000
$100,000,000,000
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
5%10%15%20%25%30%35%40%45%50%55%60%65%70%75%80%85%90%95%100%
-$40,000,000,000
-$20,000,000,000
$0
$20,000,000,000
$40,000,000,000
$60,000,000,000
$80,000,000,000
$100,000,000,000

Documents

63612434 Pricing Strategy