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11th Prod.Active Meetup
“Pricing strategy”
Iasonas Antonopoulos
11th Prod.Active Meetup: “Pricing Strategies”
The purchase funnel
11th Prod.Active Meetup: “Pricing Strategies”
There’s nothing better than pricing
Independent studies confirmed that: 1% increase in pricing affects a
company’s profits more than any other change.
From all the things you can spend time tweaking, pricing will yield
the best return.
11th Prod.Active Meetup: “Pricing Strategies”
Definitions
Product / Service Price
Is the amount of money at which a product or service can be bought
Market Price
Is the converging point where amount of money at which a product
or service can be bought
Price cue
A price cue is defined as any marketing tactic used to persuade
customers that prices offer good value compared to competitors’
prices, past prices or future prices.
11th Prod.Active Meetup: “Pricing Strategies”
Price synonyms & adjectives
Synonyms Rate
Subscription
Licence fee
Commission
Adjectives Premium
Lower end
Other?
11th Prod.Active Meetup: “Pricing Strategies”
Consumer price referencing
Fair price
Standard price
Last price paid
Upper /lower bound price
Benchmarked price (competitor pricing)
Usual discount price
Expected price
11th Prod.Active Meetup: “Pricing Strategies”
“True” customers characteristics
True customers WANT to spend money with you.
True customers reciprocate the value if the product/service that they
receive.
True customers understand that you have a business to run here,
with bills & salaries to pay
– If they’re not willing to pay you, then they’re
not your customers. Sorry….
11th Prod.Active Meetup: “Pricing Strategies”
Common Pricing Mistakes
Determine costs and take traditional industry margins
Neglect the product positioning strategy – Set the price independently of the rest of the marketing mix
Failure to revise price to capitalize on market changes
Failure to vary price by product item, market segment, distribution channels, and purchase occasion
Target breaking even the fastest and neglecting the prosperity of the product
11th Prod.Active Meetup: “Pricing Strategies”
Steps in setting up a price
#1: Price
objective
#2: Demand
Estimate
#3: Cost
estimation
#4: Benchmark
competition
#5: Pricing
strategy
#6 : Final price
Product
positioning
11th Prod.Active Meetup: “Pricing Strategies”
#1: Price objective
Maximum profit
Maximum market share
Market skimming
Survival
Product quality leadership (dependant of Product positioning)
11th Prod.Active Meetup: “Pricing Strategies”
#2: Estimate demand
Price sensitivity: how sensitive are customers on your price?
Estimating demand curves: how much money are customers willing
and able to pay for your product?
Price elasticity on demand (PED): the percentage change in quantity
demanded in response to a one percent change in price.
Revenue is maximizedwhen price is set so that the PED is exactly one(=0,01%/0,01%).
11th Prod.Active Meetup: “Pricing Strategies”
Factors lowering price sensitivity
The product/brand is distinctive
The product is assumed to have high quality and prestige
The expenditure is a smaller part of buyer’s total income
The expenditure is small compared to the total cost of end product
Buyers are less aware of substitutes/ Buyers cannot compare the quality of substitutes
Part of the cost is paid by another party
The product is used with previously purchased assets11th Prod.Active Meetup: “Pricing Strategies”
#3: Cost estimation
Fixed costs
Variable costs
Total costs
Average costs
Cost at different level of production
11th Prod.Active Meetup: “Pricing Strategies”
#4: Benchmark competition
Pricing objectives
Pricing method
Actual Prices
Price cues
11th Prod.Active Meetup: “Pricing Strategies”
#5: Selecting a pricing strategy
Markup pricing: Adding a constant percentage to the cost price of an item
Target-return pricing: starting from the desired rate of return objective,
price is arranged based on when the above rate should be met
(used by market leaders or monopolists)
Perceived-value pricing: the price that consumer perceives or estimates
as good for these features/functionality
(effective in pricing of premium goods and services with a large intangible
component - good for skim pricing and penetration pricing strategies)
Value based pricing: sets prices primarily, but not exclusively, in the value,
perceived or estimated, to the customer rather than on the cost of the
product or historical prices.
11th Prod.Active Meetup: “Pricing Strategies”
When to use price cues
o Customers purchase item infrequently
o Customers are new
o Product designs vary over time
o Prices vary seasonally
o Quality or sizes vary across stores
11th Prod.Active Meetup: “Pricing Strategies”
#6: Selecting the final price
Impact on other marketing activities
Company pricing policies
Total costs
Average costs
Impact on pricing by other companies
11th Prod.Active Meetup: “Pricing Strategies”
Price scaling
High price: no possible demand on the price
Ceiling price: the best possible price consumers are willing to pay
> Customer’s assessment of product uniqueness
> Competitor prices and prices of substitutions
> Costs
Floor price: no possible profit on the price
Low price: no possible profit on this price
11th Prod.Active Meetup: “Pricing Strategies”
Price adaptation strategies
How to adapt your pricing
11th Prod.Active Meetup: “Pricing Strategies”
Price adaptation Strategies
Geographical pricing
Discount /Allowances
(Cash / Quantity /Functional /Seasonal discount)
Promotional pricing
Differentiated pricing
11th Prod.Active Meetup: “Pricing Strategies”
Responding to competitive price cuts
Maintain price
Maintain price and add value
Increase price and improve quality
Launch a low-price fighter line
Reduce price
11th Prod.Active Meetup: “Pricing Strategies”
Promotional pricing
Loss-leader pricing
Special-event pricing
Cash rebates
Low-interest financing
Longer payment terms
Warranties and service contracts
Psychological discounting
11th Prod.Active Meetup: “Pricing Strategies”
Differentiated/Discriminatory pricing
Customer-segment pricing
Product-form pricing
Image pricing
Channel pricing
Location pricing
Time pricing
Yield pricing
11th Prod.Active Meetup: “Pricing Strategies”
Increasing pricing
Delayed quotation pricing
Escalator clauses
Unbundling
Reduction of discounts
11th Prod.Active Meetup: “Pricing Strategies”
Cost driven vs Price driven costing
Drucker considered cost-driven pricing ridiculousand blamed the loss of the consumer-electronics industry and the machine-tool industry in the U.S. directly on this deadly sin.
Instead of cost-driven pricing Drucker suggested price-driven costing(start with the right price, and then to work back from price to determine your allowable costs)
Then you start working to make those costs. We are talking about marketing after all!
11th Prod.Active Meetup: “Pricing Strategies”
How psychology affects pricing
11th Prod.Active Meetup: “Pricing Strategies”
Pricing: a judgment problem
Michael Dearing says that “Pricing is a judgmentproblem, not a math problem”
Many start-ups have a new product for which there aren’t competitors for customers to benchmark against.
Setup a hypothesis, A/B test it and use other analytics to refine it.
Take into account competition and your intuition.
11th Prod.Active Meetup: “Pricing Strategies”
Higher price = Better product
There’s an amazing phenomenon in pricing…
An increase in price leads to an increase in sales because:
when something costs more we assume that it is better. …
“The above association is Pavlovian”
11th Prod.Active Meetup: “Pricing Strategies”
Too many options can harm you
People would rather buy nothing than choose the wrong option.
Prices must:– be straight forward
– help people select the proper product usage
– avoid people making future calculations
Variable pricing sliding upwards with more usage can scare potential customers.
11th Prod.Active Meetup: “Pricing Strategies”
Contextual pricing
People evaluate decisions on a relative scale so paying attention to the context of a price is crucial
People happily pay 2 € for a cup of Twinning's tea to take away in a paper cup. They pay roughly ~20c€ for a Twinning's tea bag.
Why?The cup of tea you purchased from is 100 times more enjoyable (hide no dangers of failure) and easy to prepare than doing it on your own
11th Prod.Active Meetup: “Pricing Strategies”
Tips
Figuring out what goes through a customer’s mind when she first sees your product can help you set a price.
Note down all the things customers might associate with your product.(include things like whether it’s cool or expensive, other products that someone might already own)
Logic kicks in eventually, so your price needs to stand up to scrutiny.
If priced too low, someone will try to figure out why.
If cheap but dressed up with expensive imagery people will figure that out, too.
11th Prod.Active Meetup: “Pricing Strategies”
Take aways
Set a product position & pricing objective
Do the math but do not forget psychology
Customers are analytical, but prone to leaps of logic;
Customers love bargains
But also hate to make wrong choices
11th Prod.Active Meetup: “Pricing Strategies”
References
Marketing Management: by Philip T. Kotler, Kevin Lane Keller
https://hbr.org/2003/09/mind-your-pricing-cues
http://upliftroi.com/blog/post/10-examples-of-great-pricing-strategies
Estimating Demand Functions
Price Cues and Customer Price Knowledge. January 2008. Eric T. Anderson. Kellogg School of Management. Duncan I. Simester.
Conceptualization of perceived value pricing in strategic marketing, Conceptualization of perceived value pricing in strategic marketing, Nagasimha Balakrishna Kanagal, Journal of Management and Marketing Research
http://www.investopedia.com/
http://www.marketingbinder.com/
The Strategy and Tactics of Pricing: A Guide to Growing More Profitably Hardcover – April 18, 2016, Tom Nagle, John Hogan, Joseph Zale
11th Prod.Active Meetup: “Pricing Strategies”
Thank you
Iasonas Antonopoulos
11th Prod.Active Meetup: “Pricing Strategies”
