Pricing
The Puzzle of the Next Century
Pricing Puzzle
“ A price is not merely a function of costs
and margins… ”
Costs + Margins = PRICE
Pricing Puzzle
“ A price is not merely a function of costs
and margins… ”
Costs + Margins = PRICE
“…it is an expression of VALUE ”
Pricing Puzzle
Minimize Optimize Maximize
Costs + Margins = PRICE
VALUE
Production costs Product performance
Indirect costs • Usefulness & Quality
Advertising costs Image / Aspirations
• Brand Equity
Distribution costs
Availability
Manufacturer’s margin • Distribution Strategy
Distributor’s margin Service
Seller’s margin • Before/During & After sales
Pricing Puzzle
4 P’s 4 C’s
PRODUCT CUSTOMER VALUE
PRICE COST
PLACE CONVENIENCE
PROMOTION COMMUNICATION
Pricing Puzzle
4 P’s 4 C’s
PRODUCT CUSTOMER VALUE
PRICE COST
PLACE CONVENIENCE
PROMOTION COMMUNICATION
A Secret Pie
Impact of a 1 % price increase on profits
– Coca-Cola 6,4 %
– Nestlé 17,5 %
– Ford 26,0 %
– Philips 28,7 %
Pricing Puzzle
4 P’s 4 C’s
PRODUCT CUSTOMER VALUE
PRICE COST
PLACE CONVENIENCE
PROMOTION COMMUNICATION
Seller’s Dilemma
Pricing Puzzle
4 P’s 4 C’s
PRODUCT CUSTOMER VALUE
PRICE COST
PLACE CONVENIENCE
PROMOTION COMMUNICATION
“ Tomorrow’s winner companies will
be those who offer distinct products at
comparatively low market prices ”
Key = Differentiation
The key to drive value is to offer relevant and
distinctive product differentiation
Physical Differences
– Features, performance, durability, conformance, design, etc…
Availability Differences
– Distribution channels ; Stores, mail-order, internet, etc…
Service Differences
– Delivery, installation, training, consulting, maintenance, etc…
Price Differences
– Price positioning (Very high / High / Medium / Low / Very Low)
Image Differences
– Symbols, atmosphere, events, media, etc…
Key = Differentiation
Differentiation : Examples
Physical Differences
– Levi’s Engineered Jeans (Ergonomic construction, durability, style)
Availability Differences
– Dell Computer’s customized production, Volkswagen “e.lupo”
Service Differences
– Acıbadem Hospital – Mother Care Division, Nissan “5-year Warranty”
Image Differences
– Audi vs Mercedes, DuPont (Innovation Leader)
Key = Differentiation
Differentiating commodities…
Perdue Chicken (USA)
– Guaranteed tenderness (30 % market-share, 10 % premium pricing)
Flora Drinking Water (Turkey – Sabancı Holding)
– Service, packaging, attributes, operation
Starbuck’s Coffee (USA)
– Atmosphere, standard service
Everything can be differentiated !...
Pricing Decisions
INTERNAL FACTORS EXTERNAL FACTORS
– Marketing Objectives – Market
» Positioning » Pure Competition
» Target Group » Monopolistic Competition
– Marketing Mix Strategy » Oligopolistic Competition
» 4 P’s » Pure Monopoly
– Costs – Demand
» Fixed & Variable » Elastic / Inelastic
– Management Approach – Competition
» Responsibility » Competitors’ offers
» Perspective » Competitiors’ reactions
– Economy
» Buying power
– Government Influence
» Laws & Regulations
Pricing Approaches
Cost-Based Pricing
– Cost-Plus Pricing
» Product Cost + Standard Mark-Up = Price
– BE Analysis & Target Profit Pricing
» A necessary survival tool
Buyer-Based Pricing
– Perceived Value
» Consider buyers’ perceptions of value NOT the cost
Competition-Based Pricing
– Basing prices on competitors’ prices
» Premium Pricing
» Going-Rate Pricing
» Discount Pricing
Pricing Strategies
PRICING a SINGLE NEW PRODUCT
– Market-Skimming
» Highest possible price to skim small but profitable segments
– Penetration Pricing
» Lowest possible price to penetrate the market quickly
Pricing Strategies
PRODUCT-MIX PRICING
– Product-Line Pricing
» Establishing product lines at different price points
Volkswagen (Polo, Bora, Golf, Passat)
– Optional-Product Pricing
» Offering to sell optional/accessory products along with the main product
BMW & Mercedes
– Captive-Product Pricing
» Offering products, which must be used with the main product
Gillette razor blades
– By-Product Pricing
» Valued by-products positively affect pricing
Petroleum by-products
– Product-Bundle Pricing
» Several products combined and offered at a reduced price
Season tickets, New-year packages of hotels
Price Adjustments
Adjust basic prices to account for various customer
differences and changing situations
– Discounts & Allowances
» To attract/reward certain customer respones
– Discriminatory Pricing
» To allow for differences in customers, products & locations
– Promotional Pricing
» Varying price reductions offered depending on shopping
period, item purchased, etc...
Price Adjustment Strategies
DISCOUNTS & ALLOWANCES
– Cash Discounts
» Attract early payments
A 15% reduction applied to those customers who buy on cash
– Quantity Discounts
» Price reduction to buyers who buy large quantities
– Functional Discounts
» Differentiating prices among trade channel members
Different mark-ups for OLSs and corners
– Seasonal Discounts
» Price reduction to buyers who buy out-of-season
– Allowances
» Trade-in Allowances
Bring the old, take away the new...
» Promotional Allowances
Discounts provided in return for participating in special programs
Price Adjustment Strategies
DISCRIMINATORY PRICING
– Customer-segment Pricing
» Different customers pay different prices
Disneyland Adult vs Child pricing
– Product-form Pricing
» Different versions of the product are priced differently, regardless of
the cost
An additional feature with a slight cost might justify a fat price premium
– Location Pricing
» Different locations are priced differently, regardless of the cost
Business Class seats
– Time Pricing
» Prices differ from month to month, day to day, even hour to hour
Prime-time/Off-prime-time pricing of advertising time
Price Adjustment Strategies
PROMOTIONAL PRICING
– Loss Leaders
» Attract consumers in store, sell other items as well
Hyper-Markets (Carrefour, Gima, Praktiker, Migros, etc...)
– Special-event Pricing
» Offering discounts at times of special events
Valentine’s Day, New year, Şişli Municipality’s discount campaign
– Cash Rebates
» Discounts offered to consumers for purchases made in a limited period
of time
Dockers campaign (20 % off)
– Simple Cash Discounts
» Over-the-counter to support revenues OR to defend against competition
Psychology of Price
Consumer’s Mind-set (Black-Box)
– BE CAREFUL !!!
» Price vs Quality Image
CK perfume
Rolex watch
Pharmaceutical items
» Perceptions
30.000.000 TL vs 29.950.000 TL
One Final Word
“ A product is not a product unless it sells.
Otherwise, it’s just a museum piece…”
Ted Levitt