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					Pricing Strategy over the Life Cycle – Chs. 7-8
• Review Fire Safety Homework
• Understand how price sensitivity, costs, and
  competition influence pricing strategy over the
  product life cycle.
• Introduce organizational tools and diagnostic
  analytics that can be used to identify and
  overcome implementation challenges
Fire Safety: 1. Given overall market growth rate = 29%, Fire Safety’s 5% price
increase in FY 2011, & 2010 CM≈62%, what was Fire Safety’s incremental %
breakeven point for unit quantity and $ sales change in FY 2011? How does that
compare with actual 2011 unit quantity and $ sales changes.
Incremental Quantity Breakeven % 2010-11:   -DP%      -5%                 -7.5%
                                                   =       =
(5% Price Increase; ~62% CM)              CM% + DP% 62%+5%
Breakeven Sales as a % of 2010 Sales                                      92.5%
(1+/- Incremental Breakeven %)
Expected 2011 Sales as a % of 2010 Sales
                                                                           129%
(No price change; Market Growth = 29%)
Breakeven 2011 Sales as a % of 2010 Sales                                119.4%
(5% Price Increase; Growth = 29%)

Actual 2011 Sales as a % of 2010 Sales                                   107.8%

Quantity % Above/Below Breakeven (2010                                   -11.6%
basis)
Quantity % Above/Below Breakeven (2011                                    -9.7%
basis)
Fire Safety: 2. Given the expected market growth rate of 44%, Fire Safety’s proposed
5% price increase in FY 2012, & 2011 CM ≈ 64%, what is Fire Safety’s incremental
percentage breakeven point for unit quantity and $ sales change in FY 2012?
Incremental Quantity Breakeven % 2011-12:                      -5%         -7.2%
(5% Price Increase; ~64% CM)                                 64%+5%
Breakeven Sales as a % of Sales
                                                                           92.8%
(1+/- Incremental Breakeven %)
Expected 2012 Sales as a % of 2011 Sales
(No price change; Growth = 44%)                                            144%

Breakeven 2012 Sales as a % of 2011 Sales
                                                                          133.6%
(5% Price Increase; Growth = 44%)
Breakeven Elasticity =                                                     -1.45
Would you recommend the 5% price increase to FSI management for FY 2012?
Why (not)? What would you recommend?
 Observed Elasticity =     %DQ      (107.8-129)         -16.44%             -3.29
                           %DP          129              5.00%
          The Final Requires Calculating Breakeven Volumes &
                 Expected Volumes based on Elasticities
               Elasticity Required to Breakeven
         The Final Requires Calculating Breakeven Volumes &
                Expected Volumes based on Elasticities




Price increase: |Elasticity| < the breakeven amount leads to contribution increase.
Price decrease: |Elasticity| > the breakeven amount leads to contribution increase.
Sales and Profits Over the PLC
                             Product Adoption Curve
                        Innovators     Early     Early      Late    Laggards or
                           3-5%      Adopters   Majority   Majority Nonadopters
                                      10-15%     34%        34%        5-16%
                   90
Percent Adoption




                   50




                   20

                   5
                   0
                                                 Time
                                 Market Dynamics over the PLC
                 INTRODUCTION                      GROWTH                        MATURITY                         DECLINE
CUSTOMERS      Small customer base         Growing customer base           Large segmented market          Declining customer base
               Innovators                  Early adopters                  Late adopters/Laggards          High knowledge buyers
               Little product knowledge    Little product knowledge        High knowledge buyers           Familiar with all suppliers
               Low knowledge buyers        Moderate knowledge buyers       Repeat purchasers               and options
                                           Increasing brand loyalty        Comparison shopping

COMPETITION Few competitors                Increased competitive entry     Shakeout to stable # of         Increased price
               Low threat of competitive   Brand proliferation &           competitors                     competition to fill
               rivalry                     confusion                       Homogeneous dominant            capacity
               Gains from market           Differentiation vs. Cost        brands                          Exiting of weak
               development are high        leadership                      Market share defense            competitors
                                                                           Gains from competitors
COSTS          High incremental costs of   Declining unit variable costs   Low variable costs              Excess capacity
               production and promotion    through volume;                 High contribution margins       High average costs, due to
               Low contribution margin     Increasing contribution         Cost controls                   low capacity utilization
               External sourcing           margins                         Asset utilization

PRICE          Reference value effect      Reference value effect          Switching cost effect           Switching cost effect
SENSITIVITY    Price quality effect        Price quality effect            Expenditure effect              Expenditure effect
               Difficult comparison &      Difficult comparison effect     End benefit effect              End benefit effect
               Fairness effect                                             Lower risk
               LOW SENSITIVITY             MORE SENSITIVITY                HIGH SENSITIVITY                HIGH SENSITIVITY
MARKETING      Generate primary demand     Brand positioning               Market share defense            Retrench, & defend
OBJECTIVES     Customer awareness          Differentiation                 Marketing and production        strongest product lines
               Market education            Brand loyalty                   efficiency                      Harvest the business
               Buyer frames of reference   Defensible competitive          Profitable market               Consolidation to small #
               Information diffusion       position                        segmentation                    of competitors

PRICING        Establish value and worth   Bundled pricing to simplify     Expansion of product line and   Price to maintain margins,
STRATEGIES                                 segmented pricing according     price points                    but signal intent to defend
                                           to buyer knowledge (Hi-Mod      Multiple pricing channels       Price for max. cash flow
                                           -Lo)                            Segmentation pricing            Predatory pricing
                        Market Dynamics over the PLC
               INTRODUCTION                GROWTH                MATURITY
CUSTOMERS     Little product         Moderate knowledge      High knowledge buyers
              knowledge              buyers                  Repeat purchasers
              Low knowledge          Increasing brand        Comparison shopping
              buyers                 loyalty
COMPETITION   Few competitors      Brand proliferation &     Homogeneous
              Gains from market    confusion                 dominant brands
              development are high Differentiation vs.       Market share defense
                                   Cost leadership           Gains from competitors
COSTS         High incremental       Declining unit variable High contribution
              costs of production    costs through volume margins
              and promotion                                  Asset utilization

PRICE         Difficult comparison   Difficult comparison    Switching cost effect
SENSITIVITY   & Fairness effect      &                       Expenditure effect
                                     Price quality effect
              LOW SENSITIVITY                               HIGH SENSITIVITY
                                     MORE SENSITIVITY
MARKETING     Generate primary       Brand positioning &    Market share defense
OBJECTIVES    demand                 loyalty                Marketing & production
              Customer awareness     Brand differentiation  efficiency
              Market education       Defensible competitive Profitable market
                                     position               segmentation
PRICING       Establish value and    Simplify segmented     Expansion of product
STRATEGIES    worth                  pricing according to   line and price points
                                     buyer knowledge (Hi- Segmentation pricing
                                     Mod-Lo)
                     PLC & Brand Strategies
                                Product Category Life Cycle
Brand Stage Introduction            Growth                Maturity                Decline
Launch     Price to establish, Based on LT         Use aggressive pricing Not
            communicate & strategy, identify       to dominate based on     recommended.
            promote value of appropriate           cost advantage or target
                                                              Cost leadership strategy
            the product      segment(s) before     underserved niches w/a
                             commercialization     service advantage.
             Product differentiation strategy
Maintenance N/A              Segment & target     Unbundle. Price             Only with
                             for LT advantage. products & services            strong
                             Lower price as       separately. Rationalize     advantage.
                             necessary to         product line &              Consolidate to
                             maintain market      distribution strategy.      solidify cost or
                             growth. Price        Price to maximize profit,   service
                             compete only to      not market share or         leadership.
                             gain cost advantage. growth.
                                        Marketing differentiation (&
                                        product proliferation) strategy
Retirement N/A               Price to clear       Slowly price yourself       Withdraw cash
                             inventory quickly    out of business.            w/incrementally
                             while launching new                              higher prices.
                             models
                   PLC & Brand Strategies
                              Product Category Life Cycle
Brand Stage Introduction                   Growth                     Maturity
Launch     Price to establish,     Based on LT strategy,     Use aggressive pricing to
           communicate &           identify appropriate      dominate based on cost
           promote value of        segment(s) before         advantage or target
           the product             commercialization         underserved niches w/a
                                                             service advantage.

Maintenance N/A                    Segment & target for      Unbundle. Price products
                                   LT advantage. Lower       & services separately.
                                   price as necessary to     Rationalize product line &
                                   maintain market           distribution strategy. Price
                                   growth. Price compete     to maximize profit, not
                                   only to gain cost         market share or growth.
                                   advantage.

Retirement   N/A                   Price to clear inventory Slowly price yourself out
                                   quickly while            of business.
                                   launching new models
                   Product differentiation   Marketing differentiation Cost leadership
                                             (& product proliferation)
 Illustrative Customer Profitability Map


   High         “Platinum”                  “Gold”
                             Ÿ
                       Ÿ ŸŸ Ÿ
                         ŸŸ Ÿ
                           Ÿ Ÿ
                  Ÿ      Ÿ
Price               ŸŸ Ÿ Ÿ
                                        Ÿ
                                  Ÿ Ÿ
                              Ÿ        Ÿ
                                 Ÿ Ÿ Ÿ Ÿ
                             Ÿ Ÿ Ÿ           Ÿ ŸŸ
                                   Ÿ           Ÿ Ÿ
                 “Silver”                   “Lead”
   Low
          Low                                        High

                      Cost to Serve
               Price Banding Output
                                       At Risk
                                      Fair Price
                                      Outlaws
Actual Price




                     Fair Price
            Customer Lifetime Value (CLV)
   Useful Analysis at the Individual Customer & Segment

      CLVinfinite lifetime      = CM/(i* + 1 – r) – AC
 where
 CM = average annual contribution for the customer (segment)
 i* = i (=the risk-free discount rate) × risk factor
 r  = retention rate for the customer (segment)
 AC = acquisition costs
How valuable/profitable is each customer (segment) given
prices & variable costs (i.e., contribution), retention rates,
discount rate, risk level & acquisition costs?
How valuable/profitable is an acquisition or retention campaign
given prices & variable costs (i.e., contribution), retention rates,
discount rate, risk level & acquisition costs?
                  Customer Equity
              Facebook April/May 2012
 Customer Equity         = # Customers × CLV
  At Facebook
• April 2012 Unique Users: 900,000,000
• Revenue ≈ 3.7 B; CM (90%) ≈ $4; i* = .05;   r = .95
• CLV ≈ $40

• Customer Equity = #Users × CLV = $36 B

External Valuation May 2012: ~$100 B
                 Customer Equity
             Facebook July/August 2012
 Customer Equity            = # Customers × CLV
  At Facebook
• July 2012 Unique Users: 955,000,000
• Revenue ≈ 4.7 B; CM (90%) ≈ $4.4
• CLV ≈ $44

• Customer Equity = $42 B

External Valuation August 2012: ~$50 B
                                 Price Waterfall Example

       800


                 620        45
       600                             1        67

                                                          507      15
                                                                               25
Price ($)                                                                                1         5         6      455


       400


                                             Major
                                           Opportunity
       200



            0
            Transaction   Ordersize Upcharges MCP / Bid Invoice   Credits   Discount / Misc.     Rebates   Debit   Pocket
               Price      Discount             Discounts Price                Terms Charges /              Backs    Price
                                              and Waived                              Allowances
                                              Upcharges
      Next Week

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posted:11/16/2013
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