9 Strategies of Pricing

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					Pricing strategies and product life
TU-91.1008 Markkinoinnin perusteet /
Introduction to Marketing

Erik Pöntiskoski
February 9, 2009
        Learning objectives

        After this lecture, you should be able to

              – Define the concept of a business model and
                explain its role in capturing value
              – Discuss the importance of understanding
                customer value perceptions when setting prices
                and the importance of company and product
                costs in setting prices
              – Outline basic strategies for pricing and explain
                how they are used in B2B and B2C contexts

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        1. About business models

        2. Factors to Consider When Setting Prices

        3. Pricing Products: Pricing Strategies

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About business models
        Alternative definitions of business models

        • BusinessDictionary.com
              – “Description of means and methods a firm employs to earn
                the revenue projected in its plans. It views the business as
                a system and answers the question, ‘How are we going to
                make money to survive and grow?’”
        • Venkatraman & Henderson (1998)
              – “Business model is a coordinated plan to design strategy
                along the customer interaction, asset configuration and
                knowledge leverage vectors.”
        • Amit & Zott (2001)
              – “Business model depicts the content, structure and
                governance of transactions designed to create value
                through the exploitations of business opportunities.”
        • Winter & Szulanski (2001)
February 9, 2009   “Business model is typically a complex set of
                                      Erik Pöntiskoski                         5
                   interdependent routines that is discover, adjusted, and fine-
                   tuned by ‘doing’.”
           The marketing process:
           Making it all happen in your business model

        Create value for customers and build customer relationships             Capture value from
                                                                                customers in return

                                         Construct an
                                                                                   Capture value
Understand the           Design a         integrated         Build profitable
                                                                                  from customers
marketplace, and      customer-driven     marketing        relationships and
                                                                                  to create profits
customer needs           marketing       program that       create customer
                                                                                   and customer
  and wants               strategy         delivers              delight
                                        superior value

Where do you put your resources in this process to make your business model work?
   February 9, 2009                     Erik Pöntiskoski                                      6
                                          Kotler & Armstrong, 2008, p. 5
        Capturing value through business models

        •    A business model is not strategy, but rather the
             implementation of strategy
              – Operationalization of the marketing process
              – Creating and capturing value
                   •   Generating revenue through sales & marketing
                   •   Creating, communicating and delivering customer value
        •    Perspectives into business models
              1.   Strategic choice
              2.   The value network
              3.   Creating value
              4.   Capturing value

February 9, 2009                    Erik Pöntiskoski                           7
        Things to coordinate in your business model
        (Shafer et al., 2005)

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        Managerial implications

        • Managing hypergrowth (Izosimov, 2008)
              1. Rule: Sell first and ask questions later
                   • Focus on first sales
              2. Rule: Don’t try too hard to innovate
                   • Innovate with caution, so you don’t lose focus
              3. Rule: Organize like McDonald’s
                   • Standardize structures and procedures
              4. Rule: Push decisions out to the front line
                   • Delegate decisions to field managers
              5. Rule: Foster a Can-Do culture
                   • Reward action and initiative
February 9, 2009                  Erik Pöntiskoski                    9
Pricing Products:
Understanding and Capturing Customer
        What is price?

           Price is the amount of money charged for a product or service.
           It is the sum of all the values that consumers give up in order to
           gain the benefits of having or using a product or service.

           Price is the only element in the marketing mix that produces
           revenue; all other elements represent costs

           Effective customer-oriented pricing involves understanding how
           much value consumers place on the benefits they receive from
           the product and setting a price that captures that value

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        Factors to Consider When Setting Prices

                            Customer Perception of Value

           Value-based pricing uses the buyers’ perceptions of value,
           not the seller’s cost, as the key to pricing. Price is
           considered before the marketing program is set.
              • Value-based pricing is customer driven
              • Cost-based pricing is product driven

           Good-value pricing offers the right combination of quality
           and good service to fair price
           Value-added pricing attaches value-added features and
           services to differentiate offers, support higher prices, and
           build pricing power
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        Factors to Consider When Setting Prices

                         Company and Product Costs

           Cost-based pricing involves setting prices based on
           the costs for producing, distributing, and selling the
           product plus a fair rate of return for its effort and risk
              • Types of costs: Fixed, Variable, and Total costs

           Cost-based pricing adds a standard markup to the
           cost of the product
           N.B. Experience or learning curve is when the
           average cost falls as production increases because
           fixed costs are spread over more units
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        Factors to Consider When Setting Prices

                           Price Ceiling
                   Customer perceptions of value
                     No demand above this price

               Other internal and external considerations
                   Marketing strategy, objectives and mix
                    Nature of the market and demand
                    Competitors’ strategies and prices

                             Price Floor
                           Product costs
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                       No profits below this price
        Factors to Consider When Setting Prices

        Pricing objectives include:
              •    Survival
              •    Profit maximization
              •    Market share leadership
              •    Customer retention and relationship building
              •    Attracting new customers
              •    Opposing competitive threats
              •    Increasing product excitement

           Non-price strategies differentiate the marketing offer
           to make it worth a higher price
              • Basically this is about positioning!

February 9, 2009                    Erik Pöntiskoski              15
Pricing Products:
Pricing Strategies
        New-Product Pricing Strategies

           Market skimming pricing is a strategy with
           high initial prices to “skim” revenue layers
           from the market

              •    Product quality and image must support the price
              •    Buyers must want the product at the price
              •    Costs of producing the product in small volume
                   should not cancel the advantage of higher prices
              •    Competitors should not be able to enter the
                   market easily
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        New-Product Pricing Strategies

           Market penetration pricing sets a low initial price in
           order to penetrate the market quickly and deeply to
           attract a large number of buyers quickly to gain
           market share

              •    Price sensitive market
                    •   Customers don’t differentiate between brands
              •    Inverse relationship of production and distribution cost to
                   sales growth
                    •   Gain profits from increasing sales and learning in production
              •    Low prices must keep competition out of the market
              •    Do customers follow you after you stop dumping?

February 9, 2009                       Erik Pöntiskoski                             18
        Product Mix Pricing Strategies

                         Pricing Strategies

        •   Product line pricing
        •   Optional product pricing
        •   Captive product pricing
        •   By-product pricing
        •   Product bundle pricing

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        Product Mix
        Pricing Strategies

        • Product Line Pricing
              – Setting price steps between product line items.
                   • Price points

        • Optional-Product Pricing
              – Pricing optional or accessory products sold with
                the main product
February 9, 2009                    Erik Pöntiskoski              20
        Product Mix
        Pricing Strategies

        • Captive-Product Pricing
              – Pricing products that must be used with the main product
                   • High margins are often set for supplies

              – Services: two-part pricing strategy
                   • Fixed fee plus a variable usage rate

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        Product Mix
        Pricing Strategies

        • By-Product Pricing
              – Pricing low-value by-products to get rid of them

        • Product Bundle Pricing
              – Pricing bundles of products sold together

February 9, 2009              Erik Pöntiskoski                     22
        A managerial view:
        Project vs. Product business

             Cash flow and profits
              PROJECT                                                   PRODUCT
             MARKETING                                                MARKETING
                                                               Main Street

                                                    The Tornado

                                     Early market   Chasm                      End of Life

                                                       The Bowling Alley

    • Nothing is the same after the chasm
         – Customers
                                                                            What is the “industry recipe”
         – Competition
                                                                                    for success?
         – Marketing and channels
February 9, 2009                                         Erik Pöntiskoski                          23
Guest lecture
Marko Parkkinen
        Guest lecture, Feb 9

        • Marko Parkkinen
              – Finnish serial entrepreneur

        • Currently
              – CEO, News-to-Screen Ltd
              – Boardmember, Fruugo Ltd.

        • Lecture themes
              – Commercializing ideas and technologies
              – Capturing value
February 9, 2009              Erik Pöntiskoski           25

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