Pricing Strategy

Andry Alamsyah
@andrybrew

IMT, December 2011

Source: Product Strategy for High Technology Company (McGrath)

Price is the quantity of payment or compensation given by one party to another in return for goods or services. Customer will compare the compensation with perception of the value of goods or services.

The sources for cost advantage provide the foundation to support price strategy. Without a cost advantage, a company competing on price is really just cutting its profit.

Developing Pricing for New Product

1. 2. 3. 4. Develop marketing strategy - perform segmentation, targeting, and positioning. marketing analysis,

Make marketing mix decisions - define the product, distribution, and promotional tactics. Estimate the demand curve - understand how quantity demanded varies with price. Calculate cost - include fixed and variable costs associated with the product.

5.
6. 7.

Understand environmental factors - evaluate likely competitor actions, understand legal constraints, etc.
Set pricing objectives - for example, profit maximization, revenue maximization, or price stabilization (status quo). Determine pricing - using information collected in the above steps, select a pricing method, develop the pricing structure, and define discounts.

Source: NetMBA.com

Pricing Methods

1. 2. 3. 4.

Cost-plus pricing - set the price at the production cost plus a certain profit margin. Target return pricing - set the price to achieve a target return-oninvestment. Value-based pricing - base the price on the effective value to the customer relative to alternative products. Psychological pricing - base the price on factors such as signals of product quality, popular price points, and what the consumer perceives to be fair.

Source: NetMBA.com

Price Discounts

1. 2.

Quantity discount - offered to customers who purchase in large quantities. Cumulative quantity discount - a discount that increases as the cumulative quantity increases. Cumulative discounts may be offered to resellers who purchase large quantities over time but who do not wish to place large individual orders. Seasonal discount - based on the time that the purchase is made and designed to reduce seasonal variation in sales. For example, the travel industry offers much lower off-season rates. Such discounts do not have to be based on time of the year; they also can be based on day of the week or time of the day, such as pricing offered by long distance and wireless service providers. Cash discount - extended to customers who pay their bill before a specified date. Trade discount - a functional discount offered to channel members for performing their roles. For example, a trade discount may be offered to a small retailer who may not purchase in quantity but nonetheless performs the important retail function. Promotional discount - a short-term discounted price offered to stimulate sales.

3.

4. 5.

6.

Source: NetMBA.com

Effects of Pricing Strategy

Price positions a product in the market

Effects of Pricing Strategy

Prices decline throughout a markets evolution.

Development: costs are initially high and products are generally at their highest price. Growth: New market begins to define itself. Customers select their preferences. High-tech product prices generally decline. Maturity: Price competition accelerates as market moves from the growth to maturity stage. Price becomes a more important competitive strategy. Decline: Some competitors exit the market and dump their excess inventory at fire-sale prices. Those companies that remain in the market have to reduce margins. There is little to differentiate competitive products. There is little justification for a high-margin, high-price strategy.

Effects of Pricing Strategy

Lower prices increase market penetration.

Sales of calculators from 1967 to 1979

Offensive Pricing Strategies

Establish price leadership as the basis for competing

User penetration pricing to increase the market

User experience-curve pricing to discourage competition

Offensive Pricing
Compete on the basis of price/performanc e Use promotional discounting to accelerate purchases

Defensive Pricing Strategies

Adapt prices to maintain highest competitive price
Adaptive pricing is the one of the most popular defensive price strategies for high-technology products. In most cases, however, it is the default of no price strategy.

User price to segment the market Use value-based pricing to maximize profit
A value-based pricing strategy is most effective in the early stages of a market.

Defensive Pricing

Use skim pricing to maximize profit

Redirect product line slase by bait-and-switch pricing

Risks of Offensive Pricing Strategies

1. Price leadership may not be sustainable. 2. Aggressive pricing could precipitate a price war. 3. Aggressive pricing may not be supported by a sufficient cost advantage.

Sources of Cost Advantage

1. 2. 3. 4. 5. 6. Low-cost design can provide a competitive cost advantage. Superior manufacturing and economies of scale build cost advantages. A more efficient supply chain is a source of cost advantage. Superior technology can provide product cost advantages. A superior development process can provide product cost advantages. Cost advantages can come from global scale.

15