Published on March 8, 2014
Pricing as a Strategic Marketing Tool © Tom Smith, Insights From Analytics, 2014
Selling Value Price + Perception = Value © Insights From Analytics, 2014
Symptoms of Pricing Problems • Sales’ incentive compensation based on sales (revenue), rather than profits (margins), and the rep can affect the final price. • Cost of goods sold are rising as a percent of sales (eroding margins). • Price changes are made across the board. • The use of cost-plus pricing. © Insights From Analytics, 2014
What is a Price? It’s what you think your product is worth to that customer at that time. © Insights From Analytics, 2014
What Else is a Price? • It’s the customer’s least favorite part of buying. • It’s a marketing expense to the seller. • It’s the only marketing tool that directly affects both the top and bottom lines of the P&L. • It’s the easiest marketing tool for the competition to copy. • It’s a marketing tool representing everything about the product -especially quality and value perceptions. © Insights From Analytics, 2014
Price Change Models Fixed costs unchanged: -(% Price Change) (% Margin) - (% Price Change) = % Sales Change Fixed costs changing: % Sales Change from Above + $ Change in Fixed Costs (New Margin) x (Unit Sales) May lose existing business: Breakeven = Price Change Margin © Insights From Analytics, 2014
The 4 C’s of Pricing What is the highest price I can charge and still make the sale? • Customers • Competitors Am I willing to sell at that price? • Costs • Constraints © Insights From. Analytics, 2014
Costs Must Have Some Role? • Costs help find the most profitable quantities to sell and markets to serve. • The only relevant costs for pricing are: • Forward-looking • Incremental • Avoidable • Pitfalls: • • • • Using average variable costs Using accounting depreciation Treating a single cost as all relevant or irrelevant Overlooking opportunity costs © Insights From Analytics, 2014
Price Bands Units Industry Average Price Level Price Index Unit sales or order frequency of a single product sold to a single market segment over a range of prices © Insights From. Analytics, 2014
Price Band Drivers • Supplier-driven • “Cost-to-serve” difference • Uneven competitive intensity • Pricing structure • Customer-driven • • • • Customer buying process Uneven switching cost Imperfect knowledge of market price levels Uneven economic value to customer © Insights From Analytics, 2014
Factors Affecting Price Sensitivity • Unique value • Substitute awareness • Difficult comparison • Total expenditure • End-benefit • Shared cost • Sunk investment • Price-quality • Inventory © Insights From Analytics, 2014
Margin Bands Band widths typically increase as their definitions become more precise for a given product/market segment. Volume Discount Competitive Discount List Price Freight Credit Terms Invoice Price Off-Invoice Promotions Pocket Price © Insights From Analytics, 2014 Selling, commissio n order processing Finished goods, Spare parts Margin
Strategic Pricing Pricing Strategy = Move the price band Pricing Tactic = Move up the price band without losing volume Have an infinite number of price points. Give the customer what they want at the price you want them to pay. © Insights From Analytics, 2014
Alternative Pricing Strategies • Skimming • Sequential skimming • Penetration • Neutral • Segmentation • Buyer identification • • • • • • Purchase location Time of purchase Purchase quantity Product design Product bundling Tie-ins/metering © Insights From Analytics, 2014
Tactical Pricing – Move Up The Band • Shift mix of orders taken • Customer mix • Order size mix • Reduce money left on the table • Establish the highest possible level • Only use price levers when they pay off • Maintain • Overall share position • Upward pressure on industry prices • Strong customer relationships © Insights From Analytics, 2014
Summary • Sell at a premium price • Increase industry prices • Maintain higher than average prices • Leave less on the table • Give less away © Insights From Analytics, 2014
A Final Thought “It is unwise to pay too much, but it’s worse to pay too little. When you pay too much, you lose a little money. When you pay too little, you sometimes lose everything, because the thing you bought was incapable of doing the thing it was bought to do. The common law of business balance prohibits paying a little and getting a lot -- it can’t be done. If you deal with the lowest bidder, it is well to add something for the risk you run. And if you do that, you will have enough to pay for something better.” © Insights From Analytics, 2014
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