2. AGENDA
Product Pricing – Why?
Pricing & Product Value
Pricing & Place (Margins, MDF, Incentives, Landing Price)
Pricing & Positioning (Price Leadership, Premium Pricing)
Pricing & Piracy
Pricing & Volume Purchase
Pricing Mirrors Business Model
3. WHY PRODUCT & PRICING?
PRODUCT & PRICING GO HAND IN HAND…
4. PRICING BASICS
• If your value to customer is
merely a low price, you
either keep an eye for a
new job (or) ensure all
other parameters are tuned
to deliver price leadership.
5. WHY PRODUCT PRICING?
WHY PRODUCT?
Ready to ‘Satisfy’ (or) to ‘Create’ a Need
Core Product Actual Product Augmented
Product
Either has a ‘Utility’ (or) kindles a ‘Desire’
‘Finished’ to Buy (or) to Resell
Solutions ‘Packaged’
Can be ‘Tangible’ (or) ‘Intangible’
‘Sticky’ Products = Customer ‘Retention’
WHY PRICING?
‘How much?’ in exchange of ‘Need satisfying
Product’
Monetize by Pricing to match Product layers
Transparency to enable Decisions
Amplify Engagement Velocity
Minimize ‘Post Purchase Dissonance’
Elongate with Retainer-ship pricing
This is how your Organization makes profits
6. NEW PRODUCT PRICING
Two types of products
Imitative products
Innovative products
Requires different approaches
12. PRICING & PLACE
+2% +5%
+20%
-20% -5% -2%
Functional Role + Risk Levels + Assets Used
13. SUPPLY CHAIN : WHY CHANNEL PRICING?
“Value added” Reseller (VAR) impact in 3 ratings viz., “Quality, Delivery (Stock keeping/Logistics/credit days),
Service”
Pv =Pq [1+(+Q + D + S)]
Where Pv = VAR Price
Pq = Quoted Price
Q = Quality Rating
D = Delivery Rating
S = Service Rating
+Q +D +S = Vendor Rating
14. CHANNEL FUNCTION & PRICING DECISIONS
Pepsi Bottling
Plant
Vending
Machines
Resellers / Online
Distributors
Call Center / Web
Service Providers
15. SC PRICING METHODS: CUP, RPM
Comparable Uncontrolled Pricing
Method
Resale Price Method
Resale Price(RSP): Price at which Product
Owner can sell (to end Customer)
GPM: Gross Profit Margin needed for the
Reseller, to cover
Functions performed (eg., Sales/Payment
period/Market Dev)
Risks Undertaken (eg., Inventory Held)
Assets Used
TP: Transfer Price for the ‘Reseller’
OECD Prescribed
CUP
RPM
Cost Plus
Transactional Net Margin
Method (TNMM)
Transactional Profit Split
Method (TPSM)
Organization for Economic Cooperation & Development
16. MULTI CHANNEL PRICING
http://hbsp.harvard.edu/multimedia/flashtools/channelmargins/
Sequence the Channel – based on,
Customer Buying Behavior
Your Business Priorities / Preferences
Competition Methods
Channel Sequence may be “1,2,3….n” (or) “1, 2, 2, 2,
3…n, n”
Per the ‘Channel Sequence’, the Value Add differs
Functions performed (e.g., Sales/Payment period/Market Dev)
Risks Undertaken (e.g., Inventory Held)
Assets Used
Feeder to next Channel Levels
Maintain the Price Levels ~ Channel Sequence (unless
market dynamics change)
17. PRICING & SUPPLY CHAIN (PEPSI INDIA CHANNEL)
http://www.scribd.com/doc/28578846/Pepsi-Distribution-Channel
Direct Store Distribution (DSD)
19. PRICING & PRODUCT POSITIONING
Waste of
money
Cool!
Knowing what your target customer perceives as
valuable is essential to setting a price…
US$ 27,000
23. Stage 1:
Want to use/know before buying
Stage 2:
Cost of Pirating ~ Price of Product
PIRACY STAGES & PRICING IMPACT MODEL
24. PRICING TO COUNTER PIRACY
PRODUCT EDITION
PRICING
Editioning involves
creating the complete
product and degrading it?
Is this OK?
Yes, if it improves
consumer satisfaction
Helps Consumer to not to
fall victim to Counterfeit
PRODUCT SAMPLE
PRICING
Customers will buy at Price (P) if
their utility is non-negative
Customer has 2 choice: Pirate (or)
Use Legal Samples
Free/Low cost Samples to get
them taste the utility (Freemium
Model)
Customer save on ‘Moral Cost of
Pirating’ (internal cost of
committing an illegal activity –
Chellappa & Shivendu 2003a)
Sampling cost < Cost of difficulty
of pirating (tech & legal factors)
PRICING
STRATEGIES
Penetration Pricing
Loss-Leader Pricing
Price Skimming (Generate
Premium before Counterfeit
hits – release next product
version at high price –
reduce the prices for earlier
version)
26. PRICING & VOLUME PURCHASE
Why Volume Pricing?
Price Advantage for Customers buying in
volume
Passing Economies of Scale benefits to
Customers for increase in volume
Large Customers to get better prices (expected
to buy large quantities) compared to small
Customers
Increase Demand for higher quantity
Upselling Opportunities
Customers to increase the size of their orders
Gets incremental profits for Sellers
27. ENABLE VOLUME PRICING
Volume Pricing Types
Multi-Step Quantity Discounts
Two Part Tariff Discount Pricing
Time & Loyalty Based Pricing
Multi-Product Pricing
Multi-Person Pricing
Price Guarantees
28. TWO-TARIFF VOLUME PRICING – CASE STUDY
German National Railroad
Standard price per mile using the train is
24¢
BahnCard is sold for a flat fee of $220
User gets a 50% discount in all trains for 1 yr
Breakeven point (total savings = $220 card
fee) is 1833 miles
Once spent the $220 for the card are sunk
cost and there is a strong incentive to
maximize its use as this means saving
more money
3.1million cards are sold per year,
revenues are over1.3billion USD
29. VOLUME PRICING MODELS
All Units Discounting Incremental Pricing Model
All-Units Volume Pricing - Total Price by Volume
All-Units Volume Discount - Per Unit Price
While
enticing
the
customer
to buy 10
instead of
nine, it
actually
results in
you
making
less
money
Incremental Volume Pricing - Price Per Unit
Incremental Volume Pricing - Total Price
Advantages
•There are no
step-down points.
where you are
selling more, but
less revenue
Disadvantages
•The pricing logic
is more difficult for
customers to
understand
•The per-unit price
displayed to
customers will not
be a marketing-
friendly price.
http://www.buildingkeystones.com//
31. PRICING TO MIRROR BUSINESS MODEL
“PRICING IS ALMOST NEVER ABOUT THE
NUMBER.
IT’S ABOUT THE MODEL”
32. WHERE DOES PRICING FIT?
Part of the Business Model
How do we make money?
How much money we can make?
Revenue / Profit / Forecast (Pricing is the base Unit)
Pricing Supports Core Value Prop
Our Product saves you $$$
…and we want 15% of that savings (our Price!)
Who are our Customers & how to reach them?
Direct Selling? Incentives / Price discounting levels / Pricing term flexibilities
Indirect Selling? Margins / Rebates / Special Pricing Requests
How quickly we can close a deal? How can we make our Partners to sell ‘quicker’?
34. PRICING EXERCISE 2: 15 MINUTES
Take a sample product
Tell your Product Story
What is the Customer Value? How did you validate Customer Value?
Who is your competition? What relative value your product has more than competition?
Specify & Justify your Product Price (quantitative)
Explain your Organizations business model & pricing alignment (Discounting / Promotions / Budling)
35. SUMMARY
Product Value Map ‘helps’ setting the right price
Channel Pricing to ‘scale’ your Product Adoption
Multi-Channel Pricing enables channel layers to ‘feed Opportunities’ to other layers
Pricing aligns and ‘confirms’ Product Positioning
Right Product Strategies & Pricing effectively ‘counters’ Piracy
Volume Pricing and discounting ‘retains’ Customers and boosts revenue
Pricing ‘complements’ Business Model
Your resultsYour results:: Business GrowthBusiness Growth
36. THANK YOU
SHIV.M@MICROSOFT.COM
All information contained in this presentation are based on the personal research & experience of the presenter.
The deck is prepared for presenting at IPMA, Bangalore for its members, solely for knowledge purposes only.
