1. Introduction to Pricing
Sreelata Jonnalagedda

2. The “PRICE” difference
1c increase in price on a can of coke = $300M
A 1% increase in price leads to an increase in
net income of
6.4% for Coca-Cola
17.6% for Fuji
26% for Ford Motor Company
Small Change  Giant Impact

3. Do Exactly as I Say
• Pick a paper and pen
• Think of an offering you
want to price
• Write it down
• Come up with a criterion
for making that pricing
decision
• Write it down

4. Cost Customer Competition
Cost + Margin Willingness-to-Pay Rival product price
 Any sale should  I don’t want to  Cannot let a rival
cover costs lose a customer steal my
 At least I know  All I need to do is customer
the formula ask the customer  Looking around
 Easy to justify  Customer is god in the market is
within the easy
organization  This is what the
market will bear

5. The margin math
 How are you accounting for your costs?
 What if prices affect cost structure?
 What about opportunity costs?

6. What customers want?
“everything for nothing”
 Do customers dictate your prices?
 Do they reveal their true willingness to pay?
 Do they understand your offering?

7. Competing to win
 What is your unique value proposition?
 Price: A fertile ground for a war?
 Should market share be your goal?

8. The relevant C’s
Customer
Competition
Cost
Create Value
Calibrate Value
Communicate Value
Capture Value

9. What is Value?
Does need drive value?
What is Economic Value?

10. Estimating the economic value
Negative Differentiation
Value
Positive
Differentiation
Value
Total Economic Value
Reference Value

11. The case of Zip Car
Car sharing company: to provide reliable and
convenient access to on-demand
transportation.
Existing modes of transportation:
Subway/Bus, Taxi, Rental car, personal vehicle
Share Fare includes: insurance, fuel, access

12. Subway/Bus Rental Car
1. Insurance ($1/hr)
1. Comfort 2. Convenience (time saved: $12/hr)
2. Travel 3. Fuel savings ($2/hr)
Flexibility
1. Induction
1. Driving Hassle
cost
2. Pre-book time
($1/hr)
1. Access 1. Pre-booking
2. Availability 2. Travel Flexibility
3. Comfort
Reference Value = $5/hr(inclusive
of insurance + fuel + rental)
Economic Value = $(5 + {12 + 1 + 2} – 1) = $19/hr

13. Value and Price
Objective Value
Perceived
Negative Value
Differentiation
Consumer’s
Value
incentive to
Positive buy
Differentiation
Value
Price
Total Economic Incentive to sell
Value
Reference
COGS
Value

14. Price and the 3 C’s
Are customers, competition and costs completely
irrelevant to pricing?
 Not really
 Is that all then?
 Distribution, Product Life Cycle, etc..

15. Pricing for Start-Ups
Sreelata Jonnalagedda

16. Economic Value
Negative  Closest Alternative
Differentiation
Value  Unique Value Proposition
Positive
Differentiation  Cost of doing business
Value
unique to you
Total
Economic
Reference Value
Value

17. On Reference and Frames

18. On the Value of a Brand

19. Unique Value and Costs
New Ventures Typically
 Over estimate costs (of doing business)
 Underestimate unique value

20. The Crash Diet Pricing
Price Economics 101
 End-of-quarter reactions to influence stock
market
 Sales targets to be met for bonuses
 Handy lever for the executives
 Least understood by managers

21. Costs
Business Model

22. The Start-Up Challenge
Will do anything
 What is the market need?
Desperate to make a sale
 Flexibility/ less rules
Too much room for experimenting
 Start anywhere
Inexperience
 Nobody is watching you

23. Pricing Models
 Transactional (Product/Service)
 most Common
 Subscription
 used for recurrent transactions
 Free/mium
 popularized by the web, Ex: Dropbox
 Two-sided subsidies
 in exchange for the consumer info, Ex: Google
 Direct Subsidies
 the razor and blades model

24. Popular Myths: FREEly Available
х Abundance drives free
pricing
х Free triggers adoption
 There is no such thing a free lunch
 Free has a negative effect on the psychology of
consumption

25. Is Free Inevitable?
 Businesses that thrive on communities
 are communities first , businesses next
 indiaparenting.in, r2i.com
 In winner-take-all markets
 it’s a bet on the future
 every bet has risks
 Commoditized markets
 by definition you add no value

26. Price, Payment, and Consumption

27. To Each His Own

28. How do I come up with a pricing model?
……………….Well… you don’t!
Value (Creation)
Calibrate (Estimate EV)
Communication of Value
Capture Value (Price)