pricing

1. Pricing
The Puzzle of the Next Century

2. Costs + Margins = PRICE
Pricing Puzzle
“ A price is not merely a function of costs
and margins… ”

3. Costs + Margins = PRICE
Pricing Puzzle
“ A price is not merely a function of costs
and margins… ”
“…it is an expression of VALUE ”

4. Pricing Puzzle
 Production costs
 Indirect costs
 Advertising costs
 Distribution costs
 Manufacturer’s margin
 Distributor’s margin
 Seller’s margin
 Product performance
• Usefulness & Quality
 Image / Aspirations
• Brand Equity
 Availability
• Distribution Strategy
 Service
• Before/During & After sales
Minimize Optimize Maximize
Costs + Margins = PRICE
VALUE

5. Pricing Puzzle
4 P’s
 PRODUCT
 PRICE
 PLACE
 PROMOTION
4 C’s
 CUSTOMER VALUE
 COST
 CONVENIENCE
 COMMUNICATION

6. Pricing Puzzle
4 P’s
 PRODUCT
 PRICE
 PLACE
 PROMOTION
4 C’s
 CUSTOMER VALUE
 COST
 CONVENIENCE
 COMMUNICATION

7. A Secret Pie
 Impact of a 1 % price increase on profits
– Coca-Cola 6,4 %
– Nestlé 17,5 %
– Ford 26,0 %
– Philips 28,7 %

8. Pricing Puzzle
4 P’s
 PRODUCT
 PRICE
 PLACE
 PROMOTION
4 C’s
 CUSTOMER VALUE
 COST
 CONVENIENCE
 COMMUNICATION
Seller’s Dilemma

9. Pricing Puzzle
4 P’s
 PRODUCT
 PRICE
 PLACE
 PROMOTION
4 C’s
 CUSTOMER VALUE
 COST
 CONVENIENCE
 COMMUNICATION
“ Tomorrow’s winner companies will
be those who offer distinct products at
comparatively low market prices ”

10.  Physical Differences
– Features, performance, durability, conformance, design, etc…
 Availability Differences
– Distribution channels ; Stores, mail-order, internet, etc…
 Service Differences
– Delivery, installation, training, consulting, maintenance, etc…
 Price Differences
– Price positioning (Very high / High / Medium / Low / Very Low)
 Image Differences
– Symbols, atmosphere, events, media, etc…
Key = Differentiation
The key to drive value is to offer relevant and
distinctive product differentiation

11.  Physical Differences
– Levi’s Engineered Jeans (Ergonomic construction, durability, style)
 Availability Differences
– Dell Computer’s customized production, Volkswagen “e.lupo”
 Service Differences
– Acıbadem Hospital – Mother Care Division, Nissan “5-year Warranty”
 Image Differences
– Audi vs Mercedes, DuPont (Innovation Leader)
Differentiation : Examples
Key = Differentiation

12.  Perdue Chicken (USA)
– Guaranteed tenderness (30 % market-share, 10 % premium pricing)
 Flora Drinking Water (Turkey – Sabancı Holding)
– Service, packaging, attributes, operation
 Starbuck’s Coffee (USA)
– Atmosphere, standard service
Differentiating commodities…
Key = Differentiation
Everything can be differentiated !...

13. Pricing Decisions
 INTERNAL FACTORS
– Marketing Objectives
» Positioning
» Target Group
– Marketing Mix Strategy
» 4 P’s
– Costs
» Fixed & Variable
– Management Approach
» Responsibility
» Perspective
 EXTERNAL FACTORS
– Market
» Pure Competition
» Monopolistic Competition
» Oligopolistic Competition
» Pure Monopoly
– Demand
» Elastic / Inelastic
– Competition
» Competitors’ offers
» Competitiors’ reactions
– Economy
» Buying power
– Government Influence
» Laws & Regulations

14. Pricing Approaches
 Cost-Based Pricing
– Cost-Plus Pricing
» Product Cost + Standard Mark-Up = Price
– BE Analysis & Target Profit Pricing
» A necessary survival tool
 Buyer-Based Pricing
– Perceived Value
» Consider buyers’ perceptions of value NOT the cost
 Competition-Based Pricing
– Basing prices on competitors’ prices
» Premium Pricing
» Going-Rate Pricing
» Discount Pricing

15. Pricing Strategies
 PRICING a SINGLE NEW PRODUCT
– Market-Skimming
» Highest possible price to skim small but profitable segments
– Penetration Pricing
» Lowest possible price to penetrate the market quickly

16. Pricing Strategies
 PRODUCT-MIX PRICING
– Product-Line Pricing
» Establishing product lines at different price points
 Volkswagen (Polo, Bora, Golf, Passat)
– Optional-Product Pricing
» Offering to sell optional/accessory products along with the main product
 BMW & Mercedes
– Captive-Product Pricing
» Offering products, which must be used with the main product
 Gillette razor blades
– By-Product Pricing
» Valued by-products positively affect pricing
 Petroleum by-products
– Product-Bundle Pricing
» Several products combined and offered at a reduced price
 Season tickets, New-year packages of hotels

17.  Adjust basic prices to account for various customer
differences and changing situations
– Discounts & Allowances
» To attract/reward certain customer respones
– Discriminatory Pricing
» To allow for differences in customers, products & locations
– Promotional Pricing
» Varying price reductions offered depending on shopping
period, item purchased, etc...
Price Adjustments

18. Price Adjustment Strategies
 DISCOUNTS & ALLOWANCES
– Cash Discounts
» Attract early payments
 A 15% reduction applied to those customers who buy on cash
– Quantity Discounts
» Price reduction to buyers who buy large quantities
– Functional Discounts
» Differentiating prices among trade channel members
 Different mark-ups for OLSs and corners
– Seasonal Discounts
» Price reduction to buyers who buy out-of-season
– Allowances
» Trade-in Allowances
 Bring the old, take away the new...
» Promotional Allowances
 Discounts provided in return for participating in special programs

19. Price Adjustment Strategies
 DISCRIMINATORY PRICING
– Customer-segment Pricing
» Different customers pay different prices
 Disneyland Adult vs Child pricing
– Product-form Pricing
» Different versions of the product are priced differently, regardless of the
cost
 An additional feature with a slight cost might justify a fat price premium
– Location Pricing
» Different locations are priced differently, regardless of the cost
 Business Class seats
– Time Pricing
» Prices differ from month to month, day to day, even hour to hour
 Prime-time/Off-prime-time pricing of advertising time

20. Price Adjustment Strategies
 PROMOTIONAL PRICING
– Loss Leaders
» Attract consumers in store, sell other items as well
 Hyper-Markets (Carrefour, Gima, Praktiker, Migros, etc...)
– Special-event Pricing
» Offering discounts at times of special events
 Valentine’s Day, New year, Şişli Municipality’s discount campaign
– Cash Rebates
» Discounts offered to consumers for purchases made in a limited period
of time
 Dockers campaign (20 % off)
– Simple Cash Discounts
» Over-the-counter to support revenues OR to defend against competition

21.  Consumer’s Mind-set (Black-Box)
– BE CAREFUL !!!
» Price vs Quality Image
 CK perfume
 Rolex watch
 Pharmaceutical items
» Perceptions
 30.000.000 TL vs 29.950.000 TL
Psychology of Price

22. One Final Word
“ A product is not a product unless it sells.
Otherwise, it’s just a museum piece…”
Ted Levitt