Presentation on theme: "Pricing for Profit Small Business September 2010 Supported by Capital Region Business Enterprise Centre Adds up to better business powering better business."— Presentation transcript:
Pricing for Profit Small Business September 2010 Supported by Capital Region Business Enterprise Centre Adds up to better business powering better business online
Nothing contributes so much to the prosperity and happiness of a country as high profits. David Ricardo Mr Forbes, the ledger shows a slight profit this month!.. Young man, I dont give a damn what your books show. Do we have any money in the Bank? Malcolm Forbes Pricing for Profit
TopicDuration The Importance of Pricing for Profit Approx. 3 Hours Reaching for the Ceiling (Price) Feeling the Floor (Price) Setting the Price Adds up to better business powering better business online
McKinsey 1992 study found... One percent improvement in price created an 11% improvement in profit. By contrast, one percent improvement in variable cost, volume and fixed costs produced profit improvements of only 7.8%, 3.3% and 2.3% respectively. Source: Marketing Management 12e, Kotler & Keller Importance of Pricing for Profit
What is Profitable Pricing
Reaching for the ceiling Market Value Based Pricing Adds up to better business powering better business online
Like beauty, value is in the eyes of the beholder Versace $ g $5.76 (0.74/100g) 800g $4.36 (0.55/100g) Woolworths Qb Sheet set $31.99 Sheridan Qb Sheet set $ Wittner $204
Understanding Current & Forecasting Future Price Past Prices are usually easy to identify from retail scan data, market sales reports etc. Future Price is harder to determine.
Identify External Price Influences P.E.S.T.E. Political e.g. Housing grant changes, home insulation fund cancellation, change of government, Tax changes, etc. Economic e.g. GFC, investor and consumer sentiment. Social e.g. Gen Y, Baby Boomers, etc. Technology e.g. Decrease in cost of storage in computer market Environment e.g. Free range, organic, Icelandic eruption, disease outbreak, etc.
Internal Market Shifts New technology iPhone, iPAD, etc. New entrants Brands- Nudi Juice Supply Chain Dominance Integration - Vertical /Horizontal Market Consolidation Takeovers, Mergers, etc. Etc. *... A key question is whether price is largely defined by cost. The answer is not simple as both grocery and petrol industries are distinguished by many variable costs that affect retail prices. In the grocery market for example, applying costs across products is not guided by standard economic theory as costs are not just based on product but include services around product supply such as item display, parking and customer services. Also, relationships resulting from alliances with key dominant players will allow some businesses to determine prices or offer lower prices while others cannot. * Retail petroleum price discounts; impact on grocery prices - VACC research paper June 2007
Consumer Reference Price What a customer expects to pay is influenced by… Actual shopping experience (price memory) – how often they buy, how often they buy at discount, etc. Price / quality inferences (threshold and trade off) – you have to pay at least $200 for a good wallet. Brand perceptions (equity) – Expect to pay more for BMW than a Ford. Where they buy it (channel) – Expect to pay less on e-bay, more for wine at a restaurant than a club or pub, etc. Other choices (substitution) – Other categories that deliver similar benefits e.g. Drinks choice = soft-drinks, milk, water, alcoholic, etc.)
Internal Market Price Factors A number of reference price points operate in each category. 1.Usual listed / shelf / recommended price 2.Average discounted price 3.Expected future price
What is the maximum price you could charge? Price Elasticity of Demand = Proportionate change in Demand Proportionate change in Price
Explore how you create value for your customer? Functional Benefits (e.g. what it is used for ) e.g. BMW – efficient, safe and comfortable transport. Emotional Benefits (e.g. how it should makes them feel) e.g. BMW - the exhilaration of superior engineering. Aspirational Benefits (e.g. Why others will think its a smart choice) e.g. BMW – Reward and recognition for personal success POINTS OF PARITYPOINTS OF DIFFERENCE How do you match competitors How are you better or Worse than competitors
Ways to influence consumer reference price Price Reference Strategies Examples Distribution Channel choice - Online, department store, discount store, etc. In store location – discount v.s. designer items. Availability – managed scarcity can increase price premium. Recommended retail price Pricing just above or below a competitor creates a point of reference re price –quality comparison If a manufacturers price is shown that is high than the shelf price it creates an additional buyer incentive Price Band Cues – 99c, under $50, etc. Discount promotion patterns Regular discounting lowers expectation for future price. VIP program – rewards repeat buyers to drive loyalty but also lowers price reference over time. Product bundling Splitting expensive items into smaller units or breaking up payments over a period of time to lower price barrier. Grouping items to increase perceived value may also bring forward future purchase or increase trial. Branding and marketing Create the right meaning around your product through name, design, merchandising, packaging, advertising, etc.
Feeling for the Floor Cost Based Pricing Adds up to better business powering better business online
Calculating the Floor Price
Sustainable Gross Margin
Breakeven Analysis FIXED COSTS CONTRIBUTION MARGIN Contribution Margin Total Sales- Variable costs Total Sales
Calculating the Breakeven Point
Practical Demonstration Adds up to better business powering better business online
Importance of Accurate Business Information Clive Peeters
Greg Smith, Managing Director, said we provided an earlier business update on 11 February 2010, stating that we considered the half year result to be very creditable, having regard to the misappropriation events and the material impact that these had on trading over the months of July 2009 to October Smith added some erosion of gross margin occurred during H due to a more competitive retail environment. However Clive Peeters margins were impacted negatively as a result of the misappropriation events and the associated impact this had on our supply channel and rebate revenue. The Company announced that its efforts to reduce costs over FY 2009 had been sustained over H1 2010, with underlying costs coming in within expectations. Smith added our cost to sales ratio for the half fell to 20.7% despite the decline in sales. We are aiming to reduce the ratio further as we consolidate our business operations and resume new store rollout. The Company noted the improvement in its Sydney operations, assisted by reductions in advertising and store remuneration costs, and by the closure of the central warehouse. The H result for Sydney was a $0.8 million net operating loss after tax (H $1.6 million) The Clive Peeters Story...
Announcement 4 May Operating loss $4,500, The Clive Peeters Story continued...
Revenue, Gross Margin Relationship Woolworths
Sustainable Gross Margin David Jones
Setting the Price Pricing for Profit Adds up to better business powering better business online
Optimum Pricing Approach Floor Price = Fixed costs+ Variable Costs + Minimum Gross Margin Ceiling Price = Maximum Price /Quality Reference Point for the customer
Your Business Strategy Your business strategy should drive all your key decisions – especially pricing
Be clear about your intentions? Business Strategy questions…NOWFUTURE What do you want to achieve? What do you want to stand for in the market? Why does it matter – to you and others? What capability do you need to be successful? What do you need to overcome? How do you plan to achieve your goals? What plans / actions to you need to resource?
Strategic Pricing Tips Know your marketplace – external price Influences (macro / micro economic) Estimate the ceiling price – customer price-quality relationship, consumer / buyer reference points, elasticity of demand in your category Be clear about your business costs – fixed / variable / working capital / sustainable gross margin Cost your business plan – Why, what, when and how, know cost to serve each customer group, to mitigate competitors, prioritise opportunities (market /customer segments), set minimum and stretch targets Make the price you need – deliver maximum value to the customer for the price that fits with your business goals. Chess player thinking – flexible price strategies supported by strategic marketing and business operational processes