© 2003 Strategic Pricing Group, Inc. 1 The Pricing Strategy Pyramid Price Level Price setting Pricing Policy Negotiation Tactics & Pricing Setting Procedures Value Creation Economic Value, Offering Design, Segmentation Value Communication Communication, Value Selling Tools Price Structure Metrics, Fences

© 2003 Strategic Pricing Group, Inc. 2 Pricing Menus Map Price Structure, Help Customers Trade Up or Trade Down Fast Turn- around Special Processing Long-term Contract Unbundled Service Economy (85% of standard) Standard Premium (130% of standard) +25% +15%-10%-15% Required - 15% Included Not Available Base Offer Service A + 3% Service B + 7% Service C + 12 % A,B,C Included * Service D + 9% Service E + 6% OfferingsAvailable A “Fixed Price, Flexible Offer” Menu

© 2003 Strategic Pricing Group, Inc. 3 SEGMENTS WITH DIFFERENT PRICE SENSITIVITIES Personal vs. Business Expenses New to Market vs. Experienced Buyers Light Users vs. Heavy Users High Income vs. Low Income Big Spenders vs. Budget Conscious Students/Retired vs. Employed

© 2003 Strategic Pricing Group, Inc. 4 SEGMENTS WITH DIFFERENT INCREMENTAL COSTS TO SERVE Peak vs. Off-Peak Purchasers New Customers vs. Established Customers Light Users vs. Heavy Users

© 2003 Strategic Pricing Group, Inc. 5 Non-Segmented Price-Offerings Miss Opportunities High Med Low p1 Unharvested value Missed Opportunities Segments Value Received One size fits all offering During the recession, the trend was to bundle value-added services into core offering to defend price points and close deals During the recession, the trend was to bundle value-added services into core offering to defend price points and close deals A B CD

© 2003 Strategic Pricing Group, Inc. 6 Tiered Offerings Map to Value to Improve Profitability High Low Value Segments ABCD Prod. 4 Prod. 3Prod. 1 Differences in value can be captured with product variations or service augmentation that creates natural fences between segments Differences in value can be captured with product variations or service augmentation that creates natural fences between segments Prod. 2

© 2003 Strategic Pricing Group, Inc. 7 Other Examples of Product Variations Basic SRP $ Pro SRP $ All in Basic + Create Customized forms, Tools to Track add’l items Premier SRP $ All in Pro + Daily Sales Summary, Retail Specific Reports Standard SRP $ Professional SRP $ All in Standard + MS Access Developer SRP $ Development Tools to Build Own Applications

© 2003 Strategic Pricing Group, Inc. 8 Sometimes the Offering Can’t be Unbundled… High Med Low Segments Value Received One size fits all offering … in these instances, look to pricing metrics to capture value differences - p1 - - p2 - - p3 - - p4 - A B CD

© 2003 Strategic Pricing Group, Inc. 9 Examples of Value-based Pricing Metrics MarketTraditional MetricsValue-based Metrics Real Estate Want Ads$ / column inch$ / property value Aircraft Engines$ / engine$ per hour of use Information service$ / minute$ / download Pharmaceutical gas$ / volume inhaled$ / minute therapy

© 2003 Strategic Pricing Group, Inc. 10 SEGMENTED PRICING FENCES: TACTICS FOR SEPARATING MARKETS  Buyer Identification  Time of Purchase  Purchase Location  Volume or Purchase Quantity  Product Design  Product Bundling  Tie-Ins  Metering

© 2003 Strategic Pricing Group, Inc. 11 SEGMENTING BY BUYER IDENTIFICATION Charging different prices to different buyers based on observable characteristics that signal buyers' price sensitivity. Buyers in different segments must have different characteristics that either are obvious, or that buyers can be induced to reveal.

© 2003 Strategic Pricing Group, Inc. 12 SEGMENTING BY TIME OF PURCHASE Charging higher prices at times when less price sensitive buyers naturally purchase, and charge lower prices at times when it would be inconvenient for them to purchase. There must be a natural difference in time-of- purchase patterns for different segments of buyers.

© 2003 Strategic Pricing Group, Inc. 13 SEGMENTING BY PURCHASE LOCATION Charge higher prices at places where less price sensitive buyers purchase. Price sensitive and price-insensitive buyers naturally purchase at different locations... or, Insensitive buyers will not change purchase location to take advantage of the price difference.

© 2003 Strategic Pricing Group, Inc. 14 SEGMENTING BY VOLUME OR PURCHASE QUANTITY When price segments differ in the quantities they buy, charge different prices for different quantities. If buyers are in competition, must be cost-justified.

SEGMENTING BY PRODUCT DESIGN Selling different versions of the product designed to appeal to different segments. The price differences for the different versions usually must far exceed the cost differences in producing them. The seller must be able to design versions of the product with special attributes for which the price insensitive buyers will pay a premium and the price sensitive buyers will not.

© 2003 Strategic Pricing Group, Inc. 16 SEGMENTING BY PRODUCT BUNDLING Selling different products either as an indivisible bundle, or only at higher prices if separated. Buyers must differ in their relative valuations of the bundled goods.

Custom Value for Automobile Sports Package Racing Stripes and Hubcaps Right Mirror Heavy Suspension Racing Enthusiast Outdoor Enthusiast Segment $200 $100 $150 $300

© 2003 Strategic Pricing Group, Inc. 18 SEGMENTING BY TIE-INS An explicit or implicit requirement that buyers of an asset purchase consumables used with the asset only from the seller. Buyer's value of the asset is proportional to use intensity.

© 2003 Strategic Pricing Group, Inc. 19 SEGMENTING BY METERING Rental or lease arrangements with a variable rental fee dependent upon a metered usage rate. Buyers' value of the asset is proportional to use intensity.