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

2. Preliminary Segment Pricing
Price Setting Process
Preliminary Segment Pricing
Optimization
Implementation
Set baseline prices based on type of value assessment and initial differential value capture rate
Refine preliminary prices with iterative process balancing tradeoffs between price, cost, and market response
Set final prices and ensure acceptance among customers and organization through effective change management approach
Key Questions:
How much of the differential value should be captured for each segment?
How much time and effort should I invest in assessing the value of my products?
How should I adjust segment prices to account for different price sensitivities?
Key Questions:
What tradeoffs should I make between long-term strategic objectives and short-term market responses to price changes?
What types of analytical techniques are best suited to my product and market conditions?
How can I estimate customer response to potential price changes?
Key Questions:
What tradeoffs should I make between long-term strategic objectives and short-term market responses to price changes?
What types of analytical techniques are best suited to my product and market conditions?
How can I estimate customer response to potential price changes?

3. Economic Value Estimation® Framework
Positive
Differentiation Value
Negative Differentiation Value
Your Unique Value Delivery
Value Capture
Total Economic Value
Competitive Reference Value
Price of Next Best
Competitive
Alternative

4. Sample Differential Value Capture Rates
Market
Differential Value Capture Rate
Enterprise Software %
Heavy Manufacturing %
Process Manufacturing %
Computers %
High Technology
5 - 50%
Professional Services %
Distribution
5 - 20%
Pharmaceuticals %

5. Preliminary Price Worksheet
Economic Value
$ XXX
First, start with the value calculated from either the EVE or the WTP assessment.
Second, determine the baseline value capture rate based on similar products in the market to set a starting point for price.
Third, adjust the starting price up or down depending on the relevant price sensitivity factors.
Finally, set the preliminary price by determining determine the percentage of the economic value you will attempt to capture.
This preliminary price will be the starting point for considering strategic factors and conducting breakeven analysis.
Baseline Value Split
YY%
Starting Price
$ Z Z
Price Sensitivity Factors
+ / = / -
Product performance risk +
Expenditure Effect --
Fairness affect -
Total adjustments
(- 10% )
Preliminary Price
$ NNN

6. The Goal of Strategic Pricing: Align Price with Value
high A
Missed
Opportunities B
Price - Value
medium
Price Paid
Unharvested
Value
low
low
medium
high
Value Received

7. Pricing Strategies
SKIM
SEQUENTIAL SKIM
PENETRATION
NEUTRAL

8. Pricing Strategy
SKIM
PENETRATION
NEUTRAL
COSTS
CUSTOMERS
COMPETITION

9. Pricing Strategy SKIM PENETRATION NEUTRAL COSTS CUSTOMERS COMPETITION
Low CMs
Low Volumes
Changes in Unit Price Drive Profit
Large BE Sales Changes
At or near capacity
High CMs
High volumes
Changes in volume drive profitability
Small BE Sales Changes
Excess capacity
Costs similar to competitors
Sufficient CM to finance adv, etc.
Little excess capacity
Incremental capacity is expensive
COSTS
High price sensitivity
-Total Expend Effect
-Large Part of End-Benefit
Little differentiation
Low Price Sensitivity
-Reference Price Effect
-Price Quality Effect
-Difficult Comparison Effect
Customers are more sensitive to other elements of the marketing mix
CUSTOMERS
Limited threat of opportunism
Limited opportunity for scale economies
Sustainable differentiation
Low threat brands
Sustainable cost & resource advantage
Competitors not willing to retaliate
Financial strength
Aggressive small share brands
Avoid threat of retaliation
Large share brands with a lot to lose
Sustainable mktg mix advantages
Oligopolies
COMPETITION

10. Categorize These Pricing Strategies
How would you categorize the pricing strategies for the following products and retailers? (S=skim, N=neutral, P=penetration)
Pepperidge Farm Cookies _______
Almost Home Cookies _______
Suave Shampoo _______
ARCO Gasoline _______
Land O' Lakes Butter _______
T.J. Maxx (Clothing) _______
L'Oreal Hair Coloring _______
Bloomingdales _______
Sears _______

11. Illustrating Setting Price
Ajax Manufacturing has developed a new type of seat belt that is easier to install and more comfortable to wear than the seat belts now in use. Standard seat belts sell to automobile manufacturers for $5.00 each. The labor cost to install the belts is $3.00 each. The new belts take 10% less time to install with a resulting labor cost of $2.70 per belt. Marketing research performed by Ajax has determined that car buyers would be willing to pay $50.00 more for a car equipped with the new belts. Since car manufacturers normally earn a 50% mark-up, this equals an added profit of $25.00 per car. The cost to Ajax of the new belt is $10.00 per car and the current strategy calls for a price of $15.00 each. A typical car requires five seat belts.
(a) What is the economic value of the new seat belt to automobile manufacturers?
(b) What type of pricing strategy does Ajax appear to be following? What other options are available?

12. Analytical Approaches to Profitability Analysis
Volume of
Transactions

13. Analyzing Profitability Using the Breakeven Sales Change Approach

14. Risk Analytic Approach to Profitability Analysis

15. Determinants of Price Sensitivity
The Reference Price Effect
The Difficult Comparison Effect
The Switching Cost Effect
The Price-Quality Effect
The Expenditure Effect
The End-Benefit Effect
The Fairness Effect
The Framing Effect
The Shared-Cost Effect

16. Price Sensitivity Illustration
You are considering purchasing a personal computer. What factors would affect your price sensitivity in making that decision? How would those same factors affect the price sensitivity of some personal computer buyers differently?

17. Price Sensitivity Illustration
For each of the following purchase decisions, what factors are likely to affect the consumer's price sensitivity?
A diamond engagement ring Automobile repairs
Food for meals at home Which university to attend
A company car Draperies for your new home
Text books Health insurance plan
Souvenirs Vacation resort

18. Price Sensitivity Discussion Questions
What can a company do to decrease its customer's price sensitivity? Would all of the company's customers be likely to react in the same way?

19. Price Sensitivity Discussion Questions
Would a company ever want to do anything to increase its customers' price sensitivity? Why? What steps might it take?

20. Price Sensitivity Discussion Questions
Which of the following statements are always true, sometimes true, never true? Why?
(a) Price elasticity is generally the same for all brands in a product category.
(b) Advertising increases price sensitivity.
(c) As a product category matures, the consumers become more price sensitive.
(d) Each consumer has different price sensitivities for different products.

21. Price Sensitivity Discussion Questions
The gasoline service stations in Rochester, New York convinced the City Council to ban signs displaying gasoline prices. Why would they want to do this? What effect do you think this law had on gasoline prices? Why?

22. Price Sensitivity Discussion Questions
Despite the fact that rental rates for commercial space and labor costs are generally higher in big cities than in small towns, the prices of many products--such as stereo equipment and clothing--are higher in small towns than in large cities. Can you explain this?

23. Price Sensitivity Discussion Questions
Many local rental car agencies rent late model cars at substantially lower prices than national companies such as Hertz and Avis. Despite their higher prices, the national companies still retain most of the market. Explain why most renters patronize the national car rental companies despite their higher prices. How have the national companies encouraged this price insensitivity?
(a) If you were a small, local company, what factors would you look for to identify the price-sensitive segment of renters likely to be attracted to your lower price?
(b) If you were a small company trying to become national, how might you overcome the low price sensitivity of customers to induce them to try your cars and evaluate the quality of your service?

24. The Elements of the Price Setting Process
Value Estimation
Price Sensitivity Factors
1. The Fairness Effect
2. The Perceived Risk Effect
3. The Switching Cost Effect
4. The Difficult Comparison Effect
5. The Price-Quality Effect
6. The Expenditure Effect
7. The End-Benefit Effect
8. The Shared-Cost Effect
9. The Reference Effect
10. The Framing Effect
Positive
Differentiation
Competitive Reference
Negative Differentiation
Total Economic Value
Price
Levels
Breakeven Sales Analysis
Risk Analysis
1mm
Contribution
Dollars ($)
Unit Sales Gain