Pricing As A Strategic Marketing Tool

Pricing as a Strategic Marketing Tool

© Tom Smith, Insights From Analytics, 2014

Selling Value

Price + Perception = Value

© Insights From Analytics, 2014

Symptoms of Pricing Problems

• Sales’ incentive compensation based on sales (revenue), rather than profits (margins), and the rep can affect the final price.

• Cost of goods sold are rising as a percent of sales (eroding margins).• Price changes are made across the board.• The use of cost-plus pricing.


What is a Price?

It’s what you think your product is worth to that customer at that time.


What Else is a Price?

• It’s the customer’s least favorite part of buying.• It’s a marketing expense to the seller.• It’s the only marketing tool that directly affects both the top and

bottom lines of the P&L.• It’s the easiest marketing tool for the competition to copy.• It’s a marketing tool representing everything about the product --

especially quality and value perceptions.


Price Change ModelsFixed costs unchanged:

-(% Price Change) (% Margin) - (% Price Change)

Fixed costs changing:

% Sales Change from Above +

May lose existing business:

Breakeven =


= % Sales Change

$ Change in Fixed Costs(New Margin) x (Unit Sales)

Price Change Margin

The 4 C’s of Pricing

What is the highest price I can charge and stillmake the sale?• Customers• Competitors

Am I willing to sell at that price?• Costs• Constraints

© Insights From Analytics, 2014.

Costs Must Have Some Role?

• Costs help find the most profitable quantities to sell and markets to serve.

• The only relevant costs for pricing are:• Forward-looking• Incremental• Avoidable

• Pitfalls:• Using average variable costs• Using accounting depreciation• Treating a single cost as all relevant or irrelevant• Overlooking opportunity costs


Price Bands


Units

Price Index

Industry AveragePrice Level

Unit sales or order frequency of a single productsold to a single market segment over a range of prices

.

Price Band Drivers• Supplier-driven

• “Cost-to-serve” difference• Uneven competitive intensity• Pricing structure

• Customer-driven• Customer buying process• Uneven switching cost• Imperfect knowledge of market price levels• Uneven economic value to customer


Factors Affecting Price Sensitivity • Unique value • Substitute awareness• Difficult comparison• Total expenditure• End-benefit• Shared cost• Sunk investment• Price-quality• Inventory


Margin Bands


Band widths typically increase as their definitions become more precise for a given product/market segment.

List Price Invoice Price Pocket Price Margin

VolumeDiscount

Competitive Discount

Freight

Credit TermsOff-InvoicePromotions Selling,

commissionorder processing

Finishedgoods,Spare parts

Strategic Pricing

Pricing Strategy = Move the price band

Pricing Tactic = Move up the price band without losing volume

Have an infinite number of price points.

Give the customer what they want at the price you want them to pay.


Alternative Pricing Strategies

• Skimming• Sequential skimming• Penetration• Neutral• Segmentation

• Buyer identification• Purchase location• Time of purchase• Purchase quantity• Product design• Product bundling• Tie-ins/metering


Tactical Pricing – Move Up The Band• Shift mix of orders taken

• Customer mix• Order size mix

• Reduce money left on the table• Establish the highest possible level• Only use price levers when they pay off

• Maintain• Overall share position• Upward pressure on industry prices• Strong customer relationships


Summary

• Sell at a premium price

• Increase industry prices

• Maintain higher than average prices

• Leave less on the table

• Give less away


A Final Thought

“It is unwise to pay too much, but it’s worse to pay too little. When you pay too much, you lose a little money. When you pay too little, you sometimes lose everything, because the thing you bought was incapable of doing the thing it was bought to do. The common law of business balance prohibits paying a little and getting a lot -- it can’t be done. If you deal with the lowest bidder, it is well to add something for the risk you run. And if you do that, you will have enough to pay for something better.”


Business

Pricing As A Strategic Marketing Tool