PRODUCT PRICING

PRICING IT RIGHT

AGENDA

Product Pricing Why?

Pricing & Product Value
Pricing & Place (Margins, MDF, Incentives, Landing Price)
Pricing & Positioning (Price Leadership, Premium Pricing)
Pricing & Piracy
Pricing & Volume Purchase
Pricing Mirrors Business Model

WHY PRODUCT & PRICING?

PRODUCT & PRICING GO HAND IN HAND

PRICING BASICS

Anyone Can
Compete On Price
(Myth?)
If your value to customer is

merely a low price, you

either keep an eye for a
new job (or) ensure all
other parameters are tuned
to deliver price leadership.

WHY PRODUCT PRICING?

WHY PRODUCT?

WHY PRICING?

Ready to Satisfy (or) to Create a Need

Core Product Actual Product Augmented Product

How much? in exchange of Need satisfying Product

Monetize by Pricing to match Product layers

Either has a Utility (or) kindles a Desire

Finished to Buy (or) to Resell

Solutions Packaged

Amplify Engagement Velocity

Minimize Post Purchase Dissonance

Can be Tangible (or) Intangible

Sticky Products = Customer Retention

Transparency to enable Decisions

Elongate with Retainer-ship pricing

This is how your Organization makes profits

NEW PRODUCT PRICING

Two types of products

Imitative products
Innovative products

Requires different approaches

PRICING & PRODUCT VALUE

VALUE BASED PRICING

PRICING & PRODUCT VALUE

Moderate Value: Low Pricing

Big Value: Premium Pricing

PRODUCT VALUE MAP

TCO
Fair-Value
Line
High

Prod 4

Prod 9
Prod 5
Prod 1

Prod 7

Prod 10

Prod 6

Cost Plus

Prod 2
Prod 3

approach
meeting Market
Driven Pricing

Prod 8

Low

Essential for

Prod 11
Low

Performance Index

High

Profits;
Breakeven
understanding

PRICING EXERCISE 1: PLOT THESE COMPANIES IN THE

GRAPH
TCO
Fair-Value
Line
High

Prod 5

Prod 9

Prod 4
Prod 1
Prod 7

Intl Airlines: Emirates, British Airways,

Lufthansa
Airlines: Jet Airways, Indigo, GoAir, SpiceJet,

JetLite

Prod 10

Prod 6

Prod 2
Prod 3

Prod 8

Low
Prod 11
Low

Performance Index

High

PRICING & PLACE ALIGNMENT

SCALABLE CHANNEL PRICING

PRICING & PLACE

Surround supply Chain

Traditional supply Chain

-20%

-5%

-2%

+2%
+5%
+20%

Functional Role + Risk Levels + Assets Used

SUPPLY CHAIN : WHY CHANNEL PRICING?

Value added Reseller (VAR) impact in 3 ratings viz., Quality, Delivery (Stock keeping/Logistics/credit

days), Service
Pv =

Pq [1+(+Q + D + S)]

Where Pv = VAR Price

Pq = Quoted Price

Q = Quality Rating

D = Delivery Rating

S = Service Rating

+Q +D +S

= Vendor Rating

CHANNEL FUNCTION & PRICING DECISIONS

Pepsi Bottling
Plant
Vending
Machines
Resellers /
Online
Distributors
Call Center /
Web
Service
Providers

SC PRICING METHODS: CUP, RPM

Comparable Uncontrolled Pricing

Method

Resale Price Method

Resale Price(RSP): Price at which

Product Owner can sell (to end
Customer)

OECD Prescribed

CUP

GPM: Gross Profit Margin needed for

the Reseller, to cover

RPM

Cost Plus

Transactional Net
Margin Method (TNMM)

Transactional Profit Split

Method (TPSM)

Functions performed (eg.,

Sales/Payment period/Market Dev)

Risks Undertaken (eg., Inventory Held)

Assets Used

TP: Transfer Price for the Reseller

Organization for Economic Cooperation & Development

MULTI CHANNEL PRICING

http://hbsp.harvard.edu/multimedia/flashtools/channelmargins

Sequence the Channel based on,

Customer Buying Behavior

Your Business Priorities / Preferences

Competition Methods

Channel Sequence may be 1,2,3.n (or) 1, 2,

2, 2, 3n, n

Per the Channel Sequence, the Value Add differs

Functions performed (e.g., Sales/Payment period/Market

Dev)

Risks Undertaken (e.g., Inventory Held)

Assets Used

Feeder to next Channel Levels

Maintain the Price Levels ~ Channel Sequence

(unless market dynamics change)

http://www.scribd.com/doc/28578846/Pepsi-Distribution-Channel

PRICING & SUPPLY CHAIN (PEPSI INDIA CHANNEL)

Direct Store Distribution (DSD)

PRICING & POSITIONING

PREMIUM PRODUCTS WITH PREMIUM PRICING

PRICING & PRODUCT POSITIONING

Cool!

Waste of
money

US$ 27,000

Knowing what your target customer perceives as

valuable is essential to setting a price

PRICING & POSITIONING

Price Leader (Low Price Strategy to address Price
Segmenting
Targeting
Positioning (STP

Process)
&
Pricing

Conscious Buyers)
Premium Provider (High Price & Quality strategy to

attract cream)
Me-Too Pricing (across all segments spreads thin)

PRICING TO COUNTER PIRACY

PIRACY STAGES & PRICING STRATEGIES

PRICING & PIRACY

PIRACY STAGES & PRICING IMPACT MODEL

Stage 1:
Want to use/know before
buying
Stage 2:
Cost of Pirating ~ Price of
Product

PRICING TO COUNTER PIRACY

PRODUCT SAMPLE
PRICING

PRODUCT EDITION
PRICING
Editioning involves creating the complete
product and degrading it?

Is this OK?

Yes, if it improves consumer satisfaction

Helps Consumer to not to fall victim to

Counterfeit

Customers will buy at Price (P) if their utility is

non-negative

Customer has 2 choice: Pirate (or) Use Legal

Samples

Free/Low cost Samples to get them taste the utility

(Freemium Model)

Customer save on Moral Cost of Pirating (internal

cost of committing an illegal activity Chellappa &
Shivendu 2003a)

Sampling cost < Cost of difficulty of pirating (tech

& legal factors)

PRICING
STRATEGIES
Penetration Pricing
Loss-Leader Pricing
Price Skimming

(Generate Premium
before Counterfeit hits
release next product
version at high price
reduce the prices for
earlier version)

PRICING & VOLUME PURCHASES

EARN MORE BY SELLING MORE FOR LESS

PRICING & VOLUME PURCHASE

WHY VOLUME PRICING?
Price Advantage for Customers buying in volume

Passing Economies of Scale benefits to Customers for increase in volume

Large Customers to get better prices (expected to buy large quantities) compared to
small Customers
Increase Demand for higher quantity

Upselling Opportunities

Customers to increase the size of their orders

Gets incremental profits for Sellers

ENABLE VOLUME PRICING

Volume Pricing Types

Multi-Step Quantity Discounts

Two Part Tariff Discount Pricing

Time & Loyalty Based Pricing

Multi-Product Pricing

Multi-Person Pricing

Price Guarantees

TWO-TARIFF VOLUME PRICING CASE STUDY

German National Railroad

Standard price per mile using the train is 24

BahnCard is sold for a flat fee of $220

User gets a 50% discount in all trains

for 1 yr
Breakeven point (total savings =

$220 card fee) is 1833 miles

Once spent the $220 for the card are sunk cost and there is a strong
incentive to maximize its use as this means saving more money

3.1million cards are sold per year, revenues are over1.3billion USD

http://www.buildingkeystones.com//

VOLUME PRICING MODELS

All Units Discounting
While
enticing
the
customer
to buy 10
instead
of nine, it
actually
results in
you
making
less
money

INCREMENTAL PRICING MODEL

Advantages
There are no
step-down
points. where
you are selling
more, but less
revenue

All-Units Volume Discount - Per Unit Price

All-Units Volume Pricing - Total Price by Volume

Incremental Volume Pricing - Price Per Unit

Incremental Volume Pricing - Total Price

Disadvantage
s
The pricing
logic is more
difficult for
customers to
understand
The per-unit
price displayed
to customers
will not be a
marketing-

PRICING TO MIRROR BUSINESS MODEL

PRICELIST REFLECTS BUSINESS

PRICING TO MIRROR BUSINESS MODEL

PRICING IS ALMOST NEVER ABOUT THE

NUMBER.
ITS ABOUT THE MODEL

WHERE DOES PRICING FIT?

Part of the Business Model
How do we make money?
How much money we can make?
Revenue / Profit / Forecast (Pricing is the base Unit)

Pricing Supports Core Value Prop

Our Product saves you $$$
and we want 15% of that savings (our Price!)

Who are our Customers & how to reach them?

Direct Selling? Incentives / Price discounting levels / Pricing term flexibilities
Indirect Selling? Margins / Rebates / Special Pricing Requests
How quickly we can close a deal? How can we make our Partners to sell quicker?

SERVICES APPROACH TO PRODUCT

Forcing Service approach to Product Market?

Square peg in a round hole.

PRICING EXERCISE 2: 15 MINUTES

Take a sample product

Tell your Product Story
What is the Customer Value? How did you validate Customer Value?
Who is your competition? What relative value your product has more than competition?
Specify & Justify your Product Price (quantitative)
Explain your Organizations business model & pricing alignment (Discounting / Promotions / Budling)

SUMMARY

Product Value Map helps setting the right price

Channel Pricing to scale your Product Adoption
Multi-Channel Pricing enables channel layers to feed Opportunities to other layers
Pricing aligns and confirms Product Positioning
Right Product Strategies & Pricing effectively counters Piracy
Volume Pricing and discounting retains Customers and boosts revenue
Pricing complements Business Model

Your results: Business Growth

THANK YOU
SHIV.M@MICROSOFT.COM

All information contained in this presentation are based on the personal research & experience of the presenter.
The deck is prepared for presenting at IPMA, Bangalore for its members, solely for knowledge purposes only.