Creating Value Pricing Strategies: The Role of Pricing
Strategic Marketing
!
TOPIC 1
Creating
value
Pricing strategies
The Role of Pricing
The role of pricing
Product
Communicating
Communicating
value
Delivering value Capturing value Promotion
Distribution
Price
!
Profitability
A 1% increase in price gives the biggest improvement in profit
2
compared to a 1% improvement in fixed cost, volume and variable cost assuming demand is perfectly elastic (i.e. demand remains the same regardless of price). Affecting the price is the easiest way to affect profitability.
!
!
Pricing factors
The Role of Pricing – Profitability
Profit
Levers
Customers
Value to customers sets the ceiling price
• Value to customers is affected by available alternatives
• Different customers derive/perceive different values - tangible and intangible
• Determine value of a customer by using Economic Value to Customers (EVC) analysis
• Market research to assess both tangible and intangible benefits
3
!
Economic Value to Customers
• Based on the insight that a customer will buy a product only if its value outweighs the value of the existing product (or closest alternative)
• EVC based on concept of Pricea + Valuea = Priceb + Valueb
• Pricea = Priceb + Valueb - Valuea
• Pricea ≤ Priceb + Differentiation Valueba
• Pricea is the price of the ‘new’ product (which includes the differentiation value/cost from the ‘new’ product) • Priceb is the price of the existing product
• Differentiation Valueba is the value/cost difference between the existing product and the new product
• EVC helps set the maximum price for the ‘new’ product versus the existing product (or alternative)
!
Customer Demand
• Predict
!
TOPIC 1
Creating
value
Pricing strategies
The Role of Pricing
The role of pricing
Product
Communicating
Communicating
value
Delivering value Capturing value Promotion
Distribution
Price
!
Profitability
A 1% increase in price gives the biggest improvement in profit
2
compared to a 1% improvement in fixed cost, volume and variable cost assuming demand is perfectly elastic (i.e. demand remains the same regardless of price). Affecting the price is the easiest way to affect profitability.
!
!
Pricing factors
The Role of Pricing – Profitability
Profit
Levers
Customers
Value to customers sets the ceiling price
• Value to customers is affected by available alternatives
• Different customers derive/perceive different values - tangible and intangible
• Determine value of a customer by using Economic Value to Customers (EVC) analysis
• Market research to assess both tangible and intangible benefits
3
!
Economic Value to Customers
• Based on the insight that a customer will buy a product only if its value outweighs the value of the existing product (or closest alternative)
• EVC based on concept of Pricea + Valuea = Priceb + Valueb
• Pricea = Priceb + Valueb - Valuea
• Pricea ≤ Priceb + Differentiation Valueba
• Pricea is the price of the ‘new’ product (which includes the differentiation value/cost from the ‘new’ product) • Priceb is the price of the existing product
• Differentiation Valueba is the value/cost difference between the existing product and the new product
• EVC helps set the maximum price for the ‘new’ product versus the existing product (or alternative)
!
Customer Demand
• Predict