Virginia SBDC - Pricing Strategy & Tactics (CUSTOMERS - factors that…
Virginia SBDC - Pricing Strategy & Tactics
Marketing Mix - 4Ps
= in most industries, impossible to determine a product's unit cost before determining its price --> costs change with volume (ECONOMICS OF SALES)
price war --> only temporary competitive advantage
ie: a price for a Ford Mustang was set first then the engineers had to figure out how to build the car under that cost definition
pricing strategy depends on 3 factors
how should cost affect price?
NEVER determine price
RATHER, play a critical role in formulating pricing strategy
your decisions abt which products to produce & in what quantities depend heavily on their cost of production
one cannot price effectively without understanding costs, incl. economics of scales
3 types of costs
associated with changes in pricing and sales
cost of doing biz (raw materials, direct labor)
costs of being in biz (rent)
: ie able to fill orders up to 500 additional units each month w/o purchasing any new equipment
CUSTOMERS - factors that affect pricing
(1) perceived substitutes effect
customers new to a market usually less aware of discount brands than ppl w more exp --> they pay higher prices and buy from the visible suppliers
ie 1: Ponds can price its petroleum jelly 1,400% higher per ounce when packaged and sold as Vaseline Lip Therapy bc the perceived substitute for the positioning, Chapstick, has a similar price
ie 2: Woolite, although expensive for a detergent, has successfully positioned itself as an inexpensive substitute for dry cleaning
ie 3: Loctile corp. positioned its powerful adhesive as a substitute for nuts and bolts, enabling it to charge a high price by the standards of its product category and still offering substantial savings for customers
impact of substitutes
ie 1: sales of top-end model disappointing --> mgt thought it must be overpriced --> turn it the price wasn't too high, BUT THE CUSTOMERS SIMPLY DIDN'T NEED "THE MOST EXPENSIVE MODEL"
solution: add a new, even more expensive model to its line --> new, most expensive product sold poorly, but the previously top-end model sold much better!!! hahaha
article about pricing for restaurants lol (Mircella)
pricing tamales for Tamales Hombres!!!!
questions to ask
what alternatives are customers typically aware of when making a purchase
to what extent are customers aware of prices of those substitutes?
to what extent can customer's price expectations be influenced by the positioning of one brand relative to particular alternatives
(2) unique value effect
product differentiation (Iphones)
questions to ask
does the product have any unique attributes that differentiate it from competing products?
what attributes do customers believe are important when choosing a supplier?
how much do buyers value unique attributes?
how can you increase the perceived importance of these different attributes?
(3) switching cost effect
possible reason: when buyer make product-specific investments to use them
if those investments do not need to be repeated when buying from current supplier, but do when buying from a new supplier, that difference is a switching cost that limits price sensitivity
questions to ask
to what extent have buyers already made investments (monetary & psychological) in dealing with one supplier that they would need to incur again if they switched suppliers?
jpw ;pmg are buyers locked into those expenditures?
(4) difficult comparison effect
buyers are less sensitive to price of a known brand when they have difficulty comparing alternatives
rather than attempting to find the best price in the market and risk getting a poor value in the process, many buyers simply settle for what they are confident will be a satisfactory purchase
SEO/SEM consulting service: lack of substitutes, hard to perceive the quality w/o actually trying it --> willing to pay more to avoid risking sloppy services at lower price
questions to ask
how difficult is it for buyers to compare the offers of different suppliers?
can the attributes of a product be determined by observation, or must the product be purchased by a consumer to learn what it offers?
what portion of the market has positive past exp w your products
are the prices of different suppliers easily comparable, or are they stated for different sizes and combinations that make comparisons difficult?
(5) price equality effect
customers are less sensitive to a product's price to an extent that higher price signals better quality
ie 1: study reported cases where a new synthetic car wax faced strong customer resistance till its price was raised from $.69 to $1.69
ie 2: sales of a creamy style cheesecake were poor till the company raised the price to equal that of its heavy regular-style cheesecake
ie 3: buyers could not judge the qualit of either product before purchase. Therefore, customers played it safe by avoiding cheap products that they believe were more likely to inferior
questions to ask
is the product enhanced in value when its price excludes some consumers
is the product of unknown quality and are there few reliable cues for ascertaining quality before purchase?
is a prestige image an important attribute of the product?
(6) expenditure effect
buyers are more price sensitive when the expenditure is larger
ie 1: heating insulation costs $2 per foot when sold to consumers in lots of 25 ft, but only $.50 per foot when sold to building contractors by the truckloads of tens of thousands of ft
ie 2: higher-income customers can afford a wider variety of goods cannot always afford time to shop for them --> rather accept higher price as a substitute for time spent shopping
questions to ask
how significant are customer's expenditures for the product in absolute dollar terms (for biz buyers) and as a portion of income (for end consumers)?
pricing strategy for Ranglers Spraying house!!
(7) end-benefit effect
the more price sensitive buyers are to the cost of the end-benefit, the more sensitive they will be to the price of products that contribute to that end-benefit
ie 1: wife wont like it if husband uses a 2-for-1 coupon when going out for a dinner for a special assocation
ie 2: Mobil Oil's premium price is well-justified considering the price of the car that the oil is intended to protect
questions to ask
how price sensitive are buyers to the cost of end-benefit
what portion of the end-benefit does the price represent or account for?
what end-benefits do customers seek from product
to what extent can the product be repositioned in the customer's minds as related to an end-benefit for which the buyer is less cost sensitive or which has a larger cost?
(8) shared cost effect
effect of partial or complete reimbursement on price is called the shared-cost effect
ie 1: insurance covers a share of customer's cost of a dr's visit or a prescription drug
ie 2: Kristen doesn't mind buying more expensive books from Barnes and Noble bc she will get reimbursed bc of her scholarship
ie 3: Boots pharmaceuticals recognized that low introductory prices of its anti-arthritic prescription drug Rufen would be ineffective bc insurance reimbursements cover such a high portion of its price
questions to ask
does the buyer pay the full cost of the product
if not, what portion of the cost does the buyer pay?
(9) fairness effect
customers are more sensitive to price when it is outside the range that they perceive is fair
concept of fairness has little to do with profitability
ie 1: oil companies are accused of gouging customers, though their profits are below the avg U.S industry
perceptions what is reasonable are also affected by prices for similar products or in similar purchase situations
ie 2: since most medications in oral form cost only a few cents each, ppl simply expect other oral medications should be similarly priced
ie 3: patients consider pill costing $1 or more per doe outrageous even when reduced patient suffering and reduced cost of other medical services justify the price in value terms
fairness and necessities
perceptions of fairness seem to be related to whether the product is necessary to maintain a previously enjoyed standard of living, or is purchased to get st more out of life
products that are necessary to maintain one's current living standards are quickly perceived as "necessities" although mankind has probably survived w/o them for most of history
charging a high-price for a "necessity" is generally perceived as unfair --> same ppl however may buy a new car, jewelry, or a vacation w/o objecting to equally high prices or price increases
questions to ask
what do buyers expect to pay for similar products in similar purchase contexts?
is the product seen as necessary to maintain a previously enjoyed standard of living
how does the product's current price compare with prices ppl have paid in the past for products in this category?
(10) inventory effect
customer's ability to hold inventory for later use substantially increases their reaction to temporary price changes from what they expect in the long-run.
ie 1: rebate programs prompted a few new car sales that would not otherwise have been made. Instead, many families simply bought cars during the initial rebate period that they would have otherwise bought later.
questions to ask
do they expect the current price to be temporary?
do buyers hold inventories of the products?
pricing against competition is more challenging and hazardous than pricing an unique product
price discounting in competitive markets
BUT fail to recognize longer-term consequences
sure bet to enhance immediate sales and profits
ie 1: Walmart, Southwest airlines
ie 2: Microsoft initially priced Windows very low to increase sales of other software that runs on it
that market share is the key to profitability --> WRONG
real source of profitability
SUSTAINABLE COMPETITIVE ADVANTAGE
rather than attracting customers by taking less in profit, these strategies attract customers by creating more value or more operating efficiency
BY: adding to the value of what is offered w/o adding as much to cost
BY: reducing costs without equally reducing the value offered
ie 1: supplier of commodity small parts used in electrical manuf illustrates the value-added strategy (1) prices are 10-15% higher than competitors' prices. (2) BUT target customers no one else wants. Competitors: require $500 min order and takes weeks to ship. The biz: accept small orders and ship within 24 hrs
ie 2: Costco targets customers who can be served at lower cost --> low markups, no store decor, limited selection, almost no service
Generic pricing strategies
(1) skim pricing
capture high margins at the expense of high sales volumes
VIABLE only when profit from selling to customers who react little to price differences exceeds that from selling to larger market at lower price
biz must have some source of competitive protection to ensure long-term profitability by precluding competitors from providing lower-priced alternatives
ie: patents & trademarks
lacking either a unique advantage or patent protection, a skim pricing strategy will simply create a market for a lower-priced competitor
(2) penetration pricing
setting a price far enough below economic value to attract and hold a large base of customers
generate sales volume even at the expense of high margins
ie 1: Uber's subsidizing its rides
ie 2: Red Roof Inns target travelers who don't need hotel amenities such as pol but who just want a good night's sleep in a clean room
when penetration pricing fails?
(1) low prices undermine the prestige value of your brand name
Lacoste allowed its alligator Izod shirts to be discounted by lowered-priced mass merchants, high-image retailers refused to carry the product and customers migrated to more exclusive brands.
(2) attract few customers to products for which price is a trivial expenditure (chewing gum) or to products for which value is difficult to compare across suppliers (medical care)
how penetration strategy works. ie of costco
price sensitivity of customers enables warehouse clubs to vary the brands they offer depending upon who gives them the best deal --> increase leverage with suppliers
enable them to maintain high turnover, high sales per square foot, hgih sales per ee --> undercut full service retailers while still earning equal or better profits per share
(3) neutral pricing
decision not to use price to gain market share, while not allowing price alone to restrict it
minimize the role of price as a mkt tool in favor of other tools that an entrepreneur believes are more powerful or cost-effective for a product's market
biz normally adopts a neutral strategy by default bc the conditions are not sufficient to support either a skim or penetration strategy
ie: GM priced its Chevrolet Camaro at a level that would make it affordable to a much broader market than the segment willing to pay a premium for its sporty look
Even when car's styling proved so popular that demand exceeded production capacity
why? GM already had one skim-priced product in its product line, the Corvette --> another would be viewed as redundant and could take sales away from the higher-priced product
BY: buyer identification
ie 1: theaters give discounts to college students who are more price sensitive bc of their incomes and their alternative course of campus entertainment
ie 2: coupons provided by the seller give price-sensitive shoppers another way to identify themselves
ie 1: dentists, opticians sometimes have multiple offices in different parts of a city, each with a different price schedule reflecting differences in their client's price sensitivity.
BY: time of purchase
ie 1: seasonal biz offers discounted prices during non-peak months when biz slows down
ie 2: (PEAK-LOAD PRICING): airlines face greater demand for seats on Mondays, Thursdays, and Fridays than other days
BY: purchase quantity
might be illegal if giving hefty discount to big purchases --> give an unfair competitive advantage over smaller grocery chains --> illegal
PURPOSE: retain biz of large customers
PURPOSE: encourage customers to place larger orders --> per-unit cost of processing and shipping declines with the quantity ordered
differ from order discounts in that they do not apply to the total quantity purchased, but only to the purchase beyond a specified amount
ie taxi fare: $10 for the first mile, $5/mile thereafter
two separate charges to consume a single product
ie: admission ticket to theme park and ticket charge for each ride
BY: product design
pay more for more functionalities
BY: product bundling
ie: seasonal tickets
types of bundling
(1) indivisible bundles
(2) divisible bundles
TAMALES HOMBRES: if wanna sell in a pack of 6, do include individual price at a high level --> incentivize customers to buy in bulk but still give them the option
specific pricing strategy
(1) all inclusive price
benefit to customers; offer a piece of mind to customers - ease for budgeting
when determining a flat fee, build in 25-50% more for the extra time you'll inevitably need
I doubt if TXC considered this factor
side benefit to the biz: needn't make explicit hourly rate --> a number that often raises eyebrows
(2) sell a low-priced product first
don't offer to do initial work (complimentary hr of consultation) for free --> ppl take the freebie and walk. you look desperate
ie: if you build websites, instead of expecting the customer to hire you off-the-bat to develop their site, say, "Let's take it one step at a time so you can feel comfortable with my work. for now, why dont you just hire me to develop a blueprint for you site? If you're satisfied with that, we can go further"
(3) offering a guarantee
provide customers w a piece of mind
(5) accept non-cash payments (products)
(4) charge more for rush jobs
reasons not to compete on price
attract difficult customers
though offered rock-bottom price, they're more likely to nitpick your project to get a price concession or more work out of you for free
develop a reputation for as a low-cost provider
cheap = sloppy mentality
it's rarely necessary to be the low-price leader
listen to customer needs, professionally propose a service/product, offer a price within reason
when to present your price?
defer the the answer!!
"be4 i can give you an accurate price, i need to know a little more abt your needs, tell me abt our situation
what to ask
listen to customer's situation
ask a few questions
summarize their needs
"so it sounds like your biz needs X, Y, and Z. Am I reading you right?
give the price
here's what it will cost you
industry-specific pricing tactics
begin with customer and their definition of value (money saved/profit generated from using your products)
LET ANTICIPATED PRICING DETERMINE THE COSTS INCURRED RATHER THE OTHER WAY AROUND (JAMES)!!!
calculate total costs
calculate fixed OH per unit
must make a fairly significant assumption as to how many units will be produced
calculate breakeven cost
theoretical bc u need to guess the number of units to produce --> nevertheless, it can give u some idea abt costs you need to cover when finalizing your price
calculate OH rate
= total oh / total direct cost
breakeven cost = total direct cost + total direct cost * OH rate
as your product moves thru the distribution chain, there will be a different price point for each player (wholesaler, retailer, middlemen, etc)
have to establish a price for you distributors, a wholesale rate for retailers, and a suggested retail price for consumer
if not sure, need to research exactly what margins each of these steps in the chain are accustomed to achieving --> if any of your margins are too low at any point of the chain, your product won't receive a lot of attention by the middlemen in between
2 types of cost associated with product
cost of goods (acquiring and delivering the goods)
fixed operating expense
: applied on the total of 2 costs above (COG and fixed oper. exp)
either: use a standard markup for ALL goods
or: different markup for different goods
calculate your gross margin
calculate your breakeven point
discount less, but discount sooner
unload aging merchandise and free up cash
merchants tend to get attached to what they buy --> "just 1 more week. it'' sell!" --> this practice is like leaving money on the table reducing overall profitability
service and consulting
inventory of time / Total Billable Hours = 365 - the following
time off: holidays, weekends, vacations, sick days
marketing: posting ads, attending networking events, etc
training: improve service and stay up with current trends
administration: invoicing, paying bills, dealing with suppliers, finding equipment, etc
understand your costs
cost of doing biz / OH
RULE OF THUMB
: take desired salary and add 30-40% to it to cover taxes, benefits, retirement, insurance
mandatory benefits: social security, FUTA, SUTA, etc --> ~14% of salary
retirement: ~10% of salary
insurance (health and life): call an agent
what you need to earn
at least more equal to or more than what you'd get as a full-time ee --> otherwise, being an ee may be a simpler way to pay bills
determin salary-equivalent you need, in annual/monthly/weekly terms
= (cost of doing biz/OH + personal cost) / (total billable hours)
= breakeven rate * (1 + profit %)
: add these factors to the "profit-rate" price (above)
what do your fellow professionals charge> What are prospects paying? call them and ask. or have a friend call
"until they say outch
" raise your rates periodically --> can always negotiate down
"a piece of the action"
: based your fee on a % of sales or savings you create (
get the deal in writing
"paying for priority": like rush orders extra charge --> often worth 25-50% more --> dont be greedy though