Pricing Strategies - Unit 10 PDF

**Unit 10: Pricing strategies ** Price sensitivity → price strategy → break-even analysis  "The single most important decision in evaluating a business is **pricing power**... if you've got the power to **raise prices without losing** business to a competitor, you've got a very good business -...

**Unit 10: Pricing strategies ** Price sensitivity → price strategy → break-even analysis  "The single most important decision in evaluating a business is **pricing power**... if you've got the power to **raise prices without losing** business to a competitor, you've got a very good business - Warren Buffet **Functions of price in the marketing strategy ** - Main function: contribute to generating revenue  Other functions  - Highlight the product quality  - Encourage the collaboration of intermediaries  - Entry barriers in the industry - Instrument against seasonality of sales  - Instrument of sales promotions  - Instrument of competition  **Factors Influencing Pricing Strategy Setting ** *External factors* - Demand of end users - Members of the distribution channel  - Competitors  - Environment: economic, political and legal  *Internal factors* - Marketing strategies  - Costs - Business objectives  Pricing methods: cost - No company can survive for long without profits (total revenue\>total cost). For this reason, the decision on the sales price is conditioned by the costs. **But it is the price that determines the cost and not the opposite** - The income provided by each unit of product sold does not necessarily have to cover all its costs. It will be necessary in all cases the **selling price is higher than the unit variable costs ** Pricing to cover costs and make a profit → **REACTIVE** → product (definition), costs, objectives, price, levels of sales necessary  Pricing based on the value of the product to customers → **PROACTIVE** → value for customers, objectives, price, level of sales necessary, costs Cost-plus pricing  Ingredients Labor       →      twin pack   → Almetta 100% markup \$0.80  → wholesale 25% markup \$0.40 Packaging         cost: \$0.80               price: \$1.60                                   price: \$2.00 → retailer 100% markup \$2.00      → consumer price for twin pack           Price \$4.00                                      price: \$4.00 Pricing methods: demand  Customer's reaction: some aspects - Understand and know the **meaning of prices for customers** - Different factors that can have an influence on **price sensitivity:**  perceived-value, the existence of different options, value for money, the option of sharing the cost with others, criteria to measure effectiveness and success, risk of changing the brand (or supplier)  - Price sensitivity could differ among various groups of consumers (**price discrimination)** Consumer reaction: low sensitivity factors  - The product is unique - Buyers are less aware of substitutes - Buyers cannot easily compare the quality of substitutes - The expense is a smaller part of the buyer's total income - The expense is small compared to the total cost of the end product  - Cost is shared with another party (cost-sharing)  - The product is used to complement of another that was bought previously  - The product is assumed to have more quality, prestige, or exclusiveness - Buyers cannot store the product  Consumer reaction: perceived value  - Customer perception is influenced by other **factors** besides product price: substitute product prices, factors related to the presentation of the product, brand image, existence of other options, etc..  - The application of this approach is useful when the price sensitivity factor is the importance (or relevance) of the product for the buyer as well as qualitative factors such as image - Perceived value relies upon knowledge and the understanding of the end use of the product by the customer. Determines the **price that the customer is willing to pay for the satisfaction they hope to get** when they use the product  - Distinguish between **REAL (**which the customer recognises in the moment) and the **POTENTIAL** (which they could have after being educated on the way to see and use the product)  - Buyers compare the advantages and the cost of the purchase. **When the advantages (perceived value) are higher than the costs, the customer proceeds with purchase. ** Calculate prices based on perceived value  - Perceived value is the level of appreciation of a product (higher or lower) as a tool to satisfy the needs and wishes of a potential customer  - Indicates the top limit for the price. **Customers buy when perceived value is higher than price ** 1. Determine product uses 2. List the advantages for each use that customer is looking for 3. Weigh the importance of every advantage for the customer 4. Establish product lists that satisfy the same needs 5. Establish the evaluation assigned to each brand for every advantage considered 6. Determine perceived value for every brand  7. Determine price for each brand based on their perceived value  Pricing strategies for individual products a. LAUNCH OF INNOVATIVE PRODUCTS  - Penetration strategy  - Skimming strategy  B. AGAINST THE COMPETITION - Maintain the price - Reduce the price - Increase the price - Frequent price changes - Parity strategy  C. ADJUSTMENTS IN THE BASE PRICE - Negotiation, discounts, psychological prices **Skim pricing strategies ** Conditions for skim pricing (EARLY MARKET)  - Very high differentiation - Quality-sensitive customers - No or few competitors (e.g.patent protection, competitors, lack technology, etc)  - No substitutes - Low customer price sensitivity   Conditions for penetration pricing (GROWTH / LATE GROWTH) - Lower differentiation - Competitive offerings available - Reaching out to more price-sensitive customers - Substitutes available - Higher customer price sensitivity  A comparison of a price comparison chart Description automatically generated with medium confidence Pricing strategies for subscription models  Subscription models  - **Premium model:** users pay for full initial access to all features  - **Freemium model:**  offers limited free access with the option to pay for additional features or exclusive content  - **Mixed subscription model:** this model combines aspects of freemium and premium. For example, a service offers a free basis with ads but allows you to pay to remove ads and access more features  - **Free trial:** some services allow access to all premium content for a limited time to get users to subscribe after the trial period ends **fixed/flat rate pricing** **Tiered pricing** **Per unit/user model** **Usage model ** ----------------------------- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ **definition** The firm offers a single product with fixed set of features for a fixed/flat price per months  The firm offers multiple packages with different features and product combinations available at different price points. Two or three pricing tiers are the most common number of tiers The firm changes prices across the number of users, i.e. pricing scales vary based on the number of users The firm changes prices based on how much of a product or service is consumed by the customer during a fixed time interval  **Advantages for firm** It is easy to communicate the price and easy to increase price as additional products are added to the portfolio The firm is able to cater to multiple types of customers with different price preferences. As a result, the firm is able to maximise revenue potential form each customers, while making it easy to offer upsell opportunities to customers as they go through each tier Used primarily in B2B and makes it easy for buyers to understand the value of the offering, thereby simplifying the sales process. It also makes forecasting revenue straight forward, given that revenue is proportional to the number of users It is easy to acquire customers who do not want to commit high upfront fees. It is able to offset the costs associated with serving heavy users by charging based on their extensive usage if the product  **Disadvantages for firm ** It often ends up leaving money on the table, if price is low, it might miss on an additional revenue opportunities, and if prices are too high customers are priced out of consideration Too many pricing tiers can create confusion in the customers minds and complicate the sale through indecision. Too many tiers also complicate the value of the offering Pricing per user doesn't necessarily make the product more valuable for users. Moreover, users can end up sharing logins and cutting into revenue Charging the customer per usage makes it difficult for the customer to predict their billing, and can lead to uncertainty in future cash flow **Example ** HBO Max Netflix Microsoft 365 Zoom room Pricing strategies for subscription models  **Flat rate model ** **Description:** in this model, users pay a flat fee, regardless of how much they use the service or product. It is a one-time fee that covers full access to services within a specific period, such as monthly or yearly  **advantages :**  - Ease for users, as they exactly how much they pay  - Predictability of revenue for the company  **Examples:** telecom services, subscriptions to streaming platforms such as Netflix or Spotify  **Disadvantages: ** - Fixed and limited revenue: although predictable, revenue potential from excessive user usage cannot be tapped  - Excessive usage: users may make intensive use of the service without generating additional revenue, which can result in high costs for the firm  **Tiered pricing model ** **Description:** this model establishes different pricing tiers based on usage or volume of services. As users consume more, a different or higher price is applied  **Advantages: ** - Flexibility to adapt to different types of users  - Encourages higher consumption, as users can opt for a higher tariff if they use more **Examples**: cloud storage services (dropbox), where prices vary according to the space used **Disadvantages for the firm: ** - Administrative complexity: different pricing tiers must be managed, which can lead to customer confusion and require more administrative resources  - Pricing mismatch: this may result in inefficient pricing or some users, which could reduce revenue potential for those who stay on low levels  **Per unit/per user model** **Description:** this model's pricing is based on specific units or users. Each additional unit or user generates a cost. The term "unit" can refer to different things, depending on the service (e.g., a user, an account, a device, a unit of consumption, etc.). A specific price is charged for each unit consumed or each additional user Advantages:  - Scalable, as the price increases proportionally with usage or number of users - Allows cost to be tailored to the exact needs of each customer  **Examples:** Zoom, Sales Force  **Disadvantages for the firm: ** - Complicated loyalty\`; if users must pay for each additional unit or user, this may discourage expansion or long-term loyalty  - Revenue instability: the firm depends on the number of active users, which can generate volatile revenue, especially if customers churn  **Usage-based model** **Description:** also known as "pay-per-use", it is charged according to the actual amount of use of the service, not by units or fixed users. The price is directly related to the level of consumption. This model is suited to services where usage may vary and is not directly related to the number of users or units.  **Advantages: ** - Customers only pay for what they use, which can make the service more affordable  - Increased flexibility and can attract users with varying needs **Examples:** cell phone services where users only pay for the number of minutes, data or messages they consume, UBER does not charge you for the number of passengers **Disadvantages: ** - Unpredictable revenues: since prices depend on consumption, revenues can be unstable and difficult to predict, complocating financial planning  - Low profitability if consumption is low: if users do not make intensive use of the service, revenues generated may be lower than expected