Pricing: Understanding and Capturing Customer Value Zou Deqiang, Ph. D School of Management, Fudan University May14,2008
1 Pricing: Pricing: Understanding and Understanding and Capturing Customer Capturing Customer Value Zou Deqiang, Ph.D. School of Management, Fudan University May 14, 2008
What is a price? Narrowly, price is the amount of money charged for a product or service Broadly, price is the sum of all the values that consumers exchange for the benefits of having or using the product or service O Copy rights reserved, Zou Deqiang
2 2 © Copy rights reserved, Zou Deqiang What Is a Price? • Narrowly, price is the amount of money charged for a product or service. • Broadly, price is the sum of all the values that consumers exchange for the benefits of having or using the product or service
Weighing Benefits vS. Total Price Total price Purchase price Total Benefits Shipping and installation Features Training, repair, upkeep Quality Fina ng Service Time and effort to find, buy, use Availability Price of accessories Performance Disposal or recycling fees Personal satisfaction O Copy rights reserved, Zou Deqiang
3 3 © Copy rights reserved, Zou Deqiang Weighing Benefits vs. Total Price
Ask The Right Questions The customer question in pricing is not What price is the customer willing to pay? The customer questions in pricing are What prices can we convince buyers are supported by the value to them of our products and services? How can we better segment the market to reflect the differences in value to different types of customers? O Copy rights reserved, Zou Deqiang
4 4 © Copy rights reserved, Zou Deqiang Ask The Right Questions The customer question in pricing is not: ¾What price is the customer willing to pay? The customer questions in pricing are: ¾What prices can we convince buyers are supported by the value to them of our products and services? ¾How can we better segment the market to reflect the differences in value to different types of customers?
Customer-Driven Pricing The demands of the market require pricing every product to reflect the customer's willingness-to-pay. PRICE WILLINGNESS TO PAY O Copy rights reserved, Zou Deqiang
5 5 © Copy rights reserved, Zou Deqiang The demands of the market require pricing every product to reflect the customer’s willingness-to-pay. The demands of the market require pricing every product to reflect the customer reflect the customer’s willingness willingness-to-pay. Customer Customer-Driven Pricing Customer-Driven Pricing Driven Pricing PRICE WILLINGNESS TO PAY
Significance of Pricing Price is the only element in the marketing mix that produces revenue; all other elements represent costs O Copy rights reserved, Zou Deqiang
6 6 © Copy rights reserved, Zou Deqiang Significance of Pricing • Price is the only element in the marketing mix that produces revenue; all other elements represent costs
Caution from a Marketing Master Discounting your brand too many times is all it takes to lower profits and erode a brand's equity Leo Burnett 7 O Copy rights reserved, Zou Deqiang
7 7 © Copy rights reserved, Zou Deqiang Caution from a Marketing Master Discounting your brand too many times is all it takes to lower profits and erode a brand’s equity. Leo Burnett
Importance of Pricing A 5% Discount Can Reduce Net Profits by Over 30%! Original Selli 5% Price Discount Reduction Selling Price $135 128 5% Quantity Sold 100 100 Gross sales $13,500$12,825 -5% Discounts 7,000 7,00 Allow ances Net sales $6,500 $5,825 -10% Cost of goods sold 3,300 Gross Margin $3,200 $2,525 SG&A Costs Net Profit $2,100 $1,425 32% 8 O Copy rights reserved, Zou Deqiang
8 8 © Copy rights reserved, Zou Deqiang Original Selling Price 5% Discount Reduction Selling Price $135 $128 -5% Quantity Sold 100 100 Gross Sales $13,500 $12,825 -5% Discounts & Allow ances 7,000 7,000 Net Sales $6,500 $5,825 -10% Cost of Goods Sold 3,300 3,300 Gross M argin $3,200 $2,525 -21% SG&A Costs 1,100 1,100 Net Profit $2,100 $1,425 -32% A 5% Discount Can Reduce Net Profits by Over 30%! Importance of Pricing
Steps in Setting Price Policy 1. Select the pricing objective 2. Determine demand 3. Estimate costs 4. Analyze competitor price mix 5. Select a pricing method 6. Select the final price 9 O Copy rights reserved, Zou Deqiang
9 9 © Copy rights reserved, Zou Deqiang Steps in Setting Price Policy 1. Select the pricing objective 2. Determine demand 3. Estimate costs 4. Analyze competitor price mix 5. Select a pricing method 6. Select the final price
1 Selecting the Pricing Objective Survival Maximum current profit Maximum market share Maximum market skimming Product-quality leadership O Copy rights reserved, Zou Deqiang
10 10 © Copy rights reserved, Zou Deqiang 1 Selecting the Pricing Objective • Survival • Maximum current profit • Maximum market share • Maximum market skimming • Product-quality leadership
