Pricing Strategy over the Life Cycle

1
Pricing Strategy over the Life Cycle Chs. 7-8

• Review Fire Safety Homework
• Understand how price sensitivity, costs, and
  competition influence pricing strategy over the
  product life cycle.
• Introduce organizational tools and diagnostic
  analytics that can be used to identify and
  overcome implementation challenges

2
Fire Safety 1. Given overall market growth rate
29, Fire Safetys 5 price increase in FY
2011, 2010 CM62, what was Fire Safetys
incremental breakeven point for unit quantity
and sales change in FY 2011? How does that
compare with actual 2011 unit quantity and
sales changes.
Incremental Quantity Breakeven 2010-11 (5 Price Increase 62 CM)
Breakeven Sales as a of 2010 Sales (1/- Incremental Breakeven )
Expected 2011 Sales as a of 2010 Sales (No price change Market Growth 29)
Breakeven 2011 Sales as a of 2010 Sales (5 Price Increase Growth 29)
Actual 2011 Sales as a of 2010 Sales
Quantity Above/Below Breakeven (2010 basis)
Quantity Above/Below Breakeven (2011 basis)
-DP
-5
-7.5


CM DP
625
92.5
129
119.4
107.8
-11.6
-9.7
3
Fire Safety 2. Given the expected market growth
rate of 44, Fire Safetys proposed 5 price
increase in FY 2012, 2011 CM 64, what is
Fire Safetys incremental percentage breakeven
point for unit quantity and sales change in FY
2012?
Incremental Quantity Breakeven 2011-12 (5 Price Increase 64 CM)
Breakeven Sales as a of Sales (1/- Incremental Breakeven )
Expected 2012 Sales as a of 2011 Sales (No price change Growth 44)
Breakeven 2012 Sales as a of 2011 Sales (5 Price Increase Growth 44)
-5
-7.2
645
92.8
144
133.6
Breakeven Elasticity -1.45
Would you recommend the 5 price increase to FSI
management for FY 2012? Why (not)? What would
you recommend?
Observed Elasticity DQ Observed Elasticity DQ (107.8-129) -16.44 -3.29
DP 129 5.00
The Final Requires Calculating Breakeven Volumes
Expected Volumes based on Elasticities
4
Elasticity Required to Breakeven
The Final Requires Calculating Breakeven Volumes
Expected Volumes based on Elasticities
Current Contribution Margin Current Contribution Margin Current Contribution Margin Current Contribution Margin Current Contribution Margin Current Contribution Margin Current Contribution Margin Current Contribution Margin Current Contribution Margin
5 10 20 30 40 50 60 70 80 90
Change in Price 20 -4.00 -3.33 -2.50 -2.00 -1.67 -1.43 -1.25 -1.11 -1.00 -0.91
Change in Price 15 -5.00 -4.00 -2.86 -2.22 -1.82 -1.54 -1.33 -1.18 -1.05 -0.95
Change in Price 10 -6.67 -5.00 -3.33 -2.50 -2.00 -1.67 -1.43 -1.25 -1.11 -1.00
Change in Price 5 -10.00 -6.67 -4.00 -2.86 -2.22 -1.82 -1.54 -1.33 -1.18 -1.05
Change in Price 0 0 0 0 0 0 0 0 0 0 0
Change in Price -5 -20.00 -6.67 -4.00 -2.86 -2.22 -1.82 -1.54 -1.33 -1.18
Change in Price -10 -10.00 -5.00 -3.33 -2.50 -2.00 -1.67 -1.43 -1.25
Change in Price -15 -6.67 -4.00 -2.86 -2.22 -1.82 -1.54 -1.33
Change in Price -20 -5.00 -3.33 -2.50 -2.00 -1.67 -1.43
Price increase Elasticity lt the breakeven
amount leads to contribution increase. Price
decrease Elasticity gt the breakeven amount
leads to contribution increase.
5
Sales and Profits Over the PLC
6
Product Adoption Curve
7
Market Dynamics over the PLC
GROWTH
MATURITY
DECLINE
INTRODUCTION
CUSTOMERS
Growing customer baseEarly adoptersLittle
product knowledgeModerate knowledge
buyersIncreasing brand loyalty
Large segmented marketLate adopters/LaggardsHigh
knowledge buyersRepeat purchasersComparison
shopping
Declining customer baseHigh knowledge
buyersFamiliar with all suppliers and options
Small customer baseInnovatorsLittle product
knowledgeLow knowledge buyers
COMPETITION
Shakeout to stable of competitorsHomogeneous
dominant brandsMarket share defenseGains from
competitors
Increased competitive entryBrand proliferation
confusionDifferentiation vs. Cost leadership
Increased price competition to fill
capacityExiting of weak competitors
Few competitorsLow threat of competitive
rivalryGains from market development are high
Declining unit variable costs through
volumeIncreasing contribution margins
Low variable costsHigh contribution marginsCost
controlsAsset utilization
Excess capacityHigh average costs, due to low
capacity utilization
COSTS
High incremental costs of production and
promotionLow contribution marginExternal
sourcing
Reference value effectPrice quality
effectDifficult comparison effectMORE
SENSITIVITY
Switching cost effectExpenditure effectEnd
benefit effectLower riskHIGH SENSITIVITY
Switching cost effectExpenditure effectEnd
benefit effectHIGH SENSITIVITY
PRICE SENSITIVITY
Reference value effectPrice quality
effectDifficult comparison Fairness effectLOW
SENSITIVITY
Brand positioningDifferentiationBrand
loyaltyDefensible competitive position
Market share defenseMarketing and production
efficiencyProfitable market segmentation
Retrench, defend strongest product
linesHarvest the businessConsolidation to small
of competitors
MARKETING OBJECTIVES
Generate primary demandCustomer awarenessMarket
educationBuyer frames of referenceInformation
diffusion
Bundled pricing to simplify segmented pricing
according to buyer knowledge (Hi-Mod-Lo)
Expansion of product line and price
pointsMultiple pricing channelsSegmentation
pricing
Price to maintain margins, but signal intent to
defendPrice for max. cash flowPredatory pricing
PRICING STRATEGIES
Establish value and worth
8
Market Dynamics over the PLC
GROWTH
MATURITY
INTRODUCTION
CUSTOMERS
Moderate knowledge buyersIncreasing brand
loyalty
High knowledge buyersRepeat purchasersComparison
shopping
Little product knowledgeLow knowledge buyers
COMPETITION
Homogeneous dominant brands Market share
defenseGains from competitors
Brand proliferation confusionDifferentiation
vs. Cost leadership
Few competitorsGains from market development are
high
Declining unit variable costs through volume
High contribution marginsAsset utilization
COSTS
High incremental costs of production and promotion
Difficult comparison Price quality effect
MORE SENSITIVITY
Switching cost effectExpenditure effect HIGH
SENSITIVITY
PRICE SENSITIVITY
Difficult comparison Fairness effect LOW
SENSITIVITY
Brand positioning loyalty Brand
differentiationDefensible competitive position
Market share defenseMarketing production
efficiencyProfitable market segmentation
MARKETING OBJECTIVES
Generate primary demandCustomer awarenessMarket
education
Simplify segmented pricing according to buyer
knowledge (Hi-Mod-Lo)
Expansion of product line and price
pointsSegmentation pricing
PRICING STRATEGIES
Establish value and worth
9
PLC Brand Strategies
Product Category Life Cycle
Brand Stage Launch Maintenance Retire
ment
Introduction Price to establish, communicate
promote value of the product N/A N/A
Growth Based on LT strategy, identify appropriate
segment(s) before commercialization Segment
target for LT advantage. Lower price as necessary
to maintain market growth. Price compete only to
gain cost advantage. Price to clear inventory
quickly while launching new models
Maturity Use aggressive pricing to dominate based
on cost advantage or target underserved niches
w/a service advantage. Unbundle. Price products
services separately. Rationalize product line
distribution strategy. Price to maximize profit,
not market share or growth. Slowly price
yourself out of business.
Decline Not recommended. Only with strong
advantage. Consolidate to solidify cost or
service leadership. Withdraw cash
w/incrementally higher prices.
10
PLC Brand Strategies
Product Category Life Cycle
Brand Stage Launch Maintenance Retirem
ent
Introduction Price to establish, communicate
promote value of the product N/A N/A
Growth Based on LT strategy, identify appropriate
segment(s) before commercialization Segment
target for LT advantage. Lower price as necessary
to maintain market growth. Price compete only to
gain cost advantage. Price to clear inventory
quickly while launching new models
Maturity Use aggressive pricing to dominate based
on cost advantage or target underserved niches
w/a service advantage. Unbundle. Price products
services separately. Rationalize product line
distribution strategy. Price to maximize profit,
not market share or growth. Slowly price
yourself out of business.
11
Illustrative Customer Profitability Map
High
Gold
Platinum
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Price
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Low
Silver
Lead
Low
High
Cost to Serve
12
Price Banding Output
Actual Price
Fair Price
13
Customer Lifetime Value (CLV)Useful Analysis at
the Individual Customer Segment
CLVinfinite lifetime
CM/(i 1 r) AC
where CM average annual contribution for the
customer (segment) i i (the risk-free
discount rate) risk factor r retention rate
for the customer (segment) AC acquisition costs
How valuable/profitable is each customer
(segment) given prices variable costs (i.e.,
contribution), retention rates, discount rate,
risk level acquisition costs?
How valuable/profitable is an acquisition or
retention campaign given prices variable costs
(i.e., contribution), retention rates, discount
rate, risk level acquisition costs?
14
Customer EquityFacebook April/May 2012
Customers CLV
Customer Equity

• At Facebook
• April 2012 Unique Users 900,000,000
• Revenue 3.7 B CM (90) 4 i .05 r
  .95
• CLV 40
• Customer Equity Users CLV 36 B

External Valuation May 2012 100 B
15
Customer EquityFacebook July/August 2012
Customers CLV
Customer Equity

• At Facebook
• July 2012 Unique Users 955,000,000
• Revenue 4.7 B CM (90) 4.4
• CLV 44
• Customer Equity 42 B

External Valuation August 2012 50 B
16
Price Waterfall Example
800
620
45
600
1
67
507
15
Price ()
25
1
5
6
455
400
Major Opportunity
200
0
Transaction
Ordersize
Upcharges
MCP / Bid
Invoice
Credits
Discount /
Misc.
Rebates
Debit
Pocket
Price
Discount
Discounts
Price
Terms
Charges /
Backs
Price
and Waived
Allowances
Upcharges
17
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