Pricing Strategy

Cesim Firm

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Basics on Pricing
QUESTIONS TO PONDER

• What are the right price points where we

can make money
• How many customers will buy the product
• Will we reach the volume we are trying to
get to
• How are the competitors pricing their
product
• Understanding customer value in all
customer segments

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THREE LENSES OF PRICING

ECONOMICS Cost
Margin
Supply/Demand
Incentives

COMPETITIORS

CUSTOMERS Value Next best alternative

Willingness to pay Market prices
Customer segments Market shares
Purchase decisions Industry dynamics

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PRICE & BUYING
PROCESS
INVOLVEMENT
• The mental energy and time invested for a product
purchase
• Low Involvement Product – Milk
• High Involvement Product – Car
• Involvement can be decided based on money, complexity
of product, trade-offs, more characteristics to consider INVOLVEMENT
• The more involved the buying process, the longer the
buyer will consider price WHOOPER CLOTHES
 Pay attention to price search : SEO, advertise price
VISIBILITY
 Consider “mental accounting” type deals BED FOR MASTER
CHOCOLATE BAR
 May require a product line : BEDROOM
 Customers trade off attributes and prices
 Different customers make different trade-offs

CONSUMPTION VISIBILITY
• The more visible the consumption, the more likely it is
that price is part of the intrinsic value of the object
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CUSTOMER VALUE
• Customer value is the sum of all the value drivers one have
• Customer value varies by customer depending on
• Needs, wants, fears
• Willingness/ ability to pay
• Context of purchase
• Customer Value = Σ Value- driveri
all i
• Customer Value = Value of next best alternative + Net value
of differences to next best alternative
Total Value Total Cost Surplus
• Customer Surplus = Customer value – Cost for customer

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VALUE DRIVERS
• There are three value drivers. Considering an example of booking a flight to explain each
• TECHNICAL – Product features that provide technical benefits
Product Value Drivers Speed, Meals, Space, Wi-Fi access
Non-Product Value Drivers Cancellation Policy

• FUNCTIONAL – Experience while purchasing the product

Product Value Drivers Ease of booking, Convenience during trip
Non-Product Value Drivers Customer service, Value-added services

• EMOTIONAL – How the customer feels about product based on his brand perception, its
reputation and their personal experience.
Product Value Drivers Brand, Prestige
Non-Product Value Drivers Courtesy of staff, Trust
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DIFFERENTIATING CUSTOMER VALUE
SEGMENTS

• Group customers into segments with

similar value drivers 1 Understand the customer value your
business provides
• Use price fences to differentiate
price by customer segment
• To manage what customers pay:
• “trade down” by removing 2 Articulate how the value drivers differ by
customer segment
features critical to a segment
• “trade up” by emphasizing
incremental benefits and Differentiate your offering to maximize
additional incentives 3 value for your target audience segment
and price accordingly 8

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WILLINGNESS TO PAY
• It is the maximum amount of money a customer is
willing to pay for a product or service
• The price at or below which a customer will buy a
product or service.
• Demand Curve is a graph between price and
quantity , where the line shows the relationship DEMAND CURVE
between two.
• It is a plot of quantity along WTP for an individual,
segment and market
• Law of demand : demand goes up when price
goes down
• The real world demand curve is more reciprocal
than linear 9
NON PRICE DETERMINANT FACTORS
• They lead to shift in demand curves
Drivers Shift to left Shift to right
Purchasing power/Income Lower Higher
Market population Shrinking Growing
Substitutes priced Lower Higher
Complements priced Higher Lower

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QUESTIONS TO THINK
BEFORE PRICING
• What is the most and least a segment is
willing to pay’
• How might WTP change if a client’s
product was positioned differently
• What shape the demand curve must likely
have
• At what price points should clients expect
step-changes in demand
• Is the client making the optimal trade-off
between under-charged and unserved
demand

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Pricing Methods
WHAT DOES IT TAKES TO SERVE A CUSTOMER
SEGMENT
Deep customer Capabilities and Access to Enabling
Understanding Assets customers Economics

• Differentiate • To deliver the • Reach each • Favourable

customer value value segment cost structures
equations proposition effectively • Critical mass in
• Identify Examples • Market each segment
segments • Technology efficiently for scale
• Articulate • Capacity • Sell through • Sufficient
winning value • Brand the right pricing power
proposition channels

As many segments as you can effectively serve profitably

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INCENTIVE CURVES
• The x-axis has all the products and the y-axis we
show the price per unit (e.g. grams/ounces,
litres/gallons, count)
• The basic shape of an incentive curve is sloping
downwards because you want to create an
incentive for the buyer who considers product A
to upgrade to product B. 
• Thus, spend more money in absolute but pays less
on a per unit basis.
• Slope of incentive curve:
• If you purchase soap bars as a packet of 3 or
6 or 12, you may not end up using more
However, in case of a packet of chips, if the
packet is bigger, there is a possibility of
higher consumption.
• Thus the curve will be steeper as compared
to soap bars

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INCENTIVE CURVES

• Considering case of hot dogs, package size is not

important as one or two can make a person full.
• The important feature is its taste
• As per a research conducted to like hot dogs on a scale of
1 to 10 (1 – bad and 10 – excellent), a matrix called Hot
dog taste points (HDTP) was created.
• The incentive curve is going down with the exception of
line with the onions
• This indicates there is very little incentive for a customer
who likes the cheese to also add onions if it doesn’t add
anything on flavour here
• This calls for a change in recipe

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INCENTIVE CURVES
• Incentive curves can also be used to compare to
competitors
• As per the graph, on the cost per taste point they
are higher and that is the charge the same price
absolute but the consumer ratings for them are
not as favourable. 
• So we are undercharging for the taste we are
providing. 
• We can think if we price up to close into
our competitor.
Understand the market Identify opportunities
What is the impact of package size on usage Can we drive incremental usage through
larger package sizes
What are appropriate target slopes between Can we introduce incentive curves, or adjust
sizes to maximize profitability their slopes to optimize profitability

What are price/unit relationships out of

place in the market
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CONJOINT BASED PRICING
• A technique to determine how people value
different product attributes
• To know how people trade-off one attribute
for another.
• Conjoint can be effective for product and
service that can be decomposed into
attributes
• Example in case of mutual funds :

• In products like clothing, emotional gut

reaction plays an important role than trade
off of attributes
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HOW DOES CONJOINT
WORKS
• By showing consumers a series of hypothetical products defined by their
attributes
• Ask the respondent to pick the product they like best
• Repeat 20-30 times
• Use responses to estimate attribute –level

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STEPS FOR CONJOINT
ANALYSIS
Step 1 : Define attribute list
• Select most important determinants of choice (from research data etc.)
• Assure independence of attributes (brand, price, colour etc.)
Step 2 : Formulate levels
• Levels should be concrete and unambiguous. Example “$250” instead of “very expensive” or “powerful” vs “280
horsepower”
• They should be mutually exclusive
Step 3 : Collect data
• Usually done via web based experiments
• Recommended respondents >=500
• Collect details of individuals (like gender, age) to aid segmentation decisions.

This defines what people prefers most and what they would like
to pay for the same.

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VALUE BASED PRICING
FOR NEW PRODUCTS

Step 1 : Define target customer segment

Step 2 : Identify next best alternative
Step 3 : Identify the customer’s value drivers
Step 4 : Quantify value drivers to find the
indifference price point
Step 5 : Use the indifference price point to set
the price

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CASE STUDY : CASE
FACTS

MARKET SCENARIO
• Brand 1 is the market leader
with 40% market share

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CASE STUDY
• Next best alternative is the product
that Jane has in mind when she
thinks of buying the laptop
• Next best alternative gives us an idea
about in which parts Jane is willing to
spend for it
• This gives the reference price
• Reference price will be starting point
for our value equations.
• We add value drivers to this, which
can either be positive or negative, to
get the indifference price.
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CASE STUDY

• Comparing with product from market leader as

this is probably Jane’s first preference
• It is similar in processor, hard drive, RAM
specifications and movie conversion and video
editing.
• This sets the reference price at $600
• The differences lie in market share, screen size
and ability to play Blue-ray movies in 3D.
• Indifference price point – is the price at which
customer becomes indifferent to next best
alternative and your product

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CASE STUDY
• How well we match Jane’s needs
• We need to put a price tag on Screen
size, Blue-ray in 3D and Brand
• Three main quantification methods:
• Economic value estimate
• Intrinsic value analysis
• Conjoint analysis

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CASE STUDY

• Thus, Indifference price calculated is $659

ACTUALLY SETTING THE PRICE
• JUSTIFIABLE PRICE RANGE :
• We need to consider the product
cost
• Product cost = $474
• From economic perspective , its
justifiable to charge more than 474
• Maximum price limit is $659
(indifference price)
• Thus, $474 - $ 659 is the justifiable
price range

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CASE STUDY

• If we apply cost-plus approach and use 16% mark-up, then we would have charged $549
• We determined Jane would consider the laptop at $659, thus cost-plus pricing may leave some money on the table
MOST LIKELY PRICE RANGE
• Includes competitive responses
• Below $474 implies destroying value and losing money for firm
• Above $659 there will be very little demand
• At reference point, we might be giving our additional capabilities away fro free. There may also trigger a price war
• Most likely price is between Reference price and Indifference price
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CASE STUDY

To set the price in this range :

• Use the demand curve for our laptop
• Using this calculate, demand, gross margin and
cost for every price point in the range

• Create profit parabola – plot of gross margin

for each price point and thus we can have the
point where it Is maximized
• The maximum for us is $649

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OPTIMAL PRICE
• To determine optimal price there is
trade-off to minimize the un-served
demand and minimizing the surplus
• Cost is also adjusted in respect to the
quantity you have
• Demand curves do not account for
non price determinant demand
drivers
• Demand curves can change over time
but also quickly

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OPTIMAL PRICING
STRATEGIES
• Ideally we wish to maximize the revenue and thus want
to cover all the surface under the demand curve.
• This implies to sell to every customer individually at a
price they are willing to pay

• Practically , we try to trace the demand curve

as closely as possible and maximize value
extraction
• This can be attained by providing offerings that
are tailored for the segments
• This help reduces surplus between each of the
segments
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Let’s apply this frameworks on our Game…