Developing Pricing Strategies and Programs Chapter 11 Developing Pricing Strategies and Programs

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 the consumers exchange for the benefit of having or using the product or service.

Pricing Mechanism Throughout most of history, prices were set by negotiation between buyers and sellers. At the end of 19th century, the development of large-scale retailing → fixed price policies, i.e. setting one price for all buyers. At the end of 20th century, the Internet → dynamic pricing, i.e. charging different prices depending on individual customers and situations.

Case: Priceline Its customer base has grown to almost 17 million users, and as many as 9 million people visit the Priceline site monthly (64% are repeat customers). Working mechanism Attractive to the “time sensitivity” product such as travel-related products (e.g. plane tickets, hotel rooms, rental cars, cruises, and vacation packages).

Dynamic Pricing on the Web Sellers can charge lower prices, reap higher margins, e.g. Dell’s “made-to-order”. monitor customer behavior and tailor offers to individuals, e.g. Amazon. charge prices on the fly according to changes in demand or costs, e.g. online catalog retailers.

Dynamic Pricing on the Web Buyers can get instant price comparisons from thousands of vendors, e.g. Compare.Net, PriceScan.com, and 手機王. find and negotiate lower prices. Both sellers and buyers can negotiate prices in online auctions and exchanges. E.g. FreeMarkets, 阿里巴巴.

Setting Pricing Policy Selecting the pricing objectives Determining demand Estimating costs Analyzing competitors’ costs, prices, and offers Selecting a pricing method Selecting the final price

Selecting the Pricing Objectives Survival Reasons: overcapacity, intense competition, or changing consumer wants. Prices cover variable costs and some fixed costs Maximum current profit Maximize current profit, cash flow or ROI Does a leveraged firm more care about the current profit than a non-leveraged firm?

Selecting the Pricing Objectives Maximum market share Examples of Chinese computer companies: 大長城→$600 (captured 1/3 of total PC sales); Start→$480 (trade in, minus monitor); 海星→$580 (aimed at schoolchildren). Conditions: (1) price sensitivity; (2) experience curve; (3) deter entry.

Selecting the Pricing Objectives Maximum market skimming Example: Sony’s HDTV: $43,000 (1990) → $6000 (1993, 28-inch) → $2000 (2000, 40-inch) Conditions: (1) initial demand; (2) economics of scale; (3) potential competitors; (4) product image. Product-quality leadership, e.g. Benz. Non-profit organization’s objectives

Determining Demand Demand curve and its slopes, e.g. Wall Street Pub in Malaysia. When does the demand curve slope upward? Price sensitivity of demand → price elasticity Conditions for less elastic demand There are few or no substitutes or competitors. Buyers do not readily notice the higher price. Buyers are slow to change their buying habits. Buyers think the higher prices are justified.

Figure: Inelastic and Elastic Demand

Determining Demand When the profits are maximized, is the price elasticity equal to 1? Tellis’s survey → 1.76 on average Non-durable good: 1.5~5 Durable good: 1.5~3 Sethuraman and Tellis → 平均而言，價格彈性約為廣告彈性的20倍.

Determining Demand Influence of the Internet on price sensitivity The Internet has increased customers’ price sensitivity, e.g. mysimon.com, 手機王. Mckinsey’s study found that there is less price-comparison shopping taking place on the Internet than is possible: 89% (book), 84% (toy) and 81% (music).

Determining Demand Asian consumers generally tend to be highly price sensitive and are pragmatic shoppers. One study in south California found that Chinese consumers engaged in more information search on products and prices than U.S. consumers. Price indifference band: 17% (mouthwash), 13% (batteries), 9% (small appliance), and 2% (certificates of deposit).

Determining Demand Estimating demand curve Experts’ judgments Ask buyers – direct or indirect Conduct price experiment, e.g. Amazon. Analyze the sales data: longitudinal or cross-sectional

專家調查法 方法：請數位專家預估在數個價格水準（如：最低與最高可行價格、中間價格等）下，未來一段時間內的銷售量。 優點：簡單、成本較低、適合於多種產品的評估狀況。 缺點：全然依賴內部資訊來源。 較適用在顧客很少的B2B市場。

專家判斷法 – 小撇步 請準備一份針對手邊狀況所設計的問卷。 可能的話，請至少訪問十位專家；說不定，他們的看法會南轅北轍。 邀集所有受訪者開會討論，並且達成共識，會比只是計算個別預估的平均值更好。 邀請不同部門和職級的專家參與，取得多元化觀點，例如：業務部門、行銷部門以及總經理層級。 由於價格反應預估這個主題具有政治性，因此最好委任中立的外界人士負責訪談的工作。一旦接受了某個價格反應曲線，公司內部便可以預設銷售量目標。 運用電腦來支援進行預測工作。

顧客調查法 – 直接了當式 一些典型的問卷問題： 您願意以25美元的價格購買這項產品的可能性有多高？ 您絕對會購買這項產品的價位是多少？ 您願意付多少錢買這項產品？ 當這項產品價格為0.99美元時，您會購買多少件？ 當兩者的價格變成多少時，您願意從A產品轉換成B產品？

Case: Vobis (歐洲最大電腦零售商)

Case: Kodak

Case: Kodak

顧客調查法 – 直接了當式 優點：方法簡單、容易瞭解、費用平實。 限制： 較適用於工業用品，而非消費性用品。 直接詢問價格可能會讓受訪者產生一種不切實際的高價意識。 本法只針對價格單獨考量，然而，在現實生活中，顧客也會針對產品屬性（價值）和價格進行評比。 價格隱含一種潛在的優越感效應，受訪者可能不願自己承認負擔不起高檔產品，表明自己愛買便宜貨。 較適用於工業用品，而非消費性用品。

顧客調查法 – 間接推論式：綜合評量法 界定想要瞭解的產品屬性 每個屬性分設等級 篩選受訪者 採用電腦展示兩兩對照的產品側寫 一般需動用10~20組的比較性資料 求出產品屬性的重要性排序 價值轉化為價格單位 預測顧客的選擇

Case: Lion

Case: Lion

Case: Lion

Case: Lion

顧客究竟要什麼？ 傳統顧客偏好評等工具大部分都設計不良，主要是因為消費者難以具體說明自己真正想要什麼。 最大差異量表(Maximum Difference Scaling, MaxDiff) 參考網址：http://maxdiff.hbr.org 摘錄自哈佛商業評論 全球繁體中文版 (p. 24, April 2009)

Estimating Costs Types of costs: fixed costs, variable costs, total costs and average costs. Accumulated production and experience curve (learning curve) Aggressive pricing Target costing Pricing that stars with an ideal selling price, then targets costs that will ensure that the price is met. E.g. P&G’s Crest SpinBrush, Honda’s Today.

Case: Kodak vs. Fuji 1970年代，Kodak佔有歐洲軟片的大部分市場，也享受穩定的價格和利潤。 然後Fuji跨入市場，以遠低於Kodak的價格進入，甚至低於Kodak的生產成本，但此時Fuji的成本還遠高於Kodak。 Kodak以短期現象看待它，你認為呢？

Analyzing Competitors’ Costs, Prices, and Offers - Jollibee Jollibee’s outlets sport the clean and well-lighted look of McDonald’s and operate with efficiency of Singapore Airlines. Similar to Disney, it spends 4% of its gross sales on advertising. Jollibee responed by holding price increases at 8.5% to McDonald’s 10% when the country’s inflation was 9.7%. Jollibee’s Yumburger Market share: Jollibee (over 50%) > McDonald’s (20%)

Selecting a Pricing Method Markup pricing Add a standard markup to the product’s cost. Reasons: (1) sellers are more certain about costs than about demand; (2) price competition can be minimized; (3) fairer to both buyers and sellers. Make sense? Target-return pricing The price yields the firm’s target rate of ROI. Perceived-value pricing, e.g. DuPont, Caterpillar, and Benz.

Caterpillar’s Perceived-Value Pricing $90,000 is the tractor’s price if it is only equivalent to the competitors tractor $7000 is the price premium for Caterpillar’s superior durability $6000 is the price premium for Caterpillar’s superior reliability $5000 is the price premium for Caterpillar’s superior service $2000 is the price premium for Caterpillar’s longer warranty on parts $11000 is the normal price to cover Caterpillar’s superior value $10000 discount $100,000 final price

Selecting a Pricing Method Value pricing Charge a fairly low price for a high-quality, e.g. Arvind Mills’s Ruf & Tuf. EDLP, e.g. Wal-Mart. Going-rate pricing Auction-type pricing English auctions (ascending bids) Dutch auction (descending bids) Sealed-bid auction

Product Mix Pricing Strategies Product line pricing Optional-product pricing Captive-product pricing By-product pricing Product bundle pricing

Product Line Pricing Setting the price steps between various products in a product line. Based on: cost differences between the products in the line, customer evaluations of their different features, cannibalization between the products in the line, and competitors’ prices.

Optional-Product Pricing The pricing of optional or accessory products along with a main product. Additive option framing (+OF) vs. subtractive option framing (-OF) Consumers tend to choose more options with a higher total option price when they use –OF versus +OF. This effect holds across different option price levels and product category of vary prices. -OF appears to demotivate category purchase when product commitment is low.

Captive-Product Pricing Setting a price for products that must be used along with a main product. Producers of the main products often price them low and set high markups on the supplies. Ex. Gillette: razor + razor blades; HP: printer＋printer cartridges. In the case of services, this strategy is called two-part pricing (fixed fee plus variable usage rate).

By-Product Pricing Setting a price for by-products in order to make the main product’s price more competitive. Zoo-Doo’s case Ford → Ford Charcoal; Wilco → I Am Trying to Break Your Heart; Fried & Hansson → “Getting Real” & “Rework”.

Product-Bundling Pricing Combing several products and offering the bundle at a reduced price Pure component pricing vs. Pure bundle pricing vs. Mixed bundle pricing

Product-Bundling Pricing Pure component: profit=$33. Pure bundle: profit=$42. (+27%) Mixed bundle: profit=$44. (+33%) Reservation Price Customer A B A+B 1 9.0 1.5 10.5 2 8.0 5.0 13.0 3 4.5 8.5 4 2.5 11.5

Product-Bundling Pricing Why can product-bundling pricing increase the profit? When is it appropriate to use the product-bundling pricing?

Case: 鑽探設備之生產和維修組合銷售 市場區隔群組 區隔大小（以市場的百分比計） 願意支付的最高價格 備註 使用機器 維修 聯賣（使用＋維修） 1 12 1250 990 2310 2 23 1450 540 1750 自己有維修工程師的公司 3 22 1080 1030 2090 使用率非常高 4 43 1390 870 2350 邊際成本 550 470 1020

Case: 鑽探設備之生產和維修組合銷售 － 定價策略 最適價 銷售量 利潤 指數 機器 維修 聯賣 Pure Component 1390 870 － 66 77 86,240 100 Pure Bundle 2090 82,390 96 Mixed Bundle 1450 1030 2310 23 22 55 103,970 121 邊際成本 550 470 1020

Complementary Product Pricing 訂價準則： 低於獨立最適訂價 隨著互補關係愈強而降低 隨著互補品的毛利增高而降低

Complementary Product Pricing 西裝之需求函數：P=500 – 0.5 Q. 西裝之成本 = $200. 1套西裝 → 0.8件襯衫 & 1.2條領帶 平均毛利：襯衫$15, 領帶$10. 獨立訂價：P=350, Q=300. 互補品訂價：P=338, Q=324.

Price-Adjustment Strategies Discount and allowance pricing Segmented pricing Psychological pricing Promotional pricing Geographical pricing International pricing

Discounts and Allowances Pricing Cash discount: a price reduction to buyers who pay their bills promptly. Quantity discount: a price reduction to buyers who buy large volumes (one type of product line design). Functional discount (trade discount): offered by the seller to trade-channel members who perform certain functions, such as selling, storing, and record keeping. Seasonal discount: allow the seller to keep production steady during an entire year.

Discounts and Allowances Pricing Trade-in allowance: a price reduction given for turning in an old item when buying a new one. Promotional allowance: payments or price reductions to reward dealers for participating in advertising and sales support programs.

Segmented Pricing Selling a product or service at two or more prices, where the difference in prices is not based on differences in costs. Types of segmented pricing: customer-segment pricing, product-form pricing, location pricing, time pricing, image pricing, and channel pricing. Airlines, hotels, and restaurants call it yield management or revenue management. Should a company offer lower rates on unsold inventory just before it expires?

Segmented Pricing Q: If there exists a dominant segment, does a company still need the discriminatory pricing? Example 1: A theater has only 4 seats. 4 non-students’ valuations 20, 18, 16, 14 4 students’ valuations 10, 8, 6, 4

Segmented Pricing Example 2 P = a – b Q, variable cost = c. An airline company: a=3900, b=10, c=100. 單一艙等 兩種艙等 三種艙等 價格 $2,000 頭等艙=$2,633 經濟艙=$1,367 頭等艙=2,950 商務艙=2,000 經濟艙=1,050 銷售量 190 頭等艙顧客=127 經濟艙顧客=127 共254 (+34%) 頭等艙顧客=95 商務艙顧客=95 經濟艙顧客=95 共285 (+50%) 利潤 $361,000 $482,600 (+34%) $541,500 (+50%)

Segmented Pricing

Conditions for Successful Segmented Pricing The market must be segmentable, and the segments must show different degrees of demand. Cost of price discrimination The segmented pricing must be legal. Customers’ feeling Reselling is impossible. Competitors’ underselling in the higher-price segment

Segmented Pricing 美國航空採用三種艙等 德國國營鐵路公司減縮火車艙等 (4→2)

Psychological Pricing A pricing approach that consider the psychology of prices and not simply the economics; the price is used to say something about the product. Consumers usually perceive higher-priced products as having higher quality, e.g. Heublein’s Smirnoff, 旺旺. Reference prices Odd pricing Symbolic and visual qualities, e.g. “8” vs. “7”.

Promotional Pricing Temporarily pricing products below the list price. Loss-leader pricing Tradeoff between store traffic and brand damage Special-event pricing E.g. Christmas, Mother’s Day, Father’s Day, Valentine’s Day. Cash rebates, e.g. automobiles, durable goods, and small appliances. Low-interest financing (分期付款)

Promotional Pricing Longer payment terms Consumers often worry less about the cost of a loan and more about whether they can afford the monthly payment. E.g. 分期零利率（全國電子、信用卡、手機、百貨公司等）. Warranties and service contract

Adverse Effects of Promotional pricing Competitors’ copy Create “deal-prone” customers Erode a brand’s value Downright addicting to both the company and the customer Lead to industry price war, e.g. Kmart.

Geographical Pricing FOB (free on board)-origin pricing (起運點定價) Uniform delivered pricing (統一交運定價) Zone pricing (分區定價) Basing-point pricing (基點定價) Freight-absorption pricing (運費自行吸收之定價)

International Pricing In some cases, a company can set a uniform worldwide price, e.g. Boeing. Factors that influence the international pricing Cost, e.g. Campbell found that distribution in the United Kingdom cost 30% more than in the United States. Marketing objectives, e.g. penetration vs. skimming. Consumer perceptions and preferences Economic conditions, competitive situations, laws, and regulations, and development of the wholesaling and retailing system

International Pricing – Price Discrimination vs. Price Consistency

International Pricing – Exchange Rate 以一家美商公司出口到台灣的情況為例，產品在台灣的售價為3200元。 匯率(USD/NT) 美元售價 單位利潤 指數 38.4 83美元 23美元 57.5 32 100美元 40美元 100 25.6 125美元 65美元 162.5 邊際成本 60美元

International Pricing – Exchange Rate 假設原本台灣市場之產品售價為3200元，此時銷售量為100單位，價格彈性為2.5。當美金從32貶值到25.6（即貶值20%）時，該公司如何制訂其商品在台灣的價格呢？ 定價策略 台幣價格 美元價格 銷售量 利潤（美元） 維持台灣市場 售價 3200 125 100 6500 維持美元之單位 貢獻 2560 150 6000 台灣市場售價降 10% 2880 112.5 6562.5 邊際成本 60

International Pricing – Exchange Rate 匯率變動與價格調整實例（1986年1月至1987年1月） 產品 匯率變動 價格變動 精工錶 -24% +13.5% Sony隨身聽 +20.0% Canon相機 +14.6% BMW 528 -25% +7.8% Benz 190E +11.5%

Price Changes Initiating price changes Responding to price changes Initiating price cuts Initiation price increases Buyer reaction to price changes, e.g. Kellogg. Competitor reactions to price changes, e.g., 美國香菸市場 (Philip Morris vs. R.J. Reynold), 美國拍立得相機市場 (Kodak vs. Polaroid), and 紐約郵報 vs. 每日新聞. Responding to price changes

降價不歸路 Ditch the Discounts 調適性訂價法(adaptive pricing) 成功案例 分款(versioning), e.g. P&G, Subway vs. Quiznos. 保證(assurance), e.g. Hyundai. 有創意的融資策略, e.g. Best Buy. 調適性訂價法有一項最大的優點，就是在經濟開始反彈時，能增加彈性，如Burger King。 摘錄自哈佛商業評論 全球繁體中文版 (p. 18, January 2011)