price structure and segmented pricing

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Price Structure and Segmented Pricing MK814 Gerald Smith

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Page 1: Price Structure And Segmented Pricing

Price Structure andSegmented Pricing

MK814Gerald Smith

Page 2: Price Structure And Segmented Pricing

2Copyright © 2006, Strategic Pricing Group, a member of Monitor Group

The Pricing Strategy Pyramid

PriceLevel

Price setting

Pricing Policy

Negotiation Tactics &Pricing Setting Procedures

Value CreationEconomic Value, Offering Design, Segmentation

Value CommunicationCommunication, Value Selling Tools

Price StructureMetrics, Fences

Page 3: Price Structure And Segmented Pricing

3Copyright © 2006, Strategic Pricing Group, a member of Monitor Group

Pricing Menus Map Price Structure,Help Customers Trade Up or Trade DownPricing Menus Map Price Structure,Help Customers Trade Up or Trade Down

EconomyEconomy(85% of standard)(85% of standard)

Fast Turn-Fast Turn-aroundaround

SpecialSpecialProcessing Processing

Long-termLong-termContractContract

Unbundled Unbundled Service Service

StandardStandard

PremiumPremium(130% of standard)(130% of standard)

+25%

+15% -10% -15%

Required - 15%Included

Not Available Not Available Base Offer

Service A + 3%Service B + 7%Service C + 12 %

A,B,C Included *Service D + 9%Service E + 6%

OfferingsOfferingsAvailableAvailable

A “Fixed Price, Flexible Offer” Menu

Page 4: Price Structure And Segmented Pricing

4Copyright © 2006, Strategic Pricing Group, a member of Monitor Group

Examples of Price Sensitivity

Which segments are more price sensitive?

• Personal vs. Business Travelers

• New to Market vs. Experienced Buyers

• Light Users vs. Heavy Users

• Students/Retired vs. Employed

Page 5: Price Structure And Segmented Pricing

5Copyright © 2006, Strategic Pricing Group, a member of Monitor Group

Steinway’s Historic Segmented Pricing

Steinway, a tiny but well regarded New York piano maker in the 1850's grew quickly after Doretta Steinway, the founder's daughter, got the idea of offering free piano lessons with the sale of each piano

– Can you explain this as a segmented pricing tactic?

– What are the segments and why would their price sensitivities be different?

Page 6: Price Structure And Segmented Pricing

6Copyright © 2006, Strategic Pricing Group, a member of Monitor Group

Examples of Cost To Serve

Which segments are more costly to serve?• Peak vs. Off-Peak Purchasers• New Customers vs. Established Customers• Light Users vs. Heavy Users

Page 7: Price Structure And Segmented Pricing

7Copyright © 2006, Strategic Pricing Group, a member of Monitor Group

Non-Segmented Price-OfferingsMissed Opportunities

High

Med

Low

p1

Unharvested value

Missed Opportunities

Segments

Val

ue

Rec

eive

d

One size fits all offering

One size fits all offering

During the recession, the trend was to bundle value-added services into core offering to defend price points and close deals

During the recession, the trend was to bundle value-added services into core offering to defend price points and close deals

A B C D

Page 8: Price Structure And Segmented Pricing

8Copyright © 2006, Strategic Pricing Group, a member of Monitor Group

Tiered Offerings Map to Value to Improve Profitability

High

Low

Val

ue

Segments

A B C D

Prod. 4

Prod. 3

Prod. 2

Prod. 1

Differences in value can be captured with product variations or service augmentation that creates natural fences between segments

Differences in value can be captured with product variations or service augmentation that creates natural fences between segments

Page 9: Price Structure And Segmented Pricing

9Copyright © 2006, Strategic Pricing Group, a member of Monitor Group

Other Examples of Product Variations

Basic SRP $199.95 Pro SRP $279.95All in Basic +Create Customized forms,Tools to Track add’l items

Premier SRP $399.99All in Pro + Daily Sales Summary,Retail Specific Reports

Standard SRP $219.99 Professional SRP $299.99All in Standard +MS Access

Developer SRP $529.99Development Tools to BuildOwn Applications

Page 10: Price Structure And Segmented Pricing

10Copyright © 2006, Strategic Pricing Group, a member of Monitor Group

Sometimes the Offering Can’t be Unbundled…

High

Med

Low

Segments

Val

ue

Rec

eive

d

One size fits all offering

One size fits all offering

… in these instances, look to pricing metrics to capture value differences

- p1 -- p2 -

- p3 -

- p4 -

A B C D

Page 11: Price Structure And Segmented Pricing

11Copyright © 2006, Strategic Pricing Group, a member of Monitor Group

Examples of Value-based Pricing Metrics

Market Traditional Metrics Value-based Metrics

Real Estate Want Ads $ / column inch $ / property value

Aircraft Engines $ / engine $ per hour of use

Information service $ / minute $ / download

Page 12: Price Structure And Segmented Pricing

12Copyright © 2006, Strategic Pricing Group, a member of Monitor Group

Segmented Pricing Fences:Tactics For Separating Markets

• Buyer Identification• Time of Purchase• Purchase Location• Volume or Purchase Quantity• Product Bundling• Tie-Ins• Metering

Page 13: Price Structure And Segmented Pricing

13Copyright © 2006, Strategic Pricing Group, a member of Monitor Group

Segmenting By Buyer Identification

Charging different prices to different buyers based on observable characteristics that signal buyers' price sensitivity.

• Buyers in different segments must have different characteristics that either are obvious, or that buyers can be induced to reveal.

Page 14: Price Structure And Segmented Pricing

14Copyright © 2006, Strategic Pricing Group, a member of Monitor Group

Segmenting By Time Of Purchase

Charging higher prices at times when less price sensitive buyers naturally purchase, and charge lower prices at times when it would be inconvenient for them to purchase.

• There must be a natural difference in time-of-purchase patterns for different segments of buyers.

Page 15: Price Structure And Segmented Pricing

15Copyright © 2006, Strategic Pricing Group, a member of Monitor Group

The Well-Structured Department Store

A department store has an interesting discounting policy for brand-name quality clothing

• The ticket on each item is dated and lists a number of prices.

– The first price is the one that a customer pays if the merchandise is bought within the first eleven days after arrival.

– The next price is discounted an additional 25% and applies to merchandise that is 12 to 17 days old.

– The third price is discounted 50% and applies to merchandise 18 to 23 days old. – The fourth price is discounted 75% and applies to merchandise that is 24 to 29 days old. – On the 30th day, the merchandise is turned over to charity. Since most of the merchandise is

surplus, there is generally a limited supply in each style, color, and size.

• What does this strategy accomplish?

• Describe the customers whom you suspect make up the different retail segments.

• A number of stores in other cities adopted this strategy for surplus merchandise, but no store had adopted it for new merchandise. Can you suggest why?

• For what other types of products would you consider this a profitable pricing tactic?

Page 16: Price Structure And Segmented Pricing

16Copyright © 2006, Strategic Pricing Group, a member of Monitor Group

Peak Load Pricing:Segmenting By Time Of Purchase

Peak-load pricing is used to segment markets by the cost of serving them at different times?

• Name types of businesses, other than public utilities, that could effectively use peak-load pricing. Describe how a peak-load strategy might be implemented in each case.

• Yield management represents a more sophisticated version of peak-load pricing. What kinds of companies use yield management?

Page 17: Price Structure And Segmented Pricing

17Copyright © 2006, Strategic Pricing Group, a member of Monitor Group

Smart Steak House

A fancy steak house in a shopping mall offers a 20% discount to employees of other stores in the mall, provided that they eat before 6:00 PM or after 8:00 PM

– Can you explain the rationale for this strategy?

Page 18: Price Structure And Segmented Pricing

18Copyright © 2006, Strategic Pricing Group, a member of Monitor Group

Delicious Deli

A deli in a college town has an interesting pricing strategy for students. The dinner specials at the restaurant are normally $4.95. Students, however, can buy weekly "meal tickets" that give them three meals for $13.90, 5 meals for $22.25, or seven meals for $29.90. The tickets expire at the end of each week and they are not transferable

– Can you explain this pricing strategy?

Page 19: Price Structure And Segmented Pricing

19Copyright © 2006, Strategic Pricing Group, a member of Monitor Group

Segmenting By Purchase Location

Charge higher prices at places where less price sensitive buyers purchase

• Price sensitive and price-insensitive buyers naturally purchase at different locations or…

• Insensitive buyers will not change purchase location to take advantage of the price difference

Page 20: Price Structure And Segmented Pricing

20Copyright © 2006, Strategic Pricing Group, a member of Monitor Group

Segmenting By Volume Or Purchase Quantity

When price segments differ in the quantities they buy, charge different prices for different quantities

• If buyers are in competition, must be cost-justified

Page 21: Price Structure And Segmented Pricing

21Copyright © 2006, Strategic Pricing Group, a member of Monitor Group

Segmenting By Product Bundling

Selling different products either as an indivisible bundle, or only at higher prices if separated

• Buyers must differ in their relative valuations of the bundled goods

Page 22: Price Structure And Segmented Pricing

22Copyright © 2006, Strategic Pricing Group, a member of Monitor Group

Two Examples

Salido’s Salad and Sandwich Shop

The local outlet of a fast food chain charges $2.60 for a salad from its salad bar if ordered a la carte. When ordered with a sandwich, however, the salad bar costs only $1.99. In either case, the customers are permitted to fill their bowls just once

– Can you explain this segmented pricing technique?

Hotel Service Policies

Most hotels will lend guests an iron and an ironing board free of charge, despite the fact that this service competes with the hotel's valet service, for which it does charge. Those same hotels usually charge outrageously to supply glasses, ice, and mixers for those who wish to have alcoholic drinks in their rooms.

– Can you explain this anomaly?

Page 23: Price Structure And Segmented Pricing

23Copyright © 2006, Strategic Pricing Group, a member of Monitor Group

Bundling for Automobile Sports Package

Racing Stripesand Hubcaps

Right MirrorHeavy Suspension

RacingEnthusiast

OutdoorEnthusiast

Segment$200

$100

$150

$300

Page 24: Price Structure And Segmented Pricing

24Copyright © 2006, Strategic Pricing Group, a member of Monitor Group

Segmenting By Tie-ins

An explicit or implicit requirement that buyers of an asset purchase consumables used with the asset only from the seller

• Buyer's value of the asset is proportional to use intensity

Page 25: Price Structure And Segmented Pricing

25Copyright © 2006, Strategic Pricing Group, a member of Monitor Group

Segmenting By Metering

Rental or lease arrangements with a variable rental fee dependent upon a metered usage rate

• Buyers' value of the asset is proportional to use intensity