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The Pricing Strategy Pyramid

The Pricing Strategy Pyramid. Price Level Price setting. Pricing Policy Negotiation Tactics & Pricing Setting Procedures . Value Communication Communication, Value Selling Tools. Price Structure Metrics, Fences. Value Creation Economic Value, Offering Design, Segmentation.

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The Pricing Strategy Pyramid

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  1. The Pricing Strategy Pyramid Price Level Price setting Pricing Policy Negotiation Tactics & Pricing Setting Procedures Value Communication Communication, Value Selling Tools Price Structure Metrics, Fences Value Creation Economic Value, Offering Design, Segmentation

  2. Pricing Menus Map Price Structure,Help Customers Trade Up or Trade Down A “Fixed Price, Flexible Offer” Menu Fast Turn-around SpecialProcessing Long-termContract Unbundled Service Offerings Available Economy (85% of standard) +25% Not Available Not Available Base Offer Service A + 3% Service B + 7% Service C + 12 % Standard +15% -10% -15% Premium (130% of standard) A,B,C Included * Service D + 9% Service E + 6% Included Required - 15%

  3. SEGMENTS WITH DIFFERENTPRICE SENSITIVITIES Personal vs. Business Expenses New to Market vs. Experienced Buyers Light Users vs. Heavy Users High Income vs. Low Income Big Spenders vs. Budget Conscious Students/Retired vs. Employed

  4. SEGMENTS WITH DIFFERENTINCREMENTAL COSTS TO SERVE Peak vs. Off-Peak Purchasers New Customers vs. Established Customers Light Users vs. Heavy Users

  5. Unharvested value p1 Missed Opportunities Non-Segmented Price-Offerings Miss Opportunities High One size fits all offering Value Received Med C D B A Low Segments During the recession, the trend was to bundle value-added services into core offering to defend price points and close deals

  6. Prod. 3 Prod. 1 Prod. 2 Tiered Offerings Map to Value to Improve Profitability High Prod. 4 Value A B C D Low Segments Differences in value can be captured with product variations or service augmentation that creates natural fences between segments

  7. Other Examples of Product Variations Professional SRP $299.99 All in Standard + MS Access Developer SRP $529.99 Development Tools to Build Own Applications Standard SRP $219.99 Pro SRP $279.95 All in Basic + Create Customized forms, Tools to Track add’l items Basic SRP $199.95 Premier SRP $399.99 All in Pro + Daily Sales Summary, Retail Specific Reports

  8. Sometimes the Offering Can’t be Unbundled… … in these instances, look to pricing metrics to capture value differences High One size fits all offering - p4 - - p3 - Value Received Med - p2 - - p1 - C D B A Low Segments

  9. 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 Pharmaceutical gas $ / volume inhaled $ / minute therapy Examples of Value-based Pricing Metrics

  10. SEGMENTED PRICING FENCES:TACTICS FOR SEPARATING MARKETS • Buyer Identification • Time of Purchase • Purchase Location • Volume or Purchase Quantity • Product Design • Product Bundling • Tie-Ins • Metering

  11. SEGMENTING BYBUYER 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.

  12. SEGMENTING BYTIME 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.

  13. SEGMENTING BYPURCHASE 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.

  14. SEGMENTING BYVOLUME OR PURCHASEQUANTITY When price segments differ in the quantities they buy, charge different prices for different quantities. If buyers are in competition, must be cost-justified.

  15. SEGMENTING BYPRODUCT DESIGN Selling different versions of the product designed to appeal to different segments. The price differences for the different versions usually must far exceed the cost differences in producing them. The seller must be able to design versions of the product with special attributes for which the price insensitive buyers will pay a premium and the price sensitive buyers will not.

  16. SEGMENTING BYPRODUCT 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.

  17. Custom Value for AutomobileSports Package Racing Stripes and Hubcaps Right Mirror Heavy Suspension Racing Enthusiast $200 $150 Segment Outdoor Enthusiast $100 $300

  18. SEGMENTING BYTIE-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.

  19. SEGMENTING BYMETERING 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.

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