10 - 1 - (1) Pricing Strategies 1- Introduction (11-14).txt

So today we're going to talk about pricing devalue as part of our go-to-market strategy. So let me just give you a little bit of an overview of where we're going to go. I'm going to start out by giving you some pricing puzzles, and some cute things that go on pricing. Then we'll talk about a framework for how to understand, how to set a price. And then we'll spend a little bit of time on customer price sensitivity and how to measure it and how to understand it. That's going to be our road map f
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  So today we're going to talk about pricingdevalue as part of our go-to-marketstrategy.So let me just give you a little bit of anoverview of where we're going to go.I'm going to start out by giving you somepricing puzzles, and some cute things thatgo on pricing.Then we'll talk about a framework for howto understand, how to set a price.And then we'll spend a little bit of timeon customerprice sensitivity and how to measure itand how to understand it.That's going to be our road map for thesenext few sessions.Let's begin with some motivations and somepuzzles.And before I say this, pricing is probablyone of the key things toreally think about in marketing becauseoftentimes prices are made really reallyarbitrarily.So I see that competitor one is charging40 US dollars competitor two ischarging 20 and so I just choose 30, noreally rhyme or reason to it.Or people engage in cost plus pricing,many things that they shouldn't be doing,and what we want to do in this session isto think about the right way to set aprice.So let's begin.Here's a little bit of motivation for youfrom a study that was done by the McKinseyCompany that looked at various things thatfirms coulddo, over 2,000 companies, to improve theiroperating profits.They could improve their fixed costposition, theycould improve their variable costs and soon.But the thing that they did that had themost impact, if they were ableto improve their final realize price byonly 1%, theywere able to increase their profitoperating profit by about 11%.So price is such a critical level, andit's one that weoften get wrong, so let's keep that inmind as we go through.Here are some puzzles just to give a senseofall of the interesting things that go onin pricing.The first one is for a company calledTrader Joe's.  It's a company that sells a lot of privatelabel product.I believe it's owned by some Germanbrothers, operates in theUnited States all over the country,there's one here in Philadelphia.Now as Barbara told you in branding,there are both national brands and privatelabels.Most of what Trader Joe's sells areprivate label products.So one of the products that I like thereis they sell goza adumplings that I can buy and I can steamand I can eat them.Now let's imagine that thosedumplings cost me about $3.99.Now that's all well and good because Ilike the dumplings, but somehow I startscratchingmy head and I say, gee you know, is $3.99really a good price for those dumplings?And I face a problem.The problem I face is I can't findthat product anywhere else, because it's aprivate label.So I don't really know is it a good dealor a bad deal.If I'm paying $2 for a can of coke, I knowthat's a bad deal, and I know the store'sripping me off.So Trader Joe's recognizes that I havethis inference problem, so what do theydo?They take a very very common product likebottled water that's availableeverywhere and then price it at anextremely low price all the time.So when I come into the store and I seethat the bottled water, a product that Ican compare that'savailable everywhere, I see that that'spriced very low, thatgives me some confidence that the productsI can't compare arealso fairly priced.So this example is showing how sometimesas companies, we wantto signal through one kind of product,that we're a good seller.That we offer good values.That's an example of using a product tosignal the value for the entire productline.A similar example, if we think about acompany like Wal-Mart.Why is it that you might find some Tidedetergent there for $4.73 or anotherproduct for $2.81,these weird kind of a endings?  So in the US at least, most prices end ineither a nine or a five,and the idea that Walmart here is endingtheir prices in fours and threes and onesand sevens, is they're trying to send youa message that they've squeezed out everypossiblecent that they can to deliver the bestpossible value to you as an in consumer.So that's another example of using theproduct priceto send a signal.The final one I'll share is a veryinteresting study done by a friend ofmine from New Zealand who teachers at theSloan management school up there at MIT.And my friend Duncan did an experimentwhere he sentout shoe catalogs to people all over theUnited States.Half the people received a catalog and apictureof a pair of shoes and the price was $44.The other half of the people, this isthousands of peopl,e receivedan identical catalog except the price ofthe shoes was $49.Now economics 101 tells us that as theprice goes updemand should go down right, but Duncanfound exactly the opposite.More shoes were sold at $49 then at $44.And why is that?Because when you see $44 the way youencode it psychologically is,gee, that's kind of a weird price, I don'tnormally see 44.Thats like 10% more than 40.But when you see 49, you feel like that'sa discount from 50.And so what I'm trying to indicate throughthese examples is the priceis more than just a number that indicateswhat you have to pay.It sends all kinds of other signals, andthat'sgoing to be one of our themes as we gothrough.So how do we set prices and what's theright framework?There are four inputs to pricing.First of all we need to think about themarginalcost of the product I'm going to call thatthe floor.Obviously we don't want a price below thefloor or at least not for too long.Then we need to think about the ceilingwhich is the customer willingness to pay.So number one is the floor, number two  is the ceiling, the customer willingnessto pay.But you can't always charge people theirabsolute maximum willingness to pay.Why is that?Because of competition.So competition is going to be the thirdfactor that will dropthe possible ceiling.If my customer is willing to pay $10 buthe can get that product froma competitor for six, then that's going todrop my price from ten down to six.And then number four is the amount bywhich prices have to be raised frommarginal cost to give some money todistributorsor re-sellers to motivate them to sell it.So those are the four key inputs topricingthat we're going to go through by way ofexample.I'm also going to show you a coupleof examples of something called economicvalue to the customer.This is a very, very important concept.And first example, well the only one I'mgoing to show is something thatmight be useful for you, those of you wholike to eat chicken wings.There's a product called the wing dipper.And the wing dipper is a place where youcan put thedip within what you want to, to dip yourchicken, chicken wings.I guess it turns out when people eatchicken wings, I don't eat it a lotmyself.I guess they spray the diparound, or they make a mess.And so therefore the restaurants arelosing a lot of money whereas ifthey had these wing dippers, the wingdipper controls the amount and based onthe size of your restaurant and the amountof wings that get eatenyou can calculate as a restaurant what theeconomic value of this product is.So many times in your communication you'rethinking about the economic value tothe customer and trying to say that in apersuasive or informative way.Okay, so now let's think about thispricing frameworkof the cost the customer willingness topay the amountthat collaborates sorry competitors willbring the price downand collaborators will bring the price upthrough some examples.
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