1. Pricing Strategy Considerations for a New Business A Macro Overview of Setting & Influencing Prices Class 26 Marketing Pricing Strategies Tuesday November 22, 2011

2. Supply Chain Product Manufacturer or Service Provider Wholesaler or Middleman Retailer Where you are in the Supply Chain affects pricing strategies used. Consume r

3. Pricing Hierarchy for a Product Manufacturer Determining Appropriate Pricing Pricing Strategy Marketing Plan Business Model [Plan]

4. Business Model Components Organization Operations & Mgmt. Products/Services Marketing Market Analysis Goals & Strategies Customer Service Financial Needs & Sources Budget, P & L, Bal. Sheet, BE Analysis

5. Marketing Plan Components Market Analysis Target Market Competition Market Trends Market Research Marketing Strategy Pricing Strategies Competitive Position Sales, Marketing / Distribution Channel Strategies Branding Advertising & PR Customer Service Customer Service Activities Evaluations

6. Price Setting Guidelines What Selling Price is acceptable to the market? How do you determine this? Survey the market needs, wants and competitive situation Research published industry reports Price testing on the web Check local businesses that carry/offer product/service What are the company objectives as far as positioning itself in the marketplace? From the Business Plan What are the company costs that must be covered and still make a reasonable profit? How do you determine this? From the Business Plan

7. Interrelated Factors Affecting Appropriate Price Setting 1) Internal Meeting Business Plan Objectives 2) Internal Covering Product Costs 3) Internal Accounting for any Added Product Value 6) External Using Marketing Channels Effectively 5) External Price reflects consumer demand 4) External Understanding the Competitive Marketplace

8. Managing Internal vs. External Forces Affecting Selling Price Strategies Internal External

9. Internal - Company Objectives and the Effect on Price & Profits Does the Sell Price reflect intrinsic company objectives? Is the Type of Selling Price structured to: Maximize profits? Generate high sales growth at the expense of profit maximization? Strike a balance between profits and growth? 1

10. Example Pricing Strategies & Types Higher Pricing To reflect product exclusivity & higher profits Skimming Initial high price, then reduce for more market share Premium Selling exclusivity Midrange Pricing To foster a good mix of sales and profits Lower Pricing To increase sales and market share Penetration Lower price to increase sales Bundle Sell a group of products at reduced price Competition Match current market price range Position Selling image & reflect consumer views

11. Internal – Product Cost Considerations Does the SP Cover Fixed & Variable Costs & Allow Reasonable Profit? Givens (from Business Plan): Breakeven Analysis Alt. 1 Balanced Alt 2 High Sales Growth Approach [20% SP Reduction] Est. yearly production = 30,000 units30,000 units at capacity Starting Sell Price [SP] = $14/unit$11.20/unit Max. Revenue =$420,000$336,000 Estimated Fixed Costs [FC] = $50,000$50,000 Estimated Variable Costs [VC] = $9.00/unit$9.00/unit [Materials= $4.00 Labor= $5.00 Total Costs [FC + VC] =$320,000 $320,000 Contribution [SP/unit – VC/unit] = $5.00$2.20 Sales volume to cover costs & initiate profit [FC / Contribution] = 10,000 units22,727 units Percent of capacity utilized33%76% before making a profit 2

12. Internal - Product Value-Added Considerations Affecting Price Adding Value to Product Features Can the product be positively modified, and/or enhanced giving it a higher net worth in the marketplace vis-à-vis consumer perception of added benefits and comparative advantage over competing products ? Example: a commodity food item is made gourmet - Starbucks If yes, will the product enhancement enable: A higher SP and profit without compromising sales growth? A wider market penetration without compromising profit? 3

13. Interrelated Factors Affecting Price Setting 1) Internal Meeting Business Plan Objectives 2) Internal Covering Product Costs 3) Internal Accounting for any added Product Value 6) External Using Marketing Channels Effectively 5) External Price reflects Consumer Demand 4) External Understanding the Competitive Marketplace

14. External – Competitive Pricing Strategy Considerations Understand your competition & their position in the marketplace Identify competitive strengths and weaknesses Fairly assess your product comparative advantages & disadvantages From that assessment, consider modifying your SP accordingly Compare your product & price to similar competitive products & pricing in your marketplace How? Market Research (Web, call, visit, industry data, interview potential customers, trade organizations, etc.) 4

15. External - Market Demand Pricing Strategy Considerations By researching what the consumer thinks of the product and what they may be prepared to pay makes using different pricing techniques possible Conduct thorough market analysis of target market. Based on those results [in combination with other Internal & External Pricing Factors]:  Set position price to reflect consumer’s view of the product genre’, or;  Set product price based on known demand, or;  Set product price high to “skim” highest profits and take advantage of some customer’s desire for a new product at any price Take into consideration where the overall economy is going, buying trends, and potential effects on product demand vis-à-vis price 5

16. External - Pricing Influences in the Marketing Channel What are marketing channels? Other than selling direct, it’s the use of intermediaries to bring and distribute products and services to market. Why companies use marketing channels? Lower cost of doing business, better positioning, targeted consumers, enhanced penetration, better match of product features to consumer’s needs, shared commercial risks. 6

17. External- Levels of Distribution Manufacturer Retailer Manufacturer Consumer Wholesaler 1 2 3

18. Manufacturer Direct to Consumer Pricing Influences Price discounts Volume discounts Bundled pricing incentives Special promotions [seasonal, economy- related, etc.] Rebates

19. Manufacturer to Retailer General Being further from the consumer means giving up some control on the how, to whom and at what price products are sold. Pricing Influences Shared or pass through costs Promotions, advertising Incentives Rebates

20. Manufacturer to Wholesaler or Middleman General You are buying contacts, market knowledge and access, experience, and scale of operation Pricing Influences Shared and pass through costs promotions, advertising Incentives Warranties, returns physical distribution – transportation & storage Enhanced cash flow Better efficiency in distribution costs: Greater sales Better profits through targeted sales 3

21. Summary Setting prices initially should consider internal inherent factors including acknowledging company sales objectives, covering product costs, and adjusting prices for legitimate value-added features. Setting prices should consider the competitive market range and reflect true demands of the target market. Once marketing channels have been selected, consider pricing adjustments to reflect additional internal efficiencies and customer- perceived added value in getting products to the desired market with cost minimization.