The Value of Pricing The Economist Josh Emmerling Mi Jung Kim Ronan Vallee

Price Shifts “Microsoft cuts xbox price in fight with rival,” “Nokia cuts prices to grab back lost market.” Recent shifts of pricing strategies show more involvement of upper management on an international level. Increased regulation on pricing in the EU and the US. Implications?  More companies centralizing prices

Global vs. Local Arguments Global (Centralized)  Extremely difficult to analyze huge volumes of sales with varied prices across the globe.  Better pricing policies and better internal management controls can yield large increases on the bottom line.  Gearing Effect: states that a 1% increase in average price will lead to a 10% increase in operating profit.

Global vs. Local Arguments Local  Though products are global, markets are local and the application of pricing in each country needs to be considered and negotiated separately.

Corporate view of pricing Pricing process can be divided into three levels:  Tactical  The life cycle or market strategy pricing  The industry strategy

The Tactical Level Nearest the customer Pure transactional pricing Encompassing volume discounts Promotional offers Delivery charges … Problem: margins are frequently eroded at the local level

The life cycle or market strategy pricing Definition: How much consumers are willing to pay and what they perceive as value for money Pricing merchandise depends on:  Position vis-à-vis competitors  Strength of brand competitors Overpriced: sales will be blighted Underpriced: the company loses valuable revenue for ever

The industry strategy Definition: based on trends in the industry and economy as a whole, and how the company can take advantage of long-term trends

Three Levels Cont. The three levels fit naturally into different parts of the organization, but at a moment, pricing tends to be scattered among  Finance  Marketing  Line management  Production …

Enter the CPO? Chief Pricing Officer (CPO) ’s Roles and Responsibilities Liaison across internal boundaries Collecting and interpreting information from the market Checking net margins Sounding the alarm if the marketing team is out of line A good networking culture, as well as good information, is vital.

Enter the CPO? Cont. Complexity – “You can’t have one person deciding on price” Purchasing, Estimating R&D, Manufacturing Customer Service, Distribution Remuneration, Training Major Accounts, etc. Foreign Operation Country subsidiaries need the freedom in price setting. Total freedom is not an attractive option in international market.

Setting the limits “Price Corridor” “Hard” Lower Limit - the local prices are not allow to fall “Soft” Upper Limit - the local management can keep their price higher Price “Frames” - A Central Pricing Department If necessary to go outside the frame, they can get co- operated.

Reference The Economist Intelligence Unit