Making Cents of Pricing Build business cases to enhance the bottom line. David M. Feldman Jessica Lee & Dana Town

Expanding the Role of the Marketing Department  Traditionally provide insights into market acceptance of new offerings and prices but have little impact on building business cases for changing prices  Need to become more active in developing pricing strategy  Need to redesign their research studies to reflect actual marketplace behavior, incorporating inputs for all items in the marketing mix

Traditional Conjoint Experiments  Focus on trade-offs between brands, prices, features, and channels for leveraging customer value propositions and developing pricing strategies  Creates an artificial marketplace by underestimating the real impact of price and price sensitivity  Can prevent marketers from accurately projecting how changes in the marketing mix will affect the marketplace

Business Case Development  The key to developing a long-term pricing strategy is to be able to report the information collected from current and potential customers in the context of overall profitability  4 key components: 1.Determine the strategic and tactical issues to support the business case 2.Develop a competitive marketplace 3.Determine marketplace sensitivities 4.Determine the impact of changes to the marketing mix in terms of bottom line profitability

Developing a Financial Model

Key Issues  Important to review with senior management all of the relevant marketing issues that affect costs and profitability before designing the study  How do I ensure that my pricing decisions will support the overall long-term positioning of my product?  How do I determine the specific benefits for which customers are willing to pay more?  How can I develop and price bundles of products/services to enhance overall profitability?

Competitive Marketplace  When focusing on pricing strategy, the survey instrument must include actual market offerings and prices  Important to be able to model what the respondents are currently purchasing based on current prices  Respondent needs to react to new offerings or prices in the context of all the options currently available  Discrete choice experiment provides the best analytical method for developing pricing strategy

Marketplace Sensitivities  Analyze customer input from survey and convert into measures of price sensitivity, brand loyalty, and channel and packaging preferences allowing development of segments  Respondents with similar market sensitivities helps marketers understand the unique needs of market segments

Profitability Model  In order to link survey results to current market size and share, must first develop a base case  Base case – offerings currently in the marketplace, at current prices  Replicates known market shares  Sizes the overall market in terms of total units sold  Developing the base case ensures that all projections are based on an agreed-upon starting point

Conclusion  Marketing departments have an opportunity to elevate themselves and become full business partners with the rest of the organization in developing pricing strategy  The key is to link pricing studies to relevant issues in developing the pricing strategy  Success with pricing can only elevate research’s positioning in the organization

Sources  Feldman, David M. "Making Cents of Pricing." Marketing Management (May/June 2005): Rpt. in Annual Editions: Marketing. Ed. John E. Richardson. Vol. 08/09 New York, NY: McGraw-Hill,