Pricing The Puzzle of the Next Century

“ A price is not merely a function of costs Pricing Puzzle “ A price is not merely a function of costs and margins… ” Costs + Margins = PRICE

Pricing Puzzle Costs + Margins = PRICE “ A price is not merely a function of costs and margins… ” Costs + Margins = PRICE “…it is an expression of VALUE ”

Pricing Puzzle Costs + Margins = PRICE VALUE Production costs Minimize Optimize Maximize Costs + Margins = PRICE VALUE Production costs Indirect costs Advertising costs Distribution costs Manufacturer’s margin Distributor’s margin Seller’s margin Product performance Usefulness & Quality Image / Aspirations Brand Equity Availability Distribution Strategy Service Before/During & After sales

Pricing Puzzle 4 P’s 4 C’s PRODUCT PRICE PLACE PROMOTION CUSTOMER VALUE COST CONVENIENCE COMMUNICATION

Pricing Puzzle 4 P’s 4 C’s PRODUCT PRICE PLACE PROMOTION CUSTOMER VALUE COST CONVENIENCE COMMUNICATION

A Secret Pie Impact of a 1 % price increase on profits Coca-Cola 6,4 % Nestlé 17,5 % Ford 26,0 % Philips 28,7 %

Pricing Puzzle 4 P’s 4 C’s Seller’s Dilemma PRODUCT PRICE PLACE PROMOTION 4 C’s CUSTOMER VALUE COST CONVENIENCE COMMUNICATION Seller’s Dilemma

Pricing Puzzle 4 P’s 4 C’s PRODUCT PRICE PLACE PROMOTION CUSTOMER VALUE COST CONVENIENCE COMMUNICATION “ Tomorrow’s winner companies will be those who offer distinct products at comparatively low market prices ”

Key = Differentiation The key to drive value is to offer relevant and distinctive product differentiation Physical Differences Features, performance, durability, conformance, design, etc… Availability Differences Distribution channels ; Stores, mail-order, internet, etc… Service Differences Delivery, installation, training, consulting, maintenance, etc… Price Differences Price positioning (Very high / High / Medium / Low / Very Low) Image Differences Symbols, atmosphere, events, media, etc…

Key = Differentiation Differentiation : Examples Physical Differences Levi’s Engineered Jeans (Ergonomic construction, durability, style) Availability Differences Dell Computer’s customized production, Volkswagen “e.lupo” Service Differences Acıbadem Hospital – Mother Care Division, Nissan “5-year Warranty” Image Differences Audi vs Mercedes, DuPont (Innovation Leader)

Key = Differentiation Differentiating commodities… Perdue Chicken (USA) Guaranteed tenderness (30 % market-share, 10 % premium pricing) Flora Drinking Water (Turkey – Sabancı Holding) Service, packaging, attributes, operation Starbuck’s Coffee (USA) Atmosphere, standard service Everything can be differentiated !...

Pricing Decisions INTERNAL FACTORS EXTERNAL FACTORS Marketing Objectives Positioning Target Group Marketing Mix Strategy 4 P’s Costs Fixed & Variable Management Approach Responsibility Perspective EXTERNAL FACTORS Market Pure Competition Monopolistic Competition Oligopolistic Competition Pure Monopoly Demand Elastic / Inelastic Competition Competitors’ offers Competitiors’ reactions Economy Buying power Government Influence Laws & Regulations

Pricing Approaches Cost-Based Pricing Buyer-Based Pricing Cost-Plus Pricing Product Cost + Standard Mark-Up = Price BE Analysis & Target Profit Pricing A necessary survival tool Buyer-Based Pricing Perceived Value Consider buyers’ perceptions of value NOT the cost Competition-Based Pricing Basing prices on competitors’ prices Premium Pricing Going-Rate Pricing Discount Pricing

Pricing Strategies PRICING a SINGLE NEW PRODUCT Market-Skimming Highest possible price to skim small but profitable segments Penetration Pricing Lowest possible price to penetrate the market quickly

Pricing Strategies PRODUCT-MIX PRICING Product-Line Pricing Establishing product lines at different price points Volkswagen (Polo, Bora, Golf, Passat) Optional-Product Pricing Offering to sell optional/accessory products along with the main product BMW & Mercedes Captive-Product Pricing Offering products, which must be used with the main product Gillette razor blades By-Product Pricing Valued by-products positively affect pricing Petroleum by-products Product-Bundle Pricing Several products combined and offered at a reduced price Season tickets, New-year packages of hotels

Price Adjustments Adjust basic prices to account for various customer differences and changing situations Discounts & Allowances To attract/reward certain customer respones Discriminatory Pricing To allow for differences in customers, products & locations Promotional Pricing Varying price reductions offered depending on shopping period, item purchased, etc...

Price Adjustment Strategies DISCOUNTS & ALLOWANCES Cash Discounts Attract early payments A 15% reduction applied to those customers who buy on cash Quantity Discounts Price reduction to buyers who buy large quantities Functional Discounts Differentiating prices among trade channel members Different mark-ups for OLSs and corners Seasonal Discounts Price reduction to buyers who buy out-of-season Allowances Trade-in Allowances Bring the old, take away the new... Promotional Allowances Discounts provided in return for participating in special programs

Price Adjustment Strategies DISCRIMINATORY PRICING Customer-segment Pricing Different customers pay different prices Disneyland Adult vs Child pricing Product-form Pricing Different versions of the product are priced differently, regardless of the cost An additional feature with a slight cost might justify a fat price premium Location Pricing Different locations are priced differently, regardless of the cost Business Class seats Time Pricing Prices differ from month to month, day to day, even hour to hour Prime-time/Off-prime-time pricing of advertising time

Price Adjustment Strategies PROMOTIONAL PRICING Loss Leaders Attract consumers in store, sell other items as well Hyper-Markets (Carrefour, Gima, Praktiker, Migros, etc...) Special-event Pricing Offering discounts at times of special events Valentine’s Day, New year, Şişli Municipality’s discount campaign Cash Rebates Discounts offered to consumers for purchases made in a limited period of time Dockers campaign (20 % off) Simple Cash Discounts Over-the-counter to support revenues OR to defend against competition

Psychology of Price Consumer’s Mind-set (Black-Box) BE CAREFUL !!! Price vs Quality Image CK perfume Rolex watch Pharmaceutical items Perceptions 30.000.000 TL vs 29.950.000 TL

One Final Word “ A product is not a product unless it sells. Otherwise, it’s just a museum piece…” Ted Levitt