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Making Cents of Pricing Build business cases to enhance the bottom line. David M. Feldman Jessica Lee & Dana Town
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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
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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
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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
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Developing a Financial Model
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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?
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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
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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
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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
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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
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Sources Feldman, David M. "Making Cents of Pricing." Marketing Management (May/June 2005): 21-25. Rpt. in Annual Editions: Marketing. Ed. John E. Richardson. Vol. 08/09 New York, NY: McGraw-Hill, 2008. 111-115
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