1. Pricing Strategy over the Life Cycle – Chs. 7-8
Review Fire Safety Homework
Understand how price sensitivity, costs, and competition influence pricing strategy over the product life cycle.
Introduce organizational tools and diagnostic analytics that can be used to identify and overcome implementation challenges

2. Fire Safety: 1. Given overall market growth rate = 29%, Fire Safety’s 5% price increase in FY 2011, & 2010 CM≈62%, what was Fire Safety’s incremental % breakeven point for unit quantity and $ sales change in FY 2011? How does that compare with actual 2011 unit quantity and $ sales changes.
Incremental Quantity Breakeven % :
(5% Price Increase; ~62% CM)
Breakeven Sales as a % of 2010 Sales
(1+/- Incremental Breakeven %)
Expected 2011 Sales as a % of 2010 Sales
(No price change; Market Growth = 29%)
Breakeven 2011 Sales as a % of 2010 Sales
(5% Price Increase; Growth = 29%)
Actual 2011 Sales as a % of 2010 Sales
Quantity % Above/Below Breakeven (2010 basis)
Quantity % Above/Below Breakeven (2011 basis)
-DP%
-5% = =
-7.5%
CM% + DP%
62%+5%
92.5%
129%
119.4%
107.8%
-11.6%
-9.7%

3. The Final Requires Calculating Breakeven Volumes &
Fire Safety: 2. Given the expected market growth rate of 44%, Fire Safety’s proposed 5% price increase in FY 2012, & 2011 CM ≈ 64%, what is Fire Safety’s incremental percentage breakeven point for unit quantity and $ sales change in FY 2012?
Incremental Quantity Breakeven % :
(5% Price Increase; ~64% CM)
Breakeven Sales as a % of Sales
(1+/- Incremental Breakeven %)
Expected 2012 Sales as a % of 2011 Sales
(No price change; Growth = 44%)
Breakeven 2012 Sales as a % of 2011 Sales (5% Price Increase; Growth = 44%)
-5%
-7.2%
64%+5%
92.8%
144%
133.6%
Breakeven Elasticity =
-1.45
Would you recommend the 5% price increase to FSI management for FY 2012? Why (not)? What would you recommend?
Observed Elasticity = %DQ
( )
-16.44%
-3.29
%DP
129
5.00%
The Final Requires Calculating Breakeven Volumes &
Expected Volumes based on Elasticities

4. Elasticity Required to Breakeven
The Final Requires Calculating Breakeven Volumes &
Expected Volumes based on Elasticities
Current Contribution Margin 5%
10%
20%
30%
40%
50%
60%
70%
80%
90%
% Change in Price
-4.00
-3.33
-2.50
-2.00
-1.67
-1.43
-1.25
-1.11
-1.00
-0.91
15%
-5.00
-2.86
-2.22
-1.82
-1.54
-1.33
-1.18
-1.05
-0.95
-6.67
-10.00 0%
-5%
-20.00
-10%
-15%
-20%
Price increase: |Elasticity| < the breakeven amount leads to contribution increase.
Price decrease: |Elasticity| > the breakeven amount leads to contribution increase.

5. Sales and Profits Over the PLC
The purpose of this slide is to ensure that all students know the dynamics of the product life cycle. Ask:
What is the product life cycle and how is it relevant to pricing? Answer: The life cycle represents how markets for products evolve over time, and therefore how marketing should also change, depending on the stage of the life cycle. The horizontal dimension is time; the vertical dimension is cumulative market penetration.
As a product moves through the four life cycle phases (introduction, growth, maturity, and decline) so do changes to relevant costs, price sensitivity and behavior of competitors. Accordingly, pricing strategy and tactics must vary if they are to remain competitive.

6. Product Adoption Curve
Innovators
3-5%
Early
Adopters
10-15%
Majority
34%
Late
Laggards or
Nonadopters
5-16% 90 50 20 5
Time
Percent Adoption
The purpose of this slide is to ensure that all students know the dynamics of the product life cycle. Ask:
What is the product life cycle and how is it relevant to pricing? Answer: The life cycle represents how markets for products evolve over time, and therefore how marketing should also change, depending on the stage of the life cycle. The horizontal dimension is time; the vertical dimension is cumulative market penetration.
As a product moves through the four life cycle phases (introduction, growth, maturity, and decline) so do changes to relevant costs, price sensitivity and behavior of competitors. Accordingly, pricing strategy and tactics must vary if they are to remain competitive.

7. Market Dynamics over the PLC
INTRODUCTION
GROWTH
MATURITY
DECLINE
CUSTOMERS
Small customer base Innovators Little product knowledge Low knowledge buyers
Growing customer base Early adopters Little product knowledge Moderate knowledge buyers Increasing brand loyalty
Large segmented market Late adopters/Laggards High knowledge buyers Repeat purchasers Comparison shopping
Declining customer base High knowledge buyers Familiar with all suppliers and options
COMPETITION
Few competitors Low threat of competitive rivalry Gains from market development are high
Increased competitive entry Brand proliferation & confusion Differentiation vs. Cost leadership
Shakeout to stable # of competitors Homogeneous dominant brands Market share defense Gains from competitors
Increased price competition to fill capacity Exiting of weak competitors
COSTS
High incremental costs of production and promotion Low contribution margin External sourcing
Declining unit variable costs through volume; Increasing contribution margins
Low variable costs High contribution margins Cost controls Asset utilization
Excess capacity High average costs, due to low capacity utilization
PRICE
SENSITIVITY
Reference value effect Price quality effect Difficult comparison & Fairness effect LOW SENSITIVITY
Reference value effect Price quality effect Difficult comparison effect MORE SENSITIVITY
Switching cost effect Expenditure effect End benefit effect Lower risk HIGH SENSITIVITY
Switching cost effect Expenditure effect End benefit effect HIGH SENSITIVITY
MARKETING
OBJECTIVES
Generate primary demand Customer awareness Market education Buyer frames of reference Information diffusion
Brand positioning Differentiation Brand loyalty Defensible competitive position
Market share defense Marketing and production efficiency Profitable market segmentation
Retrench, & defend strongest product lines Harvest the business Consolidation to small # of competitors
PRICING
STRATEGIES
Establish value and worth
Bundled pricing to simplify segmented pricing according to buyer knowledge (Hi-Mod-Lo)
Expansion of product line and price points Multiple pricing channels Segmentation pricing
Price to maintain margins, but signal intent to defend Price for max. cash flow Predatory pricing

8. Market Dynamics over the PLC
INTRODUCTION
GROWTH
MATURITY
CUSTOMERS
Little product knowledge Low knowledge buyers
Moderate knowledge buyers Increasing brand loyalty
High knowledge buyers Repeat purchasers Comparison shopping
COMPETITION
Few competitors Gains from market development are high
Brand proliferation & confusion Differentiation vs. Cost leadership
Homogeneous dominant brands Market share defense Gains from competitors
COSTS
High incremental costs of production and promotion
Declining unit variable costs through volume
High contribution margins Asset utilization
PRICE
SENSITIVITY
Difficult comparison & Fairness effect
LOW SENSITIVITY
Difficult comparison & Price quality effect
MORE SENSITIVITY
Switching cost effect Expenditure effect
HIGH SENSITIVITY
MARKETING
OBJECTIVES
Generate primary demand Customer awareness Market education
Brand positioning & loyalty Brand differentiation Defensible competitive position
Market share defense Marketing & production efficiency Profitable market segmentation
PRICING
STRATEGIES
Establish value and worth
Simplify segmented pricing according to buyer knowledge (Hi-Mod-Lo)
Expansion of product line and price points Segmentation pricing

9. PLC & Brand Strategies Product Category Life Cycle Brand Stage Launch
Maintenance
Retirement
Introduction
Price to establish, communicate & promote value of the product
N/A
Growth
Based on LT strategy, identify appropriate segment(s) before commercialization
Segment & target for LT advantage. Lower price as necessary to maintain market growth. Price compete only to gain cost advantage.
Price to clear inventory quickly while launching new models
Maturity
Use aggressive pricing to dominate based on cost advantage or target underserved niches w/a service advantage.
Unbundle. Price products & services separately. Rationalize product line & distribution strategy. Price to maximize profit, not market share or growth.
Slowly price yourself out of business.
Decline
Not recommended.
Only with strong advantage. Consolidate to solidify cost or service leadership.
Withdraw cash w/incrementally higher prices.
Product differentiation strategy
Cost leadership strategy
Marketing differentiation (& product proliferation) strategy

10. PLC & Brand Strategies Product Category Life Cycle Brand Stage Launch
Maintenance
Retirement
Introduction
Price to establish, communicate & promote value of the product
N/A
Growth
Based on LT strategy, identify appropriate segment(s) before commercialization
Segment & target for LT advantage. Lower price as necessary to maintain market growth. Price compete only to gain cost advantage.
Price to clear inventory quickly while launching new models
Maturity
Use aggressive pricing to dominate based on cost advantage or target underserved niches w/a service advantage.
Unbundle. Price products & services separately. Rationalize product line & distribution strategy. Price to maximize profit, not market share or growth.
Slowly price yourself out of business.
Product differentiation
Cost leadership
Marketing differentiation
(& product proliferation)

11. Illustrative Customer Profitability Map
High
“Platinum”
“Gold”           
Price                       
Topic: Customer Profitabiity
Key Learning Points for Students
Illustrate how customer profitability can be useful tool to guide pricing strategies
Teaching Recommendations
Break the students in to four groups and assign each group a quadrant. Ask the students to develop a pricing strategy for their quadrant. Do a readout of the groups and compare the different approaches
Discussion Question(s)
Understanding customer profitability is an important tool for pricing strategists, yet it is used in only a small percentage of firms. What might the barriers to more widespread adoption?
Low
“Silver”
“Lead”
Low
High
Cost to Serve

12. Price Banding Output Actual Price Fair Price At Risk Fair Price
Outlaws
Actual Price
Topic: Price Banding
Key Learning Points for Students
Understand the process for developing regression-based models of pricing performance
Be able to use the tool to diagnose potential pricing problems in support of a revised pricing policies
Teaching Recommendations
The key to successfully teaching these concepts is to ensure the students understand the concept of “fair” price. Fair is defined as a price that is consistent with the average price paid for other transactions with similar characteristics (e.g., volume, region, time of year, etc.)
It is important to note that “fair” does not mean optimal. It is a measure of current pricing practices and should not be the only consideration when enforcing price levels.
Discussion Question(s)
What do we mean by “fair” prices? Is fairness a valid metric for pricing analytics?
Fair Price

13. Customer Lifetime Value (CLV) Useful Analysis at the Individual Customer & Segment
CLVinfinite lifetime
= CM/(i* + 1 – r) – AC
where
CM = average annual contribution for the customer (segment)
i* = i (=the risk-free discount rate) × risk factor
r = retention rate for the customer (segment)
AC = acquisition costs
How valuable/profitable is each customer (segment) given prices & variable costs (i.e., contribution), retention rates, discount rate, risk level & acquisition costs?
How valuable/profitable is an acquisition or retention campaign given prices & variable costs (i.e., contribution), retention rates, discount rate, risk level & acquisition costs?

14. Customer Equity Facebook April/May 2012
= # Customers × CLV
At Facebook
April 2012 Unique Users: 900,000,000
Revenue ≈ 3.7 B; CM (90%) ≈ $4; i* = .05; r = .95
CLV ≈ $40
Customer Equity = #Users × CLV = $36 B
External Valuation May 2012: ~$100 B

15. Customer Equity Facebook July/August 2012
= # Customers × CLV
At Facebook
July 2012 Unique Users: 955,000,000
Revenue ≈ 4.7 B; CM (90%) ≈ $4.4
CLV ≈ $44
Customer Equity = $42 B
External Valuation August 2012: ~$50 B

16. Price Waterfall Example
800
620 45
600 1 67
Price ($)
507 15 25 1 5 6
455
400
Major Opportunity
200
Topic: Price Waterfall
Key Learning Points for Students
Understand the concept of the pocket price waterfall and how it can be used to identify and track discount leaks
Teaching Recommendations
Have the students go through various elements of the waterfall and suggest various ways that “leaks” might occur
Discussion Question(s)
Does the fact that one or more of the discount “buckets” is very large in this example mean that it represents a big opportunity for improvement? Why or why not?
Transaction
Ordersize
Upcharges
MCP / Bid
Invoice
Credits
Discount /
Misc.
Rebates
Debit
Pocket
Price
Discount
Discounts
Price
Terms
Charges /
Backs
Price
and Waived
Allowances
Upcharges

17. Next Week Atlantic Computers Case Analysis & Toilet Paper Priced Like Airline Tickets