Basics of pricing strategies - Primitive

1. Author - Ravi Lakkundi
Pricing

2. What is this presentation all about?
• An insight about How to price you new
product
• Focusing of practical approaches to product
management (Mainly Pricing Strategic)
• Learning by Example

3. Product Management - Pricing
• Price you decide for your product will directly
effect your business
• Wiki says “Pricing is the process of
determining what a company will receive in
exchange for its products”
• Pricing is the MOST important product
management tasks

4. Product Manager has to and is the
right person to put a price tag on
the product or make suggestions
Remember he is the only person
close to the customers and knows
market trend

5. Some Fundamentals …
• Before we get into Putting a price tag on a
product we need to one key fundamental
business term – Contribution Margin (CM)
• Contribution Marin is also called as Gross
Profit
• Nothing but Sales Price received minus the
variable cost
• Lost??? Lets take an example …

6. Get on to the Job, Sell an Apple !!
• Say Steve is selling an Apple for $10 each
Sale price
$10
Purchase Price from the Farm
- $3
Cleaning and washing apple
- $0.50
Packaging the Apple
- $1.0
Shipping to Market Store
- $1.50
Contribution Margin CM ($)
10 – (3+0.50+1+1.50) = $4
• CM % = (10-6)/10 = 40%

7. Price Build-up: Fundamentals
• Example
– Say a Company ACowStick Pvt ltd wants to import
products in India
– They have started the India operations and want
to come up with a pricing strategy for FunTabStick
• Refer to Product management by Ravi Lakkundi
– http://www.slideshare.net/RaviLakkundi/productmanagement-quick-bite
– DB before getting into various pricing strategies
has to know the price build-up on imported
products
FunTabStick7 is a product from ACowStick Pvt ltd

8. Nearest Port
Finished packed products
Factory
• Factory will deliver the finished goods @ any nearest port
(Air/Rail/Sea)
• Price of finished goods delivered to nearest port is known as
FOB (Free On Board)
• The additional cost that ACowStick will have to pay is the
Freight charges, Customs/Import Duty of the country
Insurance for goods
India Warehouse
Sea Transfer
Transfer
Unload the goods

9. Example: FunTabStick
• Assuming the Supplier in China delivered
FunTabStick7 @ $21.4
• FOB is $21.4 and was delivered to nearest port
• ACowStick has partnered with a freight
forwarder and the goods will be delivered to
its warehouse in India
• ACowStick has to pay for Customs Import
Duty, Insurance and Freight charges

10. FOB to MRP (/MSRP) – Price Buildup
Exchange Value ($->INR)
51.25
FOB (USD)
$21.4
FOB ( INR)
INR 1,096.8
Freight, Insurance, Handling
Customs Assessed Value
Customs Duty
ACowStick Landed Cost
5%
INR 1,151.6
23.90%
INR 1,426.8
ACowSticks Expected Std CM
23%
Distributor Buy Price
1853.0
Distributor Margin
Dealer Buy Price
Dealer Margin
MRP/MSRP (without VAT)
VAT
MRP/MSRP(with VAT)
8%
2001.2
20%
2401.5
5.00%
2521.57462
• INR 1096 product translates to INR
2522 Retail Price
• Key Take Away
• Observe how the price translates
at every stage
• ACowStick Std CM*is 23%
•((SP-CP)/SP)
• Distributor Margin is 8%
• Dealer Margin is 20%
*Please refer to some good reference on
CM and Operating profit

11. Operating Profit (EBIT)
• OP is a measure of income that tells how
much of revenue will eventually become profit
for a company
• Operating profit is important because it is an
indirect measure of efficiency. The higher the
operating profit, the more profitable is a
company's core business

12. Price – Perception - Reality
•
•
•
•
Perception is a wonderful thing
Perceived value is different for different things
As Humans we try to put a value to everything
Lets take an example – Put a price tag for the
below product
• In US customers might say 800 to 1000 USD
• In India customers might put a value of 300 to 400 USD
Price is Perception and if the price tag crosses that
perceived value, you will have to sell the product
If it matches the perceived value you may not need to
sell – It may sell for itself!

13. Pricing - Discussion
• Perceived value – Lot of factors may influence
the perception of value to people/customers
• Brand, Features, Competitor knowledge etc
are some factors influencing perceived value
Lets get on to actual pricing strategies …..

14. Decide Margin – Ignore Everything else …
• In our Price Build-up you can set a margin that
you expect from selling FunTabStick
• Example (slide 10) shows the margin expected is
30%
• Problems
– Even though the margin in calculation meet your
expectation the end retail price may not work in the
market
– It may be too high for market or too low !
– It does not take into account the demand (based on
the price you just decided)
Strategy : Cost-plus pricing

15. 50 = 10 (CM$)x4(units) + 2(CM$)*5(units) +
Jackpot
• FunTabStick is an absolutely new product in
market
• Competitors will take some time to catch upto
this killer product by ACowStick
• ACowStick can price for few months this
product at a very high price
• Inturn recovering some of its Research and
Development cost
• later correcting the retail price (Margin)
Strategy : Skimming

16. LossFit !!!(Loss-Profit)
• Why will a company sell a product at 0%
margin or even –ve margin?
• One reason could be it need to boost its other
profitable sales
• It is a very good and effective method to
expand its market share as a whole
• This needs a very careful thinking
Strategy : Loss Leader

17. Common Sense
Variable
Exchange Rate
• Research the market for Product,
Price and Placement
• Know your competition similar
offering
• Know
your
unique
differentiation as compared to
competitors (USP)
• Fix Retail Price, Fix FOB and
change Margins and reach an
acceptable level
51.25
Maximum Retail Price (MRP)
1999
5%
VAT
Dealer/Retailer Landed (INR)
1903.81
8%
1762.79
18%
1500.24
ACowSticks Expected Std CM
5%
MRP without VAT (INR)
Distributor Margin
Distributor Landed (INR)
Dealer/Retailer Margin
ACowSticks Landed Cost (INR)
1425.23
Fixed
Customs Duty
23.90%
1150.31
Freight + Insurance + Handling
FOB (INR)
Strategy : Market Oriented
Customs Assessed Value (INR)
5.00%
1095.53
FOB (USD)
$21.4

18. Get-in the market
• To initially get the market share the price of
product will be low
• Once the product starts selling in the market
and ACowStick starts gaining the market share
the product price can be revised
• This is just to attract customers
Strategy : Penetration

19. First in Class
• Set the price Artificially high, to create a
Premium perception in minds of customer
• Imagine you pass-by a store and you see a
hoarding – “The worlds most premium and
costliest icecream” – Will your heads turn and
would you buy?
• This product will gain exceptional reputation
and will become a desirable product (inturn
Brand)
Strategy : Premium

20. Consumer Psychology
• Which price will have your heads turn?
– 99 cents or 1 Dollar?
• Instead of pricing product @ ex: Rupees 300
India has something commonly known as Bata
pricing Rupees 299 !
Strategy : Psychological

21. Other Strategies
• Only key pricing strategies for ACowStick is
discussed here
• For other strategies please refer to good
marketing references also
• Contribution margin based pricing being one amongst
them
– http://en.wikipedia.org/wiki/Pricing_strategies

22. Other Important Reading
• http://en.wikipedia.org/wiki/Cost%E2%80%93volume%E2%80
%93profit_analysis