* cost-based pricing
- cost base. Product cost + mark up
* value-based pricing
- depends on what customers actually value.
- ex. Google with the Ads and "cost per click.": no fixed price, whoever has the highest bid will get a higher ranking in the Google Ads.
> because Google can make more money
> capture the willingness to pay of every customer in the market
*how do companies move to value-based pricing?
- what is it the customer actually value/insight?
- what is the better solution that the customer want?
- communicate that value through a superior value proposition?
- Capture that value differential
> ex. how much time and hassle it saves the customer by not having someone putting lubricant on a screw
* value-based pricing capabilities
- superior customer insight=house/base of pricing
> what customers value?
> what different segments you have in a market?
> what the different willingness to pay of those segments?
> ex. Price seeker >> create new company to satisfy low end need
Need RD and service >> original company
- pricing economics.
> your costs?
> fixed costs?
> variable costs?
> opportunity costs?
> economics in the market
> How big is the market?
> price elasticity in the market?
> What drives demand in a market?
> ex. book for $5 (variable cost)
and the regular price is $10, no one bought it for a year > $5 are considered sunk costs > Not just the book cost, but also the opportunity cost of using that bookshelf
> understanding of which costs are relevant or not for a pricing decision?
- pricing management
> when you set your price, how well are you in executing all the functions to actually capture the price till have money in bank?
> ex. leave a lot of money through discounting.
>> do all the discounts that your customer get make sense?
> difference between the price we wanna charge and what we get >> Ex. Stupid discounts or smart discount?
> keep discounts that make sense, get rid of the discounts that make no sense. >> unprofitable customer got a lot of discounts >> because customers are often good friends with the relationship manager >> take away discounts that they did not deserve
- Pricing psychology
> it's the perception of the price that drives the customer behavior. price manager = perception manager
> Decoy Effect: the moment you introduce a top-end camera, the mid-range camera looks better, our mind tricks us
> Loss Aversion: losses count heavier than gains, ex. starts with the most expensive car then go low, is better than starts with the cheapest car then go high > Because there's a point where I will say no further down > we prefer heart hurt than wallet hurts
* why some companies are not able to apply value-based pricing?
- they don't have the required capabilities
- they have objectives that are not aligned, ex. market share VS profitability, as traditional thinking: the higher your market share the more profitable > Big order at low price to increase market share, Or go for profit and don't accept, ex. Poker walk away from bad deal, but CEO want have market share, so price go down
* customer segmentation
- separate the price buyers by willingness to pay
- different prices in the market for same product
> fencing: ex. Coupon let customer segment themselves, price buyer or convenience/value buyer?
> versioning: ex. precision scale. the pharmaceutical companies are willing to pay four times more because they need this FDA approval, compare to university
* pricing = pain management > if lower price, need big quantity or prepayment
- no one ever pays the full list price. price negotiation = discount negotiation
- problem: you give too many discounts without get sth in return
- every discount should have a pain, otherwise will ask for more discount
* price elasticity
> of price economic
> measures the change of the demand depending on the change of price.
> Ex. increase the price by 5%, and the demand goes down by 5%, then price elasticity= - 5%demand/5%price increase=-1
> market is more elastic/bad, if number is greater. Ex. Increase price 5%, demand goes down 25%, elasticity = -25% decrease demand/ 5% price increase= -5
> elasticity=0=increase the price without losing any customers= demand unchanged.
> the higher the demand, the more customers we lose with a price increase
>understand the elasticity to figure out to which point can we increase the price without losing too many customers
> executives and entrepreneurs drastically overestimate the price elasticity.
> ex. Swiss increase 20% >> think Switzerland already expensive, additional increase 20%, probably drive down demand at least 20% >> in reality, demand only less 3~4%, elasticity=-0.2, very low
*why executives overestimate the price elasticity? fear they will lose many customers if increase price
> customers/your sales typically said you are too expensive, even you are not
> majority companies thinks that they are more expensive than average> wrong perception prevents us charge higher price>we assume demand will go down drastically if increase little price>overestimate negative market demand> don't capture the value they create
* price negotiation
- price psychology: pricing anxiety or pricing confidence.
- buyer knows supplier fear rejection>win this deal at any cost> price will go down
- price management: build pricing confidence, ex. you deserve to charge more value.
- inficator of pricing anxiety: experienced person value the price, or Commodization: client give u price from your competitor to drive down your price