PRICING
Prof. Andreas Hinterhuber
Strategic pricing is critical for success > 3 approaches to pricing:
- Cost based pricing
- Competition based pricing
- Customer value based pricing
The impact of even small increases in price on profitability by far exceeds the impact of other
levers of operational management, but pricing has a big impact on profitability. We can increase
the profitability of 20% by increasing the price by 2%.
Turnover = 100
COGS (cost of goods sold, cioe i CV) = 50
mdc margine di contribuzione = CTOT – CV = 100- 50 = 50
EBIT (earnings before interests and taxes) = CTOT – CV – CF = 10
If price increases of 2% > 100+2 = 102 > 102 – 50 = 52 > 52- 40 = 12 + 20% rispetto a 10
Ways to implement a price increase:
- Increment list prices
- Reduce discounting
- Supplementary services es. Shipping costs or warrant costs
- Up-selling
- Reduce content
Pricing is the most powerful instrument of the mkt mix.
The first pass at pricing a new product should be made without foreknowledge of what the
product will cost of manufacture.
TYPES
1. Cost based pricing > you overcharge (aumenti troppo il prezzo) when the demand is low
and you undercharge when the demand is high. The biggest problem is that your interest is
and the customer interest are not aligned (allineati)
2. Competition based pricing > I assume that price is the most important purchase criterion
for customers (and other assumptions), but… I’m wrong!! Because I can differentiate my
products and the price is not the most imp criterion > risks are price wars, reactive
approach, I neglect customer needs and so on (SLIDE) + I don’t have to compare my price to
others because people compare products considering their value, not their price
3. Customer based pricing > the key is to think about the utility for the customer, that is what
a product does for him > perceived customer value is the main factor in setting prices >
customer based pricing is outward orientated, driven by customers perception and so on...
(SLIDE)
Value = maximum willingness to pay
Total customer value is made by reference value and differentiation value
Customer value based pricing > you try to estimate how much your customers would pay for
your competitive advantages! If the differentiation value is low we are talking about
competitive disadvantages
