Download By-Product Pricing

Pricing: Understanding and
Capturing Customer Value
What is a Price?


Narrowly: price is the amount of money
charged for a product or service.
Broadly: price is the sum of all the values that
the consumers exchange for the benefit of
having or using the product or service.
Pricing Mechanism
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Throughout most of history, prices were set
by negotiation between buyers and sellers.
At the end of 19th century, the development
of large-scale retailing → fixed price policies,
i.e. setting one price for all buyers.
At the end of 20th century, the Internet →
dynamic pricing, i.e. charging different prices
depending on individual customers and
situations.
Case: Priceline
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Its customer base has grown to almost 17
million users, and as many as 9 million
people visit the Priceline site monthly (64%
are repeat customers).
Working mechanism
Attractive to the “time sensitivity” product
such as travel-related products (e.g. plane
tickets, hotel rooms, rental cars, cruises, and
vacation packages).
Dynamic Pricing on the Web

Sellers can
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charge lower prices, reap higher margins, e.g.
Dell’s “made-to-order”.
monitor customer behavior and tailor offers to
individuals, e.g. Amazon.
charge prices on the fly according to changes in
demand or costs, e.g. online catalog retailers.
Dynamic Pricing on the Web

Buyers can
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get instant price comparisons from thousands of
vendors, e.g. Compare.Net, PriceScan.com, and
手機王.
find and negotiate lower prices.
Both sellers and buyers can negotiate prices
in online auctions and exchanges.

E.g. FreeMarkets, 阿里巴巴.
Setting Pricing Policy
1.
2.
3.
4.
5.
6.
Selecting the pricing objectives
Determining demand
Estimating costs
Analyzing competitors’ costs, prices, and
offers
Selecting a pricing method
Selecting the final price
Selecting the Pricing
Objectives

Survival
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Reasons: overcapacity, intense competition, or
changing consumer wants.
Prices cover variable costs and some fixed costs
Maximum current profit

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Maximize current profit, cash flow or ROI
Does a leveraged firm more care about the
current profit than a non-leveraged firm?
Selecting the Pricing
Objectives

Maximum market share


Examples of Chinese computer companies: 大長
城→$600 (captured 1/3 of total PC sales);
Start→$480 (trade in, minus monitor); 海星→$580
(aimed at schoolchildren).
Conditions: (1) price sensitivity; (2) experience
curve; (3) deter entry.
Selecting the Pricing
Objectives

Maximum market skimming
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Example: Sony’s HDTV: $43,000 (1990) → $6000
(1993, 28-inch) → $2000 (2000, 40-inch)
Conditions: (1) initial demand; (2) economics of
scale; (3) potential competitors; (4) product image.
Product-quality leadership, e.g. Benz.
Non-profit organization’s objectives
Determining Demand
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Demand curve and its slopes, e.g. Wall
Street Pub in Malaysia.
When does the demand curve slope upward?
Price sensitivity of demand → price elasticity
Conditions for less elastic demand
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There are few or no substitutes or competitors.
Buyers do not readily notice the higher price.
Buyers are slow to change their buying habits.
Buyers think the higher prices are justified.
Figure: Inelastic and Elastic Demand
Determining Demand
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When the profits are maximized, is the price
elasticity equal to 1?
Tellis’s survey → 1.76 on average

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Non-durable good: 1.5~5
Durable good: 1.5~3
Sethuraman and Tellis → 平均而言，價格彈
性約為廣告彈性的20倍.
Determining Demand

Influence of the Internet on price sensitivity


The Internet has increased customers’ price
sensitivity, e.g. mysimon.com, 手機王.
Mckinsey’s study found that there is less pricecomparison shopping taking place on the Internet
than is possible: 89% (book), 84% (toy) and 81%
(music).
Determining Demand
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Asian consumers generally tend to be highly
price sensitive and are pragmatic shoppers.
One study in south California found that
Chinese consumers engaged in more
information search on products and prices
than U.S. consumers.
Price indifference band: 17% (mouthwash),
13% (batteries), 9% (small appliance), and
2% (certificates of deposit).
Determining Demand

Estimating demand curve
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Experts’ judgments
Ask buyers – direct or indirect
Conduct price experiment, e.g. Amazon.
Analyze the sales data: longitudinal or crosssectional
專家調查法
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方法：請數位專家預估在數個價格水準（如：
最低與最高可行價格、中間價格等）下，未來
一段時間內的銷售量。
優點：簡單、成本較低、適合於多種產品的評
估狀況。
缺點：全然依賴內部資訊來源。
較適用在顧客很少的B2B市場。
專家判斷法 – 小撇步
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請準備一份針對手邊狀況所設計的問卷。
可能的話，請至少訪問十位專家；說不定，他們的看
法會南轅北轍。
邀集所有受訪者開會討論，並且達成共識，會比只是
計算個別預估的平均值更好。
邀請不同部門和職級的專家參與，取得多元化觀點，
例如：業務部門、行銷部門以及總經理層級。
由於價格反應預估這個主題具有政治性，因此最好委
任中立的外界人士負責訪談的工作。一旦接受了某個
價格反應曲線，公司內部便可以預設銷售量目標。
運用電腦來支援進行預測工作。
顧客調查法 – 直接了當式

一些典型的問卷問題：

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您願意以25美元的價格購買這項產品的可能性有多
高？
您絕對會購買這項產品的價位是多少？
您願意付多少錢買這項產品？
當這項產品價格為0.99美元時，您會購買多少件？
當兩者的價格變成多少時，您願意從A產品轉換成
B產品？
Case: Vobis (歐洲最大電腦零售商)
Case: Kodak
Case: Kodak
顧客調查法 – 直接了當式
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優點：方法簡單、容易瞭解、費用平實。
限制：
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直接詢問價格可能會讓受訪者產生一種不切實際的
高價意識。
本法只針對價格單獨考量，然而，在現實生活中，
顧客也會針對產品屬性（價值）和價格進行評比。
價格隱含一種潛在的優越感效應，受訪者可能不願
自己承認負擔不起高檔產品，表明自己愛買便宜貨。
較適用於工業用品，而非消費性用品。
顧客調查法 – 間接推論式：綜合
評量法
界定想要瞭解的產品屬性
每個屬性分設等級
篩選受訪者
採用電腦展示兩兩對照的產品側寫
1.
2.
3.
4.

5.
6.
7.
一般需動用10~20組的比較性資料
求出產品屬性的重要性排序
價值轉化為價格單位
預測顧客的選擇
Case: Lion
Case: Lion
Case: Lion
Case: Lion
顧客究竟要什麼？
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傳統顧客偏好評等工具大部分都設計不良，主
要是因為消費者難以具體說明自己真正想要什
麼。
最大差異量表(Maximum Difference Scaling,
MaxDiff)
參考網址：http://maxdiff.hbr.org
摘錄自哈佛商業評論 全球繁體中文版
(p. 24, April 2009)
Estimating Costs
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Types of costs: fixed costs, variable costs,
total costs and average costs.
Accumulated production and experience
curve (learning curve)
Aggressive pricing
Target costing
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Pricing that stars with an ideal selling price, then
targets costs that will ensure that the price is met.
E.g. P&G’s Crest SpinBrush, Honda’s Today.
Case: Kodak vs. Fuji
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1970年代，Kodak佔有歐洲軟片的大部分市場，
也享受穩定的價格和利潤。
然後Fuji跨入市場，以遠低於Kodak的價格進
入，甚至低於Kodak的生產成本，但此時Fuji
的成本還遠高於Kodak。
Kodak以短期現象看待它，你認為呢？
Analyzing Competitors’ Costs,
Prices, and Offers - Jollibee
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Jollibee’s outlets sport the clean and well-lighted
look of McDonald’s and operate with efficiency of
Singapore Airlines.
Similar to Disney, it spends 4% of its gross sales on
advertising.
Jollibee responed by holding price increases at
8.5% to McDonald’s 10% when the country’s
inflation was 9.7%.
Jollibee’s Yumburger
Market share: Jollibee (over 50%) > McDonald’s
(20%)
Selecting a Pricing Method
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Markup pricing
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Target-return pricing
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Add a standard markup to the product’s cost.
Reasons: (1) sellers are more certain about costs
than about demand; (2) price competition can be
minimized; (3) fairer to both buyers and sellers.
Make sense?
The price yields the firm’s target rate of ROI.
Perceived-value pricing, e.g. DuPont,
Caterpillar, and Benz.
Caterpillar’s Perceived-Value
Pricing
$90,000
is the tractor’s price if it is only equivalent to the
competitors tractor
$7000
is the price premium for Caterpillar’s superior durability
$6000
is the price premium for Caterpillar’s superior reliability
$5000
is the price premium for Caterpillar’s superior service
$2000
is the price premium for Caterpillar’s longer warranty
on parts
$11000
is the normal price to cover Caterpillar’s superior value
$10000
discount
$100,000
final price
Selecting a Pricing Method
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Value pricing
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Charge a fairly low price for a high-quality, e.g.
Arvind Mills’s Ruf & Tuf.
EDLP, e.g. Wal-Mart.
Going-rate pricing
Auction-type pricing
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English auctions (ascending bids)
Dutch auction (descending bids)
Sealed-bid auction
Product Mix Pricing Strategies
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Product line pricing
Optional-product pricing
Captive-product pricing
By-product pricing
Product bundle pricing
Product Line Pricing
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Setting the price steps between various
products in a product line.
Based on: cost differences between the
products in the line, customer evaluations of
their different features, cannibalization
between the products in the line, and
competitors’ prices.
Optional-Product Pricing
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
The pricing of optional or accessory products along
with a main product.
Additive option framing (+OF) vs. subtractive option
framing (-OF)
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Consumers tend to choose more options with a higher total
option price when they use –OF versus +OF. This effect
holds across different option price levels and product
category of vary prices.
-OF appears to demotivate category purchase when
product commitment is low.
Captive-Product Pricing
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Setting a price for products that must be used along
with a main product.
Producers of the main products often price them low
and set high markups on the supplies.
Ex. Gillette: razor + razor blades; HP: printer＋
printer cartridges.
In the case of services, this strategy is called twopart pricing (fixed fee plus variable usage rate).
By-Product Pricing
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Setting a price for by-products in order to
make the main product’s price more
competitive.
Zoo-Doo’s case
Product-Bundling Pricing
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Combing several products and offering the
bundle at a reduced price
Pure component pricing vs. Pure bundle
pricing vs. Mixed bundle pricing
Product-Bundling Pricing
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Pure component: profit=$33.
Pure bundle: profit=$42. (+27%)
Mixed bundle: profit=$44. (+44%)
Reservation Price
Customer
A
B
A+B
1
9.0
1.5
10.5
2
8.0
5.0
13.0
3
4.5
8.5
13.0
4
2.5
9.0
11.5
Product-Bundling Pricing
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Why can product-bundling pricing increase
the profit?
When is it appropriate to use the productbundling pricing?
Case: 鑽探設備之生產和維修組
合銷售
市場
區隔
群組
區隔大小（以
市場的百分比
計）
願意支付的最高價格
使用機器 維修
備註
聯賣（使用
＋維修）
1
12
1250
990
2310
2
23
1450
540
1750
自己有維修工
程師的公司
3
22
1080
1030
2090
使用率非常高
4
43
1390
870
2350
550
470
1020
邊際成本
Case: 鑽探設備之生產和維修組
合銷售
定價策略
最適價
銷售量
利潤
指數
機器
維修
聯賣
機器
維修
聯賣
Pure
1390
Component
870
－
66
77
－
86,240
100
－
2090
－
－
77
82,390
96
Mixed
Bundle
1450 1030 2310
23
22
55
103,970
121
邊際成本
550
Pure
Bundle
－
470
1020
Complementary Product
Pricing
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訂價準則：
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低於獨立最適訂價
隨著互補關係愈強而降低
隨著互補品的毛利增高而降低
Complementary Product
Pricing
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西裝之需求函數：P=500 – 0.5 Q.
西裝之成本 = $200.
1套西裝 → 0.8件襯衫 & 1.2條領帶
平均毛利：襯衫$15, 領帶$10.
獨立訂價：P=350, Q=300.
互補品訂價：P=338, Q=324.
Price-Adjustment Strategies
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Discount and allowance pricing
Segmented pricing
Psychological pricing
Promotional pricing
Geographical pricing
International pricing
Discounts and Allowances
Pricing

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Cash discount: a price reduction to buyers who pay
their bills promptly.
Quantity discount: a price reduction to buyers who
buy large volumes (one type of product line design).
Functional discount (trade discount): offered by the
seller to trade-channel members who perform
certain functions, such as selling, storing, and record
keeping.
Seasonal discount: allow the seller to keep
production steady during an entire year.
Discounts and Allowances
Pricing


Trade-in allowance: a price reduction given
for turning in an old item when buying a new
one.
Promotional allowance: payments or price
reductions to reward dealers for participating
in advertising and sales support programs.
Segmented Pricing
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
Selling a product or service at two or more
prices, where the difference in prices is not
based on differences in costs.
Types of segmented pricing: customersegment pricing, product-form pricing,
location pricing, time pricing, image pricing,
and channel pricing.
Segmented Pricing

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Airlines, hotels, and restaurants call it yield
management or revenue management.
Should a company offer lower rates on
unsold inventory just before it expires?
Segmented Pricing


Q: If there exists a dominant segment, does a
company still need the discriminatory pricing?
Example 1: A theater has only 4 seats.
4 non-students’ valuations
20, 18, 16, 14
4 students’ valuations
10, 8, 6, 4
Segmented Pricing

Example 2
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P = a – b Q, variable cost = c.
An airline company: a=3900, b=10, c=100.
單一艙等
兩種艙等
三種艙等
價格
$2,000
頭等艙=$2,633
經濟艙=$1,367
頭等艙=2,950
商務艙=2,000
經濟艙=1,050
銷售量
190
頭等艙顧客=127
經濟艙顧客=127
共254 (+34%)
頭等艙顧客=95
商務艙顧客=95
經濟艙顧客=95
共285 (+50%)
利潤
$361,000
$482,600 (+34%)
$541,500 (+50%)
Segmented Pricing
Conditions for Successful
Segmented Pricing
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The market must be segmentable, and the
segments must show different degrees of
demand.
Cost of price discrimination
The segmented pricing must be legal.
Customers’ feeling
Reselling is impossible.
Competitors’ underselling in the higher-price
segment
Segmented Pricing


美國航空採用三種艙等
德國國營鐵路公司減縮火車艙等 (4→2)
Psychological Pricing
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A pricing approach that consider the psychology of
prices and not simply the economics; the price is
used to say something about the product.
Consumers usually perceive higher-priced products
as having higher quality, e.g. Heublein’s Smirnoff, 旺
旺.
Reference prices
Odd pricing
Symbolic and visual qualities, e.g. “8” vs. “7”.
Promotional Pricing
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
Temporarily pricing products below the list price.
Loss-leader pricing
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Special-event pricing
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Tradeoff between store traffic and brand damage
E.g. Christmas, Mother’s Day, Father’s Day, Valentine’s
Day.
Cash rebates, e.g. automobiles, durable goods, and
small appliances.
Low-interest financing (分期付款)
Promotional Pricing


Longer payment terms
 Consumers often worry less about the cost
of a loan and more about whether they can
afford the monthly payment.
 E.g. 分期零利率（全國電子、信用卡、手機、
百貨公司等）.
Warranties and service contract
Adverse Effects of
Promotional pricing
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
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Competitors’ copy
Create “deal-prone” customers
Erode a brand’s value
Downright addicting to both the company and
the customer
Lead to industry price war, e.g. Kmart.
Geographical Pricing



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
FOB-origin pricing
Uniform delivered pricing
Zone pricing
Basing-point pricing
Freight-absorption pricing
International Pricing


In some cases, a company can set a uniform
worldwide price, e.g. Boeing.
Factors that influence the international pricing




Cost, e.g. Campbell found that distribution in the United
Kingdom cost 30% more than in the United States.
Marketing objectives, e.g. penetration vs. skimming.
Consumer perceptions and preferences
Economic conditions, competitive situations, laws, and
regulations, and development of the wholesaling and
retailing system
International Pricing – Price
Discrimination vs. Price Consistency
International Pricing –
Exchange Rate

以一家美商公司出口到德國的情況為例，產品在德國
的售價為150馬克。
匯率（美元/馬克）
美元售價
單位利潤
指數
0.5
75美元
15美元
37.5
0.67
100美元
40美元
100
0.74
111美元
51美元
127.5
邊際成本
60美元
International Pricing –
Exchange Rate

假設原本德國市場之產品售價為150馬克，此時銷售量為
100單位，價格彈性為2.5。當馬克從0.67貶值到0.5（約
25%）時，該公司如何制訂其商品在德國的價格呢？
定價策略
馬克價格
美元價格
維持德國市場
售價
150
75
100
1500
維持美元之單位
貢獻
200
100
17
680
德國市場售價漲
10%
165
82.5
75
1687.5
邊際成本
60
銷售量 利潤（美元）
International Pricing –
Exchange Rate
匯率變動與價格調整實例（1986年1月至1987年1月）
產品
匯率變動
價格變動
精工錶
-24%
+13.5%
Sony隨身聽
-24%
+20.0%
Canon相機
-24%
+14.6%
BMW 528
-25%
+7.8%
Benz 190E
-25%
+11.5%
Price Changes

Initiating price changes





Initiating price cuts
Initiation price increases
Buyer reaction to price changes, e.g. Kellogg.
Competitor reactions to price changes, e.g., 美國
香菸市場 (Philip Morris vs. R.J. Reynold), 美國拍
立得相機市場 (Kodak vs. Polaroid), and 紐約郵報
vs. 每日新聞.
Responding to price changes