Pricing Strategy and Tactics. SME Growth Support Workshop 4

Transcription

1 Pricing Strategy and Tactics SME Growth Support Workshop 4 1

2 Introduction to SME Growth Support

3 Innovate UK SME Growth Support New offer for successful SMEs in Innovate UK competitions from 2015: Diagnosis of Business Needs Attend Growth Workshop, meet Growth Manager, develop Growth Plan Connecting to Business Support Participate in Coaching, Mentoring & Entrepreneurial Skills training Connecting to other Government Support Introductions to UKTI, IPO, KTN, EEN, Catapults Connecting to Investors Showcase face-to-face and online

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5 Entrepreneurial Skills Training Menu Workshop 1: Defining Your Value Proposition Workshop 2: Developing Your Business Model Workshop 3: Testing and Refining Your Business Model Workshop 4: Pricing Strategy and Tactics Workshop 5: Strategic Marketing Workshop 6: Web Fuelled Business Workshop 7: Selling and Negotiation Workshop 8: Building, Managing and Leading Winning Teams Workshop 9: Organisational Strategy and Development Workshop 10: Financial Management for Growth Workshop 11: Access to Finance for Growth Workshop 12: Mitigating and Managing Risk 5

6 Agenda 09:30 Welcome and introductions 10:00 Pricing overview 10:15 8 Steps to Value Based Pricing 11:30 Break 11:45 Revenue Model and Pricing mechanisms Lunch 14:00 Pricing considerations and pricing psychology 15:30 Break 16:00 Pricing Tactics 16:45 Q&A, Key Learning & Next Steps 17:00 Close 6

7 Learning objectives you will: Explore a range of pricing strategies, mechanisms and tactics Understand how to formulate a value based pricing strategy Consider pricing psychology basics and how they affect customer decision making Determine which revenue models and pricing tactics could be used in your business 7

8 Ground rules Support and challenge approach Confidentiality No such thing as a stupid question Phones on silent Socratic Method Your rules?

9 Why is pricing important? Price affects your customers decision-making process Has a direct impact on your revenue Can increase or decrease your turnover and/or profits 9

10 Pricing can have the most impact on profits A 1% increase in price led to an 11.1% increase in operating profits. While a 1% increase in volume only raised profits by 3.3% on average and A 1% decrease in fixed cost led to a 2.3% increase in profit on average. Harvard Business Review Managing Price, Gaining Profit Marn and Rosiello (1992) 10

11 Pricing is the exchange rate you put on the total of all the tangible and intangible aspects of your business. 11

12 Definitions Pricing is the process of determining what a company will receive in exchange for its product or service Price the amount of money something is bought, sold or offered for Or value in monetary or other terms e.g. time. 12

13 What do you need to consider when pricing? Pricing should take the following factors into account: Company objectives Different market segments Costs Competition Proposed positioning strategies What does this mean for you/your company? 13

14 5 Common Pricing Mistakes 1. Lack of customer segmentation 2. Basing prices on cost rather than value 3. Setting prices purely on the basis of the competition 4. Keeping prices the same for too long 5. Not investing sufficient resources into pricing 14

15 Another issue - The money illusion We tend to think about money in face value terms, not in real terms. This tends to lead to price stickiness as businesses are concerned about price increases being noticed 15

16 Different pricing strategies Value based pricing Penetration pricing Competitive pricing Premium pricing Pricing Strategies Bundle pricing Optional pricing Psychological pricing Cost plus pricing Skimming pricing 16

17 Value Based Pricing Value based pricing Penetration pricing Competitive pricing Premium pricing Pricing Strategies Bundle pricing Optional pricing Psychological pricing Cost plus pricing Skimming pricing 17

18 What is value-based pricing? when prices are based on the value of a product as perceived by the customer The perceived value determines the customer's willingness to pay and thus the price a company can charge for its product/service. 18

19 Video: Value based pricing 19

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21 8 Steps of a Value Based Pricing Strategy 1. Segment your market 2. Understand each segment and review/ test your value proposition(s) 3. Determine your value metric 4. Estimate the value of the benefits you offer 5. Identify your competitors and the value they offer 6. Highlight key differences you offer your customers 7. Frame the value you offer against competitors 8. Price, test and iterate 21

22 1. Segment your market By demographics? By psychographics? By same situation? By same criteria? By same tribe? By job to be done? 22

23 Exercise: Market segmentation How do or could you segment your market? Explore the different possibilities. Does your segmentation result in those in each segment all having something significant in common? 23

24 2. Understand each segment and review/ test your value proposition(s) Review your Value Proposition for each segment What do you do that people need or want? What benefits do you offer your customers? What are your customers pains and gains? Which features deliver these benefits? Image source:

25 A positioning statement that explains what benefit you provide for who and how you do it uniquely well. It describes your target buyer, the problem you solve, and why you re distinctly better than the alternative. Geoffrey Moore 25

26 Geoffrey Moore s Model 1. The (product name) 2. is a (product category) 3. for (users) 4. who (statement of desire) 5. That (compelling reason to use) 6. unlike (the best the best alternative) 7. allows (the main difference) 1. The IPod 2. is a portable music player 3. for music lovers 4. who want to listen to their tunes 5. anywhere, anytime 6. unlike portable cd players or MP3s with less storage 7. the ipod allows easy access to all your music in any situation 26

27 Exercise: Value proposition (for one segment) (the product name) is a.(product category) for (users/customer segment) who (statement of desire/problem) that (compelling reason to use) unlike..(the best the best alternative) allows..(the main difference) 27

28 Test your value proposition with real customers Carry out some research to a test where your customers get value from Survey Interviews Focus group 28

29 3. Determine how and for what you are charging How and for what are you charging? Does your charging structure allow your customers to predict costs? Does it maximise your revenue per customer? Are there any alternative ways of charging? 29

30 Exercise: Explore how you charge customers What is your current/proposed method for charging customers? Can you think of any other alternatives? For each alternative, think about the impact on your customer? Would it make it easier for them to make a purchasing decision? Would they struggle to calculate the value they would get? Is your charging structure easy to understand? Does it enable your company to grow with your customer? 30

31 4. Estimate the value of the benefits you offer Customers pay for the benefits that the features of your product/service provide Do your benefits: Save them money? How much? Make them money? How much? Create a non-financial benefit? 31

32 Exercise: Can you estimate the value of the benefits your offer to customers? Does your product/service. Save your customers money? How much? Make your customers money? How much? Create a non-financial benefit? What is this worth? 32

33 5. Identify your competitors and the value they offer What are the features and benefits of your competitors offer? 33

34 Exercise: Competitor Identification Who would you recommend if your business did not exist? What are the next best alternatives to your business? Name 3 competitors and start to complete the grid. Company Features /Benefits Pricing Notes Your company 34

35 6. What are the key differences between your competitors business model(s) and your own? Channel Partners Customer relationship Proposition Key Difference Revenue Model 35

36 Exercise: Competitor differentiation Identify how your business model differs to the competitors you identified in the previous exercise. Channel Partners Customer relationship Proposition Difference Revenue Model 36

37 Complete the final column on your competitor grid. Company Features/ Benefits Pricing Notes Key Difference(s) Your company n/a

38 7. Frame the value you offer against your competitors Customers will make judgements against your competitors. Use your competitor analysis to create a frame to help determine your pricing Source: 38

39 Exercise: Frame your offer Attempt to produce a value map and plot on your business. Can you plot your competitors on the map? 39

40 8. Price, test and iterate Iterate Price Test 40

41 Revenue Models

42 Video: Revenue Models (Steve Blank)

43 Video: Revenue Models

44 Revenue models Asset sale Consulting Licencing Advertising Revenue streams Usage fees Lending Renting Brokerage Subscription Auction 44

45 People don t want to buy a quarter inch drill. They want to buy a quarter inch hole. Ted Levitt, Harvard Business School Professor 45

46 Retail or asset sale Customers purchase your product by paying for it once. Transaction revenue.

47 Consulting Daily rates Fixed fees

48 Usage fees Including lending, renting an leasing

49 Subscriptions Fixed fee over a given time period. Re-occurring predictable fees.

50 Lending/renting Shared ownership Lending items or renting for short or long periods of time Share the ownership of item or location Re-occurring predictable fees

51 Licensing Use of IP for a set period of time Beginning and end stated Acceptable use Fee plus royalty

52 Brokerage Service provided by a broker Fees paid by either broker, vendor or both.

53 Advertising Access to users, communities and customers Common in double-sided business models

54 Auction Bidding process Usually with a reserve price

55 Pricing Mechanisms 55

56 Fixed pricing Fixed, visible and static Set in advance May still include bulk discounts and/or price differentiation

57 Dynamic pricing Responds to market conditions Perishable goods or services Yield management Negotiation Real-time 57

58 Exercise: Revenue model and pricing mechanism check Can you apply alternative revenue models to your product/service? Do any of these alternatives offer more benefits to the customer than your existing revenue model? Are there any additional revenue streams for your business? Explore other options. Is the pricing mechanism for each revenue stream fixed or dynamic? Explore other options. 58

59 Energiser exercise: Pass the Proposition! Or in small groups around a table. One person tells their value proposition to the person on their right, who will pass it around the table until it arrives back at the person on their left. This person then shares and compares!

60 Pricing Psychology 60

61 Pricing Psychology Anchoring Relativity Similar prices

62 Anchoring A quick exercise.. 62

63 Anchoring Basis of comparison Harnesses the power of suggestion by giving a reference Can spotlight a product or service that you want customers to buy and encourage decision making. 63

64 Video clip: Anchoring 64

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66 Exercise: Can you use Anchoring? Do your provide customers with a benchmark price which provides a baseline for comparison (e.g. on your website, promotional literature etc) prior to seeing the actual price of your product/service? Can you guide your customers towards a product/ service deliberately using anchoring? How could you use anchoring in future negotiations? 66

67 Relativity 67

68 Relativity Buyers are sensitive to relative price differences more than absolute prices. 68

69 Relativity game Suppose I gave you 10. How would that make you feel? How much would I have to give you to make you twice as happy? The average response is 40 69

70 With money it always takes more than twice the cash to double the thrill. William Poundstome, Priceless 70

71 But remember relatively works both ways To make the saving on a 150 ticket appear to be as good as a saving of 10 on a 20 ticket, you are going to have to reduce the price of the 150 ticket by a lot more than 10. This is important if you are thinking about using discounts and price promotions to drive sales. 71

72 Relativity in action 72

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75 Video clip: Relativity pricing Source: Mark Wickersham, FCA 75

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77 Exercise: Relative pricing Think about the range of products/services you offer and summarise them into different pricing bands. Is any one of these options more appealing to your customers? Can you make one of the offers more appealing relatively? 77

78 Pricing considerations 78

79 Know your costs At what price and/or volume will you make a profit? Consider: Variable costs e.g. direct cost of producing goods/services Fixed costs e.g. overhead costs Sunk costs e.g. set up costs, R&D, patents etc. 79

80 Check your break-even point Break Even (quantity) = FC / (P-VC) FC = Total fixed costs P = Average price per unit, and VC = Variable costs per unit. 80

81 Similar pricing 81

82 Are your prices similar within your range of products/services? According to research, similarity in pricing can COST you sales. Similar prices lead to customers deferring their decision instead of taking action. Do you clearly differentiate your prices according to the different product/service features?

83 Magic number? Research shows 5-10% is the level of difference that is not typically noticed by consumers (or if it is noticed, is accepted as fair). This is by no means a rule of thumb, but a baseline against which to test price elasticity and responses to changes in price. 83

84 Could a small change in price lead to a large change in demand? Factors affecting the demand of your product: Type of product necessity vs luxury/discretionary Customer options number of alternatives available? Budget impact price change as a proportion of budget Brand value reputation and perception can lead to inelasticity Can you increase price with minimal impact on volume? How might you make this the case?

85 Aim high It is easier to come down in price than it is to increase price. 85

86 Pricing Tactics 86

87 Price Skimming Artificially high Captures as much customer value as possible from innovators and early adopters Reduces over time Common in technology sector 87

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90 Premium pricing High end anchoring to elevate and maximise profits Aspirational/hero products and services e.g. Apple watch 90

91 Customised pricing Bespoke products or services Inline with customer intimacy Invest in relationships 91

92 Optional pricing To encourage upselling 92

93 Versioning Multiple releases of a product, all of which have the same general function but are improved, upgraded or customised. 93

94 Bundled Pricing Often one big ticket item plus complimentary. Bundles tend to give the business an advantage. Can lower marketing and selling costs. 94

95 Introductory pricing Price high to recoup sunk costs such as research and development Or Competitively to test the market Minimal viable products and product/service launches

96 Loyalty discounts To secure on-going and repeat sales 96

97 Loss leaders Price at cost or at a loss to secure the initial sale and to drive customers to other more profitable products or services. Should be limited and evaluated. Can be used to secure a reference customer. 97

98 Price discrimination Same product or service sold at different prices to different customer segments. Image source: romeconomics.com 98

99 Exercise: Mechanisms and tactics Which tactics do you employ? Which tactics could you employ? Complete the grid on the handout. Do your choices link back to your value proposition, brand strategy and overall aims? 99

100 Pricing Tactics Checklist Tactic Currently used? Could be used? Notes Price skimming Premium pricing Customised pricing Optional pricing Versioning Bundled pricing Introductory pricing Loyalty discounts Price discrimination Loss leaders 10 0

101 Importance of testing price points 10 1

102 Exercise: Testing prices What could you do to test customer price points and willingness to pay? In groups of three spend 15 minutes discussing how each business might test pricing. Share your top tips. 10 2

103 Remember to evaluate and iterate Pricing is not static Should continually be evaluated and evolved Iterate Price Test 10 3

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