WIXLIB

INTRODUCTION TO THEPRICING STRATEGY ANDPRACTICELiping Jiang, Associate ProfessorCopenhagen Business School14th December, 2016Figure source: ScanpixOpen Seminar of the Blue INNOship Project no. 15Servitization: Creating the market by understanding price, cost, contracts and financing

What is the issue?Why is it important?What can be done?!"

What is the issue?Why is it important?What can be done?#"

Pricing your productPRICE TOO HIGH!! Drive customer awayPRICE TOO LOW!! Limited profit margin!! Negative effect on howcustomer perceives theproduct quality "

Pricing your serviceCHARACTERISTICSCHALLENGES!! Intangibility!!Underpriced!! Inseparability!!Promised at performancelevels that cannot bedelivered profitablyInsufficient estimation ofcosts related to risks!! Variability!! PerishabilitySource: Avlonitis and Indounas, 2005!!%"

Pricing as a challengePrice is undermanagedPARADOXRETHINK thepricing strategyStruggle forprofitSubstantialinvestmentSETTING theprofitable priceSubstantialcostsSource: Gebauer, Fleisch and Friedli, 2005Increased productservice offerings&"

What is the issue?Why is it important?What can be done?'"

The power of pricing!! Pricing is a key aspect of your businessPriceSource: Jiang and Hansen, 2016; Osterwalder and Pigneur, 2009Everything in your business works to justify your value for a price

The power of pricing!! Pricing has the highest impact on increasing profitProfitincreaseof 8%Priceincreaseof 1%Source: Compustat; McKinsey analysis, 2003101No changeNo riablecostsOperatingprofit

The power of pricing!! Pricing has the highest impact on increasing profitIncreases company profits by (%)8In priceIn variable costs4In sales volume4In fixed costs3Source: Rüdiger, Ellige and Weigell, 2007A 1% rise/decrease

What is the issue?Why is it important?What can be done?(("

Pricing StrategiesCustomervaluebasedpricing3 majorpricingstrategySource: Nagle, Hogan and Zale, 2005CostbasedpricingCompetition-basedpricing

Price rangeNo demandCustomer’s perception of value"ProfitmarginCompetitor’s priceProduct/service costsTotal costsper unitPrice ceilingPrice floorNo profits

Cost-based pricing!! Setting prices based on costs and desired profit margin!! Focus on seller’s cost (price floor)"!! The most common and simplest method of setting prices!! Data readily available!! Don’t take demand (willingness to pay) and competition into account!! Produce sub-standard profitability!! Ryanair or WalmartSource: Hinterhuber, 2008; Myers et al., 2002; Simon et al., 2003

CostsCost-based pricingTotal costsVariable costsAssumption: One can firstdetermine sales levels, thencalculate unit cost and profitobjectives, and then set a priceFixed costsMoving targetUnitsprofitCOSTPRICEVOLUME

Customer value-based pricingBenefitHow much valuecustomers place onbenefitsPriceSet the priceaccordingly ,.12*":-3 45/?.,-715,"/3" ,817,-" ,.1-, "7084,"0/"/0-2,/":-15," ,-17,"/0-2,/"53./.")* ,-./0* 1*2".34-5,."36"7084,"63-"54./39,-"0* "7084,":,-5,:;3*." ,/"/ ,":-15,"/3"0."0"64*5;3*"36"7084,"Source: https://marketing-insider.eu/

Customer value-based pricingSetting pricesbased oncustomer’sperception ofvalue(price ceiling)"Source: Hinterhuber, 2008Data aredifficult toobtain andinterpretTakecustomerperspectiveinto accountCustomervalue is not agivenAppleLufthansaBMW

Competition-based pricing !Setting prices basedon anticipated orobserved price levels ofcompetitors(price reference)!! Don’t take customerinto accountLead to missedopportunitySource: Hinterhuber, 2008Data readily availableLow riskGasoline industry

Comparison‘Our ValueScan survey, covering more than 200 companies in both consumer andbusiness markets, found that firms developing and effectively executing value-based pricing strategies earn 31 percent higheroperating income than competitors whose pricing is driven by marketshare goals or target margins’ (Zale, 2014).Cost-based pricingProductCostPriceValueCustomerCustomer value-based pricingCustomerValuePriceCostProduct

The popularityAdoption of alternative pricing strategies in practiceSource: Hinterhuber, A. 2008.

Strategic pricingMore market shareVSGreater profitPROFITABILITY Pricing for profitMaking informed trade-offs between price and volume inorder to maximize profits.

Thank youDr. Liping Jiang, Associate ProfessorDepartment of Operations ManagementCopenhagen Business Schoollji.om@cbs.dk

Discussion 1!! Customer value-based pricing strategy: is it your choice? Ifnot, why companies resist?!! Suppliers - Which pricing strategy is right for your businessand why? Would it be possible to have mixed pricingstrategies?!! Customers - Which factors bring you the customer benefits(eg. price, quality, performance, finance, low risk)?

siserseinapmcoSource: Hinterhuber, A. 2008.

ObstaclesObstacles to the implementation of value-based pricing strategies79%Value assessmentValue communicationMarket segmentationSales force managementTop management supportOther factors60%58%50%65%Source: Hinterhuber, A. 2008.65%

SolutionsValueassessmentValue to customer reference value (the price of customer’s bestalternative) differentiation value (the value ofwhatever differentiates offering from the alternative)Market segmentationSales force managementTop management supportOther factorsSource: Hinterhuber, A. 2008.ValueProduct / service featurescommunicationCustomer benefitsCustomer benefits in accordance with customer needs

Discussion 2!! Customer value-based pricing strategy: is it your choice? Ifnot, why companies resist?!! Suppliers - Which pricing strategy is right for your businessand why? Would it be possible to have mixed pricingstrategies?!! Customers - Which factors bring you the customer benefits(eg. price, quality, performance, finance, low risk)?

Next steps!! Pricing seminar report!! Price modeling!! Bilateral industry dialogues and case studies7 thematic seminars1)! Target costing as a strategic tool to commercialize the product and service innovation (3 Oct, 2017)2)! Pricing management and strategy for the maritime equipment manufacturers and service providers(14 December, 2017)3)! Optimization and handling of risks and cost within the service contracts (1 March, 2017)4)! The strategic decision making of ship owners in investing in maritime equipment manufacturers andservice providers (7 June 2017)5)! Financing of new business models that can promote business and sales within the maritime industry– general (20 Sep 2017)6)! Financing of new business models that can promote business and sales within the maritime industry– cases (6 Dec 2017)7)! Negotiation and collaboration through international contracts (22 March 2018)!@"

PRICING STRATEGY AND PRACTICE Liping Jiang, Associate Professor Copenhagen Business School 14 . Revenue Fixed costs Variable Operating profit 100 19.2 68.3 12.5 101 No change No change 13.5 Price increase of 1% Profit increase of 8% Source: Compustat; McKinsey analysis, 2003 . The power of pricing !!Pricing has the highest impact on increasing profit Source: Rüdiger, Ellige and Weigell .