Price It Right with Dmitry Shesterin

Price It Right
with
Dmitry Shesterin

Intro
Pragmatic:
 Management Consultant
 Startup Advisor for Seed & Round A
 VP, Product Management
 VP, Marketing
 Large Capital Project Sales Manager

Academic
 Executive MBA
 BA, Intercultural Communications

Likes
 Theory of pricing
 Being a geek

© 2013 Dmitry Shesterin. All Rights Reserved. 2

What Is Your Price To:
You: Your Customer:
The amount of money you The amount of money
HAVE to run at which she VALUES
your business on whatever you offer

Key Term: Willingness To Pay (WTP)
Definition: WTP is the maximum amount a person is willing to part with to get
whatever you offer.

Ideal Setup*: Your Price = Individual WTP of every customer.
*Impossible as each customer has unique WTP.


Why Bother?
• You are missing 25-50% of gross revenues if you do not
know approximate WTP levels of your customers

Consumer surplus,
-Price-

or value you create.

WTP – Customer 1 Your extra profits.
P2
This is why you bother.
WTP – Customer 2
P1
De Minimal sales to cover
ma
nd costs with no profit.
0 Q1 -Quantity-


Initial Price Setting
Most Popular - Copy Competition
• Easy and quick.
• You are copying someone else’s homework on someone else’s
assignment.
• If your product is different enough, do your own homework.

Cost-Based Pricing
• If it cost me $1 to produce one widget and am fine with 10% margin on
top of it, I will sell at $1.10.
• Your costs might increase without your ability to raise prices.
• In software business by the time you have shipping code all costs are
sunk and effectively $0.

Least Popular and Most Effective - Determine Perceived Value
• Identify key customer segments with differences in value perception
• Although it is the most difficult to create, it yields the most profitable
results in the long run.


Pricing Objectives
When Lowering Prices:
• Market penetration
• Deter new entrants
• Force exit of weaker competitors
• Increase top line revenues (with elastic demand)
• Long term margin increase (with elastic demand)

When Raising Prices:
• Short term margin increase
• Long term margin increase
• Increase top line revenues

• Note: Different customer segments can be priced uniquely to achieve
different objectives.


Low Price Myth
NOT your competitive advantage!

• It only means you are WILLING to accept lower profit margins

• Sustainable for as long as your cost structure can afford it
• Leaves profits on the table
• Indicates poor revenue and value management
• Compensates with efficient value chain for poor pricing

• Your true competitive advantage is the efficient internal value creation
chain and superior cost structure that afford you the ability to sustain
lower prices. This advantage can be lost quickly to a better organized
player.
• The end result of a price-based competition is a price of 0$.
Do you still want to play this game?

Pareto Proportion – 20/80
Close to 20% of your customers
generate close to 80% of your revenues

• Do you know who those 20% are?
• What is important to these 20%?
• What are the Value Creating factors for these 20%?
• Invest in identifying the consistently paying 20% of your
customer base Customers Revenues


Price Discrimination
• Price Discrimination is good for your business.
• Allows you to set prices closer to customers’ WTP

• Examples of Price Discrimination:
• Customer segment, or vertical market pricing
(You charge a library X$, and a bank Y$)
• Volume (You charge X$ each for one widget, but Y$ each
for an order of 100)
• Bundles
• Coupons


Love / Hate Those Bundles
• Bundles are often more difficult to:
• Communicate to customers and own sales and partners
• Integrate with internal processes and practices

Create bundles only if individual bundle components yield
greater additional value than when sold separately

• To create bundles, first survey customers
who already own potential bundle elements

• Beware of unnecessary discounting and
potential revenue cannibalization


Making Price Changes
• Avoid sticker shock
• Have perception tests internally and externally
• Keep an eye on competition - price adjustments are signals (expect
retaliation when lowering, following increase if you raise prices)
• Give plenty of notice
• Allow for a significant grace period (2-3 average sales cycles length) to
conduct business with old prices
• Notify partners first, then announce to customers, then to prospect
• Put Your Marketing Communication in High Gear
• Communicate extra value created
• Add new and spell out all value creating elements, some might not be
apparent
• Add guarantees if possible


Price Control Policy
• Limited Discounting is Healthy

• Create and Enforce a Price Control Policy
• Provides price level validation
• Indicates price fluctuations in the marketplace
• Allows to track own price performance
• Provides data for determination of own price elasticity
• Allows for more precise customer segmentation


Price Control Policy Setup
• Institute Discounting Responsibility Waterfall Framework
• Account Managers - 10%
• Sales Management - 20%
• Executive Sales Management – 40%
• Executive Management – 50%

• Setup Dedicated Reporting Structure
• Determine discounting “champions”
• Integrate with training and performance management frameworks
• Identify and handle valid and invalid sales objections
• Isolate individual price leakage components
• Separate out partner margins and commissions for clarity


When To Review Pricing
• Continuously
• Make it a habit
• Integrate with your operations
• Performance – based
• Sales are falling
• Sales are growing, but average order size is shrinking
• Your cost structure changes
• High discounting rate (over 25% of deals are discounted)
• Event - based
• Launch a new product
• Retire a product
• Change in your GTM strategy
• You competition changes prices


If You Lower Your Prices
• Competition will retaliate
• Determine the degree of retaliation
• Analyze and predict possible outcomes
• Design strategies to counter competitive retaliation
• Asses financial stability of competitors


Price Change Rollout
• DOs:
• Allow for 60 to 120 days for new prices to propagate
• Provide business partners with advance notice
• Respect opportunities in progress
• Prepare and update all internal tools
• Design communication and marketing plans

• DON’Ts:
• Don’t change prices multiple times a year.
Keep disruptive changes to a minimum.
• Don’t increase complexity unnecessarily.
If you can simplify and reduce SKUs, do it.


Close The Loop
Customer
Segmentation

Value Cost
Identification Structure

Price
Competitive Discounting
Research Reports

Authority
Waterfall

Price monitoring and adjustments represent a continuous business
practice, not one-off events


Useful Pricing Terms - I
• List Price or Price
A method to capture value you create. Usually price on your invoices, or MSRP communicated to
partners.

• Price Leakage
Necessary evil reality of business. Various discounts that reduce your list price represent Price
Leakage.

• Pocket Price
Finally achieved price net of all possible discounts. Still does not include commissions or any
marginal variable costs.

• Pricing Waterfall
A representation of step-by-step price decrease with application of all possible deductions such as
loyalty discounts, promotional offers, early payment bonuses et cetera.

• Price Realization
Practice of decreasing price leakage and increasing pocket price.

• Effective Price Management
Comprehensive framework that continuously reduces price leakage and increases the pocket price
through price realization.


Useful Pricing Terms - II
• Willingness To Pay
WTP is the maximum amount a person is willing to part with to get whatever you offer.

• Consumer Surplus
Any gain obtained by consumers when getting a product for a price that is less than their WTP.

• Producer Surplus
The amount that producers benefit by selling at a price that is higher than the least that they would
be willing to sell for.

• Price Elasticity of Demand
A measure used to show the responsiveness, or elasticity, of the quantity demanded of a good or
service to a change in its price. Elasticities greater than one are called "elastic," elasticities less
than one are "inelastic," and elasticities equal to one are "unit elastic."

• Elastic or Inelastic Demand
When demand is elastic (<1), you can generally lower prices and increase your total revenue.
When demand is inelastic (>1), you can generally increase prices to increase your total revenues.

• Cross Price Elasticity of Demand
A measure of the percentage change in demand for a particular good caused by a percent change in
the price of another good.
Goods can be complements, substitutes or unrelated.


Further Reading
• Dilbert
• Implementing Value Pricing: A Radical Business Model for Professional Firms
• Managerial Economics
• Neuromarketing: Understanding the Buy Buttons in Your Customer's Brain
• Pricing and Profitability Management: A Practical Guide for Business Leaders
• Pricing and Revenue Optimization
• Pricing Segmentation and Analytics
• Professional Pricing Society
• Professional Pricing Society on LinkedIn
• Recession Storming: Thriving In Downturns Through Superior Marketing, Pricing And Product Strategies
• Smart Pricing: How Google, Priceline, and Leading Businesses Use Pricing Innovation for
Profitability
• The 1% Windfall: How Successful Companies Use Price to Profit and Grow
• The Art of Pricing: How to Find the Hidden Profits to Grow Your Business
• The Strategy and Tactics of Pricing: A Guide to Growing More Profitably


Happy Pricing!

 Email d.shesterin@gmail.com for template
files and frameworks
 Connect on LinkedIn at linkd.in/shesterin
 Follow me @dscheste

© 2013 Dmitry Shesterin. All Rights Reserved.
Dmitry Shesterin. All Rights Reserved. 21

Price It Right with Dmitry Shesterin

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