Pricing is not one-shape-fits-all. Cost+, legacy-, or competitor-based pricing may lead you to leave money on the table. You need to consider both the value that you add to buyers as well as your corporate objectives. This becomes even more complicated when you’ve got an entirely new, innovative product or service. The talk will highlight these topics and show you how to think about them when setting your prices. Bring your questions and learn about how leading product managers use pricing to support innovative strategies. This would be an interactive session with the presenter leading discussions by providing an overview of key pricing approaches. Alain Meloche, Managing Partner of Pricing Cloud in Canada, has lead workshops across the world including Canada, the U.S., Singapore, Shanghai, Paris, and Johannesburg.

1. JULY 20TH
TED ROGERS SCHOOL OF
MANAGEMENT, RYERSON UNIVERSITY
ProductCamp
2013
www.productcamptoronto.wordpress.com

2. Why Price Matters

3. Impact of Price

4. Price Orientation Versus Pricing
Realization
Pricing Realization: relates to how close a firm sticks to list price
and avoid profit leaks in pricing tactics and in deal negotiations with
customers.
Includes dimensions of pricing discipline and pricing compliance.
Pricing Orientation: a “philosophy” or a pricing practice.
Decisions relating to:
• Price positioning
• Setting or changing prices.

5. Pricing Orientation
Four Methods of Pricing

6. Four Methods of Pricing
There are four methods that typically have been used to price a
product or service.
1. Cost - Based Pricing
2. Competition - Based Pricing
4. Performance - Based Pricing
3. Value - Based Pricing

7. 1. Cost – Based Pricing
Cost-based pricing is perhaps the oldest form of pricing. It involves
adding a fixed mark-up to a product's cost to ensure a target margin.
 Common when difficult to know the competition’s price
 Relatively easy to implement and use on a day-to-day
basis
 Effective at ensuring the product is sold at the target
margin
 May not be effective at ensuring the product achieves
other important objectives
 Problem when launching new products
Price = ( 1 + target margin ) x ( product cost )

8. 2. Competition – Based Pricing
Competition-based pricing sets a product’s price by adding a set
premium – or discount – to the price of a competing product (or
basket of products).
 Common in environments where the competition’s price is very visible
and/or rapidly changing
• Often called “reference” pricing
 Relatively easy to implement and use on a day-to-day basis
 Effective at ensuring the product is sold at the target premium or
discount
 May not be effective at ensuring the product achieves other
important objectives.
Price = { 1 + ( target premium or discount ) } x ( competition’s price)

9. 3. Value – Based Pricing
Ties price to the attributes that customers use when determining the
benefits that a product or service may provide them. For example:
• use of a product or service may provide dollar savings
• incremental price compared to competitors would then be based on
some fraction of the incremental savings relative to the best available
alternative on the market.
 Common for new product pricing – especially in the
case of very innovative products
 Not an approach that can be implemented rapidly;
requires careful consideration of alternatives and their
pros and cons
 Not always effective at ensuring the product achieves
its objectives
Incremental Price = some fraction of ( savings vs. best alternative )

10. 4. Performance-Based Pricing
10
Total cost if all savings
accrue to customer
Total product cost
Distribution
cost 5.6%
Total CURRENT
customer cost
8.25
8.00
7.75
7.50
7.25
Product
savings
New Product
Cost
Customer
efficiency
savings
Total NEW
Cost to
customer
after its
share of
savings
Other
non-
guarante
ed
savings
to
customer
Advanced Solution
Cost to
customers after
guaranteed
share of savings
$ Millions
Supplier
share of
savings
Guaranteed
savings
Total cost if all savings
accrue to customer
Total product cost
Distribution
cost 5.6%
Total CURRENT
customer cost
8.25
8.00
7.75
7.50
7.25
Product
savings
New Product
Cost
Customer
efficiency
savings
Total NEW
Cost to
customer
after its
share of
savings
Other
non-
guarante
ed
savings
to
customer
Advanced Solution
Cost to
customers after
guaranteed
share of savings
$ Millions
Supplier
share of
savings
Guaranteed
savings
Price = Base +some fraction of benefits( eg. savings)
•Useful when performance level is uncertain (eg. New product)
•Ensures that seller does not undercharge buyer
•Buyer receives insurance that will not be overpaying
•Buyer and seller need to agree to metrics and they must be measurable
Example

11. Value by Segment
11
Value to
Customers
International
Software applied to:
External Customers Internal Users
National
Software applied to:
External Customers Internal Users
Regional
Software applied to:
External Customers Internal Users
Enhanced
customer
relationships
Lower
transaction
costs
Reduce
operating
costs
Broaden
exposure to
market
Efficient
transfer of
information
Maximize
breadth of
products/
services
available

12. Value - Price Matrix
High Medium Low
LowMediumHigh
Price
Value
1. Premium 2. Penetration 3. Superb Value
4. Overcharging 5. Fair Value 6. Good Value
7. Rip-Off 8. Cream-Skimming 9. Cheap Value
Price/ Value Equivalence
Line (PVE)

13. Hold Strategies:
Price Appropriately for Value Offered
13
High Medium Low
LowMediumHigh
Price
Value
1. Premium 2. Penetration 3. Superb Value
4. Overcharging 5. Fair Value 6. Good Value
7. Rip-Off 8. Cream-Skimming 9. Cheap Value
•To be used to stabilize markets
•Best used when there are clear lines of demarcation among competitors
•Most customers tend to classify products and services in boxes 1, 5, and 9

14. Penetration Strategies:
Price LOW for Value Offered
14
High Medium Low
LowMediumHigh
Price
Value
1. Premium 2. Penetration 3. Superb Value
4. Overcharging 5. Fair Value 6. Good Value
7. Rip-Off 8. Cream-Skimming 9. Cheap Value
•Difficult to execute unless they can be sustained for the long term
•Risk of falling into box 9

15. Skim Strategies:
Price HIGH for the Value Offered
15
High Medium Low
LowMediumHigh
Price
Value
1. Premium 2. Penetration 3. Superb Value
4. Overcharging 5. Fair Value 6. Good Value
7. Rip-Off 8. Cream-Skimming 9. Cheap Value
•Small, opportunistic but very profitable
•Usually takes advantage of a captive situation

16. Depends on two Factors:
• Our Negotiating/ Market Power
• The Value of a Particular Deal
Price Realization

17. Pricing Capability Grid®

18. Value Based Pricing: Two Key
Components
The Value of a Particular Deal
Value of Buyer to SellerValue of Buyer/Deal to
Seller
Examples
Cost to serve
Cost to Replace
Cross-sell Opportunity
Volume/Contract
Length
Long Term Potential
Influence
(Marketing
opportunity)
Customer’s
Value to
the seller/
supplier

19. Application to New Product Pricing

20. Setting prices- Release Prices
Premium Pricing: HOW HIGH CAN YOU GO?
Penetration Pricing: HOW LOW CAN YOU GO?
Perceived Value
Perceived Price
Low High
High
Price-Value
Equivalence
Line
Evolutionary
Revolutionary
Penetration
Pricing
Premium
Pricing
Me- Too
Low