1、Chapter 2: Introduction to Pricing and Revenue Optimization,Some slides from Robert L. Phillips,Page 2,Roadmap:,The common pricing challenges The three traditional approaches to pricing Discussion on PRO,Page 3,2.1 The challenges of pricing,Pricing includes a remarkably complex set of decision The l
2、ist price is generic, while the pocket price may be different for each customer. The price waterfall (introduced by McKinsey and Company) illustrates the discounts that occur between the list price and the pocket price.,Page 4,Course Agenda,Page 5,The pocket price paid by an individual customer is o
3、ften the result of a single decision, but the cumulative result of a series of decisions. Many discounts are the results of independent decisions made by different parts of the organization, without consistent measurement or tracking. Management attention is often heavily concentrated on invoice pri
4、ces or list prices. However the majority of important pricing adjustments often take place after the invoice and certainly after the list price.,Illustration of the price waterfall,Page 6,Measuring the quality of the PRO decision making,Page 7,Illustration of pocket-price distribution,The existence
5、of a pocket-price distribution does not by itself say anything about the quality of the pricing decision. Question : Is the pocket-price distribution the result of a corporate process based on sound analysis, or is it the result of an arbitrary process? A key measurement of the quality of PRO decisi
6、on making is the extent to which the pocket-price correlates with customer characteristics (indicators of price sensitivity),Page 8,Correlation of discount with customer characteristics,Page 9,2.2 Traditional approaches to pricing,PRO incorporates costs, customer demand (or willingness to pay) ,and
7、competitive environment to determine the price that maximizes expected net contribution.,Page 10,2.2.1 Cost-Plus Pricing,The oldest and the most popular approach Objectivity and financial prudence. The major drawback: Inward-focused exercise( has nothing to do with market). Calculating prices withou
8、t any reference to what customers might being willing to pay. Doesnt support price differentiation (the heart of PRO). The basic costs are often nowhere near as “objective” as they seem.,Page 11,2.2.2 Market-Based Pricing,An effective strategy for a low-cost supplier seeking to enter a new market. A
9、ppropriate in a commodity market. Drawback:Not allow us to capitalize on the changing value perceptions of customers in the market/the differential perception that customers hold of us versus the competition.,Page 12,2.2.3 Value-Based Pricing,The use of methodologies such as customer surveys, focus
10、groups, and conjoint analysis to estimate how customers value a product relative to the alternatives. Especially when a new product is being introduced. Drawback: No way to discern individual customer value for a product at the point of sales. Competitive pressure drive companies almost always have
11、to price lower than they would like to any group of customers.,Page 13,2.2.4 Summary,Any one of the above is “purist”. any companies that sticks to any one of the three pure approaches would likely find itself in deep trouble very quickly. What is often seen in realty is hybrid. Pricing confusion :
12、there is rarely a consistent justification or approaches applied across all pricing decision.,Page 14,2.3 the Scope of PRO,The PRO Cube Customer Commitments. The PRO Process.,Page 15,2.3.1 PRO Cube,The goal of the PRO is to provide the right price For every product To every customer segment Through
13、every channelAnd update those prices over time in response to changing market conditions In theory ,each cell within the Pro cube could correspond to a different price. In practice ,some cells may not be meaningful.,Page 16,Page 17,2.3.2 Customer Commitments,A core concept in PRO is the idea of a cu
14、stomer commitment. A customer commitment occurs whenever a seller agrees to provide a customer with products or services, now or in the future ,at a price. Including: The products and services being offered The price The time period over which the commitment will be delivered The time for the offere
15、d commitment is valid Other elements of the contract Fairness of the commitment and risk sharing,Page 18,2.4 the PRO Process,Successful PRO involves two components: A consistent business process focused on pricing as a critical set decisions; The software and analytical capabilities required to support the process,Page 19,The four contents:,Operational activities of the PRO The supporting activities of the PRO The time dimension The role of the PRO,Page 20,
