Case synopsis----quick finish in 4 hours
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Ch.3lectureslide.pdf
ENTREPRENEURIAL PRICING
LECTURE 4
ENTREPRENEURIAL PRICING
AN EXAMPLE - WARBY PARKER
Neil Blumenthal, CEO and cofounder of Warby Parker presented to Professor Jagmohan Raju, a pricing expert:
The value proposition was very stylish, hip, prescription glasses sold over the Internet, with free try-ons of up to five different frames at home, delivered with excellent customer service, and donation by the company of one pair of glasses to a needy person for each pair purchased. The price was $45 per pair of glasses. With his forecasted costs, the business would be solidly profitable with that price (similar glasses at any neighborhood optometrist would cost much more than $45).
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ENTREPRENEURIAL PRICING
AN EXAMPLE - WARBY PARKER
Responses from Professor Raju, a pricing expert:
> First, the glasses would probably cost more to make and sell and deliver than they forecasted.
> Second, the glasses might be too inexpensive, causing people to question how good they could be at such a low price.
> Third, they could make a lot more money at higher prices.
> Finally, they should test alternative prices to see how they impact revenue and consumer perception.
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ENTREPRENEURIAL PRICING
AN EXAMPLE - WARBY PARKER
The team listened to Professor Raju and tested alternative prices.
The Results: − A $95 price was actually more attractive than a $45 price because $45 was not
credible to many people
− Costs were actually higher than they forecasted, but the doubling of the pricing gave them plenty of room to remain solidly profitable
− In 2015, Warby Parker have raised more than $115 million in venture capital funding to fuel their rapid growth.
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ENTREPRENEURIAL PRICING
PRICING – THE TRADITIONAL MODELS
> Pricing - most difficult marketing decision but probably the most important one as well
> Managers use comfortable, precise rules for pricing: − Markup rules
− Competitive matching rules
> Traditional “rules” − Easy to make the pricing decision
− Leave lots of money on the table
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ENTREPRENEURIAL PRICING
GETTING PRICE RIGHT EARLY
> Lower a price -- no one will complain Raise a price significantly -- it is not fair!
> Important to have your initial price set at a very good level
> First customers want (and deserve) special pricing treatment !
> Prices should be structured as charter customer discounts or introductory discounts from a regular price
> You may never charge the regular price !!!
> Ok, then how to do pricing?
> Value-Pricing Thermometer
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ENTREPRENEURIAL PRICING
THE ESSENCE OF VALUE-BASED PRICING - VALUE-PRICING THERMOMETER
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Adapted from “Principles of Pricing,” Robert J. Dolan, HBS 2009.
ENTREPRENEURIAL PRICING
PRICE CAN CHANGE PERCEIVED VALUE TOO
> Example: MINIVAC 601, priced at $79.95 Educational kit machines to help people understand how the binary logic and arithmetic of computers worked
> Three target market segments − Home hobbyists
− High schools and colleges
− Computer and technology companies
> Changes: − Switches upgraded to higher tolerances
− Machine colour changed from blue and red to gunmetal grey
− $79.95 $479
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It’s just a toy!
Yes!
Yes!
Yes!
ENTREPRENEURIAL PRICING
PERCEIVED VALUE IN BUSINESS-TO-BUSINESS CONTEXTS
> Market new products and services to businesses − Customers perceived that they will be more profitable if they adopt the new
product or service
− Using common measures to indicate improvements
> Customer Value: the hypothetical price for a supplier’s offering at which a particular customer would be at overall economic break-even relative to the best available alternative to the customer for performing a set of functions.
> Customer Perceived Value: a customer’s perception of his/her own “customer value.”
> The best pricing situation: pricing as close to “Customer Perceived Value” as possible without exceeding it
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ENTREPRENEURIAL PRICING
PERCEIVED VALUE IN BUSINESS-TO-BUSINESS CONTEXTS
> Perceived customer value = product value + supplier value - switching investments
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ENTREPRENEURIAL PRICING
PERCEIVED VALUE IN BUSINESS-TO-BUSINESS CONTEXTS
> An example: The SAS Institute, Inc The Institute provides business analytics software and services to target markets in business, government, and education.
> The SAS pricing Model: pay a first-year license fee and an annual fee after
> Traditional Software firms: a software purchase (a big lump sum) along with a (low) maintenance contract
> What is the difference? Which is better? − Customers receive increasing value over time...
− SAS Model is better !
> Microsoft has adopted this model
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ENTREPRENEURIAL PRICING
PRICING OF INTELLECTUAL PROPERTY
> Intellectual property: essentially no/minimum costs associated with additional copies
> Pricing Models: − Subscription pricing (e.g., The Wall Street Journal online)
− Free + cross selling (e.g., The New York times + Whole foods)
− Free + advertising incomes (e.g., Google)
− Free + upsell users to a premium version (e.g., LinkedIn)
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ENTREPRENEURIAL PRICING
PRICING OF INTELLECTUAL PROPERTY
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ENTREPRENEURIAL PRICING
PRICING OF INTELLECTUAL PROPERTY
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ENTREPRENEURIAL PRICING
CUSTOMER-DETERMINED PRICING
> Customers have a different utility for money than the vendor
> Let the customer set the price − eBay’s Auction Model
− The Priceline Model (Priceline.com)
− Multiple pricing choices • LaneHawk system:
1. Full capital cost up front + monthly maintenance 2. Monthly rental 3. Sharing the savings from loss prevention
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ENTREPRENEURIAL PRICING
DETERMINING REVENUE AT ALTERNATIVE PRICE LEVELS
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ENTREPRENEURIAL PRICING
DETERMINING REVENUE AT ALTERNATIVE PRICE LEVELS
If the products cost $1 per unit, and I sell them for $2/unit, a doubling markup.
Am I happy as an entrepreneur?
Of all the possible prices I can charge for my widgets, which price will maximize my profitability over my planning horizon?
What would happen to my units sold if I charged other prices than $2?
You can run some tests…
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ENTREPRENEURIAL PRICING
DETERMINING REVENUE - PREMARKET METHODS
> Use concept testing − Multiple versions with different prices
− Each customer only sees one version
− Biases of the concept test would be constant over different prices, the relative differences in response of one price versus another will usually be quite valid
> Example: ABLE Faucets A small, non-U.S. manufacturer of faucets for kitchen sinks
− Wanted to see if they could convince the retailer to change the retail price from $98 to a higher price, enabling ABLE to raise the wholesale price to the retailer
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ENTREPRENEURIAL PRICING
DETERMINING REVENUE - PREMARKET METHODS
> The concept testing on consumers
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ENTREPRENEURIAL PRICING
DETERMINING REVENUE - PREMARKET METHODS
> Results:
> It would not make sense to raise the faucet’s price …
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ENTREPRENEURIAL PRICING
DETERMINING REVENUE - PREMARKET METHODS
> Revisit the concept statement:
> Feature info not benefits …
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ENTREPRENEURIAL PRICING
DETERMINING REVENUE - PREMARKET METHODS
> New Results when redo with benefit statement:
> At $141 with the redesigned box, the concept test shows a true win-win-win situation.
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ENTREPRENEURIAL PRICING
DETERMINING REVENUE - IN-MARKET METHODS
> A very valid predictor
> Not always practical − If one market participant finds out that another participant bought what they
perceived as the same product bundle at a better price, they will feel cheated
> Possible when: − Customised products
− Personal sales
− Complex with multiple components
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ENTREPRENEURIAL PRICING
DETERMINING REVENUE – USING INTERNET
> Purchasing is done individually on the Internet, and each person can be exposed to a different, customized website, the Internet can be an extremely effective and valid in-market price-testing device.
> An example: utility.com a provider of deregulated electric power in a number of states across the United States
− The VP of marketing thought they needed to offer 15% off in order to get customers to switch from their existing suppliers
− Maybe get away with only 10% off if they chose “green” (environmentally clean) power?
− Need a test…
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ENTREPRENEURIAL PRICING
DETERMINING REVENUE – USING INTERNET
> utility.com tested offers of 5%–15% off, each leading to a page that offered 0%–5% additional if you signed up right away
> The results were not really intuitive. The best combined action came from a 7% offer to get visitors to the site, where they were offered 3% off for immediate sign-up—a total of 10% off.
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ENTREPRENEURIAL PRICING
SUMMARY
> Common cost-based or competitive-based pricing rules may be “precisely wrong”
> Value-based pricing strategy − (Customer) Perceived Value
> Determining Revenue at Alternative Price Levels − Premarket Methods
− In-Market Methods
− Using Internet
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