Transcription
Hello. My name is Igor Didok. I am the Commercial Director of the Nexany network. You are studying on the "Long Game" project. Today we will talk about pricing strategy. Price is not just a number on a price tag. It is a concentrated expression of value, positioning, demand, supply, brand trust, and business ambitions. It is the lever that allows a company not only to cover costs but also to scale profits, retain customers, convey positioning, and even manage the behavior of competitors. In the classic 4P model: Product, Place, Price, Promotion, Price is the only element that brings money. All other elements are associated with costs. Price differs significantly from the other three elements. It is the company's effort to fix a portion of the value into the profit it receives. But the irony is that pricing is often done intuitively, not systematically. It is determined as is customary in the category, as it is with competitors, or how much people seem willing to pay. Pricing should not be random, but a strategic decision. It is not just about formulas; it is a communication between business and buyer. It is about how the company sees itself and how it sees its customer. In this lecture, we will explore what price is from the perspective of business, marketing, and the consumer, what are the basic pricing models, how the value-based approach works, what a pricing model is and why it is important, and how it is formed. Before talking about models, it is worth clarifying basic pricing terminology. Cost of goods sold (COGS) is the sum of expenses incurred in the production and sale of goods, works, or services. Markup is the difference between the selling price and the cost of goods sold, in relation to the cost of goods sold. Margin is defined as the difference between the selling price and the cost of goods sold, in relation to this selling price. From the definitions provided, we understand that margin is the portion of profit that the price contains. Therefore, margin cannot be 100% or more, as any price contains a portion of the cost of goods sold, while markup can exceed 100%. Margin and profitability are identical indicators for different objects. Margin for goods or services, profitability for business. So, we have the cost of goods sold. What methods exist for determining prices? Let's start with classic approaches and see why they are not universal. Three classic approaches to pricing. Cost-based pricing. The simplest method. You determine costs and add a desired markup. It seems easy to apply, easy to control profits. Historically, cost-plus pricing has been the most common pricing procedure because it carries an aura of financial prudence. Financial prudence, from this point of view, is achieved by setting a price for each product or service that would ensure a fair profit on all costs. The problem with cost-oriented pricing is fundamental. In most industries, especially manufacturing, it is impossible to determine the cost of a unit of production before determining its price. Why? Because the cost of a unit of production changes, increases or decreases depending on the production volume. Failure to account for the impact of price on volume, and volume on costs, leads to managers making pricing decisions that can undermine profitability. Competitive pricing. Competition-based pricing is a strategy where prices are set based on the perceived value of a product or service by consumers. Customer-driven pricing focuses on meeting customer expectations, aiming to maximize customer satisfaction and company profits. Two problems arise when prices reflect the amount buyers seem willing to pay. Buyers are rarely honest about how much they are willing to pay for a product. Once buyers know that sellers' prices are reactively flexible, they have an incentive to hide information from sellers and even mislead them. For example, when buyers know that a product is periodically discounted, they will tend to postpone their purchase until they receive a discount. The task of the sales and marketing department is not simply to fulfill orders at any price the customer is willing to pay at the moment, but to increase their willingness to pay to a level that better reflects the true value of the product. And third. Share-driven pricing is a strategy for setting prices for goods or services based on competitor prices. The goal is to set a price that is competitive in the market to attract buyers. This strategy requires careful and rather labor-intensive analysis of competitors' pricing policies and can be effective under certain conditions. If a company has no strong reason to believe that its competitors cannot respond to a price reduction, then the long-term costs of using price as a competitive weapon usually outweigh any short-term benefits. Remember, do you know of cases where a price reduction by one market player led to the exit of other players from the market? This is a rather rare occurrence. Each of the approaches to pricing presented is possible but has its limitations, pros, and cons. However, we must return to the question: what is strategic pricing? Strategic pricing involves managing value from its creation to its fixation in pricing in a way that allows the organization to achieve high sustainable profits from its efforts. Value-based pricing. Let's start with the value cascade. You create a product that has defined consumer value and try to realize this value at a fair price. Strategic pricing largely involves managing the relationship between price and value. Essentially, what we call strategic pricing can also be called strategic value management. When we talk about managing value from its creation to its fixation in price, we understand that setting the price level is only one step in a multi-stage process that affects the entire spectrum of marketing decisions. If the goal of pricing is considered only during the setting of price levels, then all previous marketing decisions are likely to be made in such a way that they will dissipate potential profits, create gaps in the diagram, long before any product or service is offered for sale. In the value cascade diagram, you see the stages of value and price formation. Between what we create and what the client perceives, gaps can arise. Value gap. We have not realized the value planned in the product, we have not been able to implement our ideas in the product. Consequently, the product is deprived of elements that allow it to differentiate itself from competitors. Perception gap. The client does not see the benefit. We created it, but could not explain or visualize it. That is, we have a problem in communicating value. For example, we advertise a smartphone and talk about its battery having a capacity of 7500 mAh. But the consumer does not understand how long this battery will last and how much better it is than competitors. Therefore, the consumer does not understand what we are offering. In this example, one could say: 48 hours of charge, 12 hours of YouTube video playback. Structure gap. The price is formed opaquely, without arguments, or is broken down in a way that raises doubts. For example, the cost of the project is €18,500. Problem: it is unclear what exactly is being paid for. There is no breakdown into stages, work, or resources. It is impossible to assess the adequacy of the price. The client thinks, is it expensive or cheap? A simple, correct example. Stage one: diagnostics, four weeks. Market analysis, audit of current processes. Two workshops, cost €10,000. Stage two: positioning strategy. Final Roadmap model. Cost €8,500. There is logic, there is a cause-and-effect relationship, there is a sense of control. Next key steps in defining value. First, identify the main benefits the product provides to the client. Time savings, risk reduction, status increase, comfort, inspiration. Second, understand how the client values these benefits in monetary terms. There are several methods for determining the benefit perceived by clients. Firstly, benefits can be economic and psychological. Psychological benefits are quite difficult to quantify even with qualitative research. Whereas economic benefits can be assessed in several ways. Thus, we can determine and compare not only the price but also the total cost of ownership and use compared to a reference product and its price. The economic value of a product is calculated as the price of the best alternative for the consumer, the benchmark value, plus the value of what differentiates the offer from the alternative, or the value of differentiation. One of the most important factors influencing consumer choice and their willingness to pay is the set of alternative products they consider for purchase. From a marketer's perspective, these products are the best competitive alternatives. Given the central role of competitor prices in the purchase decision, the assessment of economic value begins with determining the price set by the competitor, which is the base in our model. After that, we must assess the differences between our product and the alternative competitive product. The third step in defining value is to set a price that is lower than the perceived benefit but higher than the costs, based on an assessment of differentiating factors. Pricing is always marketing, and therefore, the price must be part of your message, design, and communication. It is not just how much, but why exactly that much. Analyze your products or services. What value do you provide to consumers? How does the value of your offerings differ from competitors'? Do your communications and distribution system ensure the correct delivery of value to consumers? Where are the main gaps in value delivery? Are they in the product itself, in communication, in value architecture, or perhaps in a pricing policy that destroys the value of your products and offerings? Solving pricing problems can be done from any element of this cascade, which will have a positive effect on the final result. So, we have understood how we create and deliver value. Next, we move on to pricing models. Pricing model. Price is not a number; it is a system. This system consists of three components: price architecture, variation factors, and price regulators. Price architecture is the way you structurally present your pricing offer. First, pricing basis. The unit for which we set the price. A metric or unit, i.e., what the consumer pays for. Per unit of product, per hour, per kilometer, per result, per access level. Second. Offer structure. Offer structure is a tool for customizing prices for your offers. When used effectively, offer structure allows for the inclusion or exclusion of different product components depending on how different customers value them compared to their available alternatives. An example can be the options for ordering a car in the Bolt service. Depending on the car class and additional options, and willingness to wait, you get price differences. The same applies to car configuration. Base plus options, where each option has a separate price, ultimately resulting in the total car price. Unlike traditional pricing approaches, value-based pricing involves greater variability in price structure, which depends on the value and customer segment for which it is offered. Price structure allows for maximum benefit extraction from each market segment by influencing the perception of value. Pricing structure variations: price lists plus discounts or surcharges. Bundling – when we combine several products into one. Price barriers – when we define the conditions for applying one price or another, for example, depending on the time. Price menus – when a product has a series of options, each with its own price, but is part of a single product. Price metrics – when we evaluate a certain metric, usage time, distance, a specific project result, KPI, dynamic pricing – when the price depends on demand, supply, and the customer's willingness to pay. Third. Pricing mechanism. Pricing mechanism is the system or process by which the price of a good or service is determined. It determines how demand, supply, costs, market conditions, and external factors interact to form the final price. It is not just a way of setting a price, but also a principle of its regulation depending on economic circumstances. Here are a few mechanisms. Fixed, which is still the most common, an actual defined product price, list price or price catalog. Dynamic, algorithmic, when the price is determined by an algorithm that considers various factors: weather, demand, supply, the segment to which the client belongs. Contractual, most often used in B2B, when the cost of a product or service is determined through negotiation. Index-based, most often applied when selling resources. We are familiar with this principle because each of us pays for gas and electricity, the price of which is indexed depending on inflation or currency exchange rates. The second component of the pricing model is variation factors. It's simple here. Under what conditions do prices change? Do we consider seasonality, currency fluctuations, inflation, changes in cost of goods sold? How? What are the rules? The third component of the price model is price regulators. What causes price changes for a specific customer or group of customers? Why do we take into account the customer's belonging to this group? You need to understand this for yourself and lay it out in clear rules. What can be a price regulator? Customer programs. How do prices vary depending on the type of customer? Example: loyalty programs, special prices for corporate clients, prices depending on the customer's geography or industry. Transaction incentives are discounts that stimulate transactions. For example, volume discounts, early booking discounts, and others. Fees and functional discounts. How is the price adjusted depending on the cost of servicing a specific customer or group of customers? Example: additional fees for special delivery conditions or discounts for self-pickup, or an extra charge for delivery to a parcel locker, for example. These are all the components of a pricing model. It may sound complicated, but if we write down all the elements and components of the pricing model in a simple table, it will be easier for us to understand which pricing model we are currently using and how we can change it. In which elements of the pricing model have we not yet decided? In which elements do we have some chaos, and how to fix this problem. Let's move on to the conclusions. Pricing is not accounting; it is not a price list. And certainly not approximately like competitors. Price is a strategic decision that determines who you are in the market, which customer you want to attract, what income you receive, what impression you leave. Price is a language. If your product is expensive, explain why. If it's cheap, show that it's not due to a lack of quality. If it's flexible, offer a choice. Recommendations. Know your cost of goods sold, which is not simple in reality. Research the market and customers, don't copy blindly. Understand your value and articulate it in a language understandable to the client. Create an architecture, not just a number on a price tag, but a system by which the price is determined in a specific sales channel for a specific customer group. Test and analyze. The best price is the one confirmed by the market. Price can attract or repel. It can destroy your business or make it scalable. It is not a digit; it is a signal. Speak clearly, earn confidently. You are studying on the "Long Game" project. And remember, knowledge is your profit. Yeah.