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Price (Subject) / Price Analysis (Lesson)

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• Price management (Def & Process Steps) Price management is an activity in which companies define value propositions anddevelop approaches in order to extract value from their customers. 1) Price analysis 2) Price strategy formulation 3) Price calculation 4) Price implementation 5) Price controlling + support organizational implementation, IT & HR
• Companies define prices at different occasions § For new products and services: finding prices§ For existing products and services: price adaptation• Changes in costs, e.g. higher / lower costs of input factors• Changes in customers’ willingness to pay• Changes in competitor prices, e.g. price increases or price reductions
• Tasks in price analysis The price analysis process is divided into the following three subprocessesthat can be conducted simultanously: 1) Market analysis 2) Customer analysis 3) Cost analysis
• The market system Economic conditions Society Technology Legal framework Political structures and intentions Nature and infrastructure
• Information required Pricing decisions require a comprehensive understanding of the forcesthat shape the market, including • number of customers and competitors• positioning of customers and competitors• power constellations (e.g. Porter’s five forces)• competitive interactions,• technological developments,• legal opportunities and barriers, +The longitudinal evolution of prices +Cross-sectional studies at a certain pointin time: •Prices of products that are in directcompetition with a firm’s own products• Prices for substitutive products• Prices for complementary products• Prices for input resources and labour(supply market prices)• Prices paid by downstream customersof customers (channel prices).
• Sources of information • Advertisements: competitor ads in different media• Newspaper and magazine reports: articles by journalists• Panel market data: survey of customers and competitors• Price crawlers: Using bots to collect pricing data from e-commerce sites• Product testing laboratories: Stiftung Warentest and similar institutions• Lost- / Won-Order-Tracking: Analysing data from past tenders or offers• Industry associations: reports about price and sales figures• Competitive Intelligence: recruitment of a competitor’s former staff member
• Scanner data as source of price information Point-of-sale scanner data: are collected at cash registers and identify theproducts, quantities sold, and prices paid inparticipating stores. provide information on retailer demographiccharacteristics that are not available inhousehold scanner data. Only provide data for participating retailers andretail formats (blind spots because of nonparticipatingretail firms). Household-based scanner data: come from a sample of households that scanuniversal product codes (UPCs) of allpurchased products after each shopping trip. provide information on household demographiccharacteristics that are not available in storescanner data. because the household scanner data panelistsare instructed to scan all purchases from alloutlets, the datasets from household-basedscanner data are more complete than datasetsof purchases of individual households collectedthrough store scanner panels.
• Price Scraping process of using bots for competitive pricemonitoring and tracking other valuable information related to pricingintelligence from e-commerce and travel sites.Competitors employ this strategy to copy dynamic pricing information(which is one of the most important strategies used by e-commerce portalsto influence consumer-buying decisions and optimize revenue) in real-time
• Lost- / Won-Order-Tracking: • On business markets, companies often submit price offers(quotations, bids etc.) to potential customers.• The process is similar to an auction, but inversed (reverseauction)• Customers ask several possible suppliers to make bids• Based on prices from successful bids and unsuccessful bidsthe company can derive price thresholds and the market’swillingness-to-pay• Over time, it identifies prices that may allow to “win” orders
• Approaches to measuring perceived value and willingness-to-pay Methods: Observation research: Market Data:transaction data from point-of-sale scanner tills or panel dataPrice experiments: test markets or in-store experiments Survey research: Customer research: direct or indirect questionsExpert interviews: opinions of sales managers or external experts
• Advertisement
• In-store experiment (Store test) Definition: Experimental sale of new products under controlled conditions in selected shops Aim: Testing the effects of marketing measures (alternative prices, alternative forms of packaging, promotional activities, shelf placement etc.) Process:• Measurement of weekly sales• Several shops required for comparison between treatment group(s) and control group• Duration: 1 to 3 months (dependent on average purchase frequency in category) Characteristics+ Conditions can be well controlled- Publicly visible (competitors may interfere and bias results)- No test of broader advertising campaigns (TV, social media etc.)- Not representative for total market
• Test market GFK Behavior Scan Process:• Local test market representative for average German population• Combination of household (n = 3500) and retail panel• Test households have electronic shopper cards as ID• Sub-sample of consumers can receive targeted test TV advertising• Products and shoppers identified at scanner tills• Targeted media can be addressed at participating households Characteristics+ Marketing mix and purchasing behavior are tracked holistically+ Conditions can be well controlled- Expansive and complex to organize- Publicly visible (competitors may interfere and bias sales results)- Local market not representative for urban populations- Risk over over-testing the local population (limited validity of results)
• Direct versus indirect approaches (Description, Characteristics & Approaches) Direct questions Direct questions• Questions about consumer‘s price perceptions• Establishes (for a product or service):• consumers‘ WTP or• likelihood of purchase at different price points• Does not ask respondents to make choices• Does not include sales volume information --> • Simple to understand• Fast answering• Identifies reasonable price ranges• Leads respondents to focus on price• Often underestimates WTP Approaches• Open line pricing• Gabor-Granger method• Van Westendorp method• Price perception method
• Direct versus indirect approaches (Description, Characteristics & Approaches) Indirect questions Indirect questions• Forces respondents to make trade-off choicesbetween products or sets of attributes• Simulates purchasing decisions whereconsumers have clear choices• Identifies WTP for individual product or serviceattributes -->• Inclusion of competitor products and prices• Reveals price elasticity• More complex to conduct• Requires deeper methodological understanding Approach: Conjoint measurement
• Open line pricing Approach• Respondants are asked to indicate a minimumand a maximum price on a line scale• Option: Competitor prices may be shown asexternal reference prices (ERP) Questions• Please indicate on the line scale the positionthat represents a minimum price for product A• Please indicate on the line scale the positionthat represents a maximum price for product A Characteristics all same with direct questions: + Simple implementation+ Simple to analyse+ Competitor inclusion possible- Directs respondent attention towards price
• Gabor Granger method 2 Versions : Version 1: How likely is it that you would buy at x€?Version 2: Would you buy at x€? Approach• Direct questions concerning probability ofpurchases at different price points• Indicates the price level below whichcustomers have a WTP for the product/service Questions• How likely is it that you would buy product A ata price of ____ €? or• Would you buy product A at a price of ____ €?
• Van Westendorp method Approach• Direct questions concerning their perceptionsof different price points.• Mapping of percentages of consumers whowould buy vs. Would not buy.• Also called „price sensitivity meter“ Questions• Given the product/service and itscharacteristics, at what price would youconsider it to be• Too cheap to buy it ____ €?• Cheap, but you would buy it ____ €?• Expensive but you would buy it ____ €?• Too expensive to buy it ____ €? IDP = Indifference Price Point (cross of 2,3)• Point at which the same percentage of customers feel that the productis getting too expensive as those who feel it is at a bargain price.• This is the point at which most customers are indifferent to the price.• This price is similar to consumers‘ internal reference price. OPP = Optimum Price Point (cross of 1,4)•Point at which the same percentage of customers feel the product is too expensiveas those who feel it is so low that the quality is questionable. PMC = Point of Marginal Cheapness (cross of 1,3)• Price point where more sales would be lost because quality is questionable thanwould be gained from ‘bargain hunters’. PME = Point of Marginal Expansiveness (cross of 2,4)• Price point above which cost is a serious concern, where it is felt that the product istoo expensive for the value derived from it. RAP = Range of Acceptable Pricing• The difference between the PMC and the PME. y-Achse: % of all respondentsx-Achse: Preis
• Price perception method Approach• Respondents rate different price pointsusing a scale ranging from „overpriced“ to„a higher price would be acceptable“• Allows identifying a price range ofacceptable prices. Questions• How would you rate product X at a price of____ €? Overpriced 5Pushing the upper limit 4Expensive but still OK 3Price is justified 2A higher price would be acceptable 1
• Conjoint measurement • Conjoint measurement is a group of statistical methods (there areseveral alternative methods how to conduct conjoint measurement)• They all aim to measure preferences for product attributes (such asdifferent sizes, colours, or price levels)• They either ask the respondent in a conjoint study to select his/herprefered combination of attribute levels or they ask them to express theirlevel of preference for combinations of attribute levels.• Conjoint analysis allows calculating „part worths“ (or utilities) for differentattribute levels à answers the question how much value a customersees in a specific level of an attribute (e.g. green colour as opposed tored or silver for a car model). -->Every product or service can be decomposed into its building blocks (attributes or value drivers)--->Every attributes has several levels (Attributes can be either quantitative (price, fuel consumption etc.) or qualitative (brand, engine type etc.)) --> Among all available offerings, customers prefer the one providing the overallbest value proposition for satisfying a given set of needs. The overall perceived value of an offering is the sum of all weighted perceived partial values
• Cost information for pricing decisions (Cost analysis) Cost information comprises monetary values used for calculating prices. Ex ante :Before transactions, companies calculate with planned (estimated) costsEx post: After transactions, companies control performance based on real costs. Problems may result from price variations for input factors. Possible cost figures:• purchasing prices and salaries/wages paid in the recent past,• average purchasing prices of past x periods,• current market prices,• expected future market prices, The choice for the use of specific cost figures should depend uponthe company‘s market (dynamic vs. stable) and its objectives. Market and customer analysis need to be complemented by cost analyses.The basic information required is the company‘s lower price limit. Basics of cost-plus calculation: pi = Ci x (1 + ri / 100) Ways of determining costs:• percentage-based cost distribution• activity-based costing
• Marketing models - Functional relationships between marketing variables • The output of a marketing function (y-axis, dependent variable) canbe constituted by any objective that marketing managers may aimto achieve (customer satisfaction, market share, sales, number of newcustomers, customer penetration rate etc.)• The input of a marketing function (x-axis, independent variable/s)can be constituted by any variable that the researcher suspects tohave a relevant impact on the dependent variable (frequency ofadvertising, number of shops, distribution rate, price, number of salesreps, customer’s age, education level, household size, income etc.)• The function links inputs to outputs (relationship between x and y)• The function may comprise a starting level (parameter a)• The mathematical linkage of variables included in the function willdefine the shape of the line or curve
• Price, sales and revenue - The price-sales function • Price is a parameter that marketing managers can influenceHence, it is an independent variable • Quantity sold (sales) depends on customers’ reactions to priceHence, it is a dependent variable Price functions describe the relationship between price and sales orother potential dependent variables such as turnover, profit or costs q = a + bp How price functions are established:- Collect data about prices set by company- Collect data about sales volumes at different prices- Estimate function using statistical method (regression analysis)- Draw graphSources of data:- Field data (own sales data, panel data from market researchinstitutes etc.)- Experiments (test shops, laboratory experiments etc.)
• Price, sales and revenue - Definition: Price elasticity Price elasticity measures the responsiveness, or elasticity,of a product’s sales volume to a change in its price. Example:Price increase from 80 € to 84 € (+5%)Quantity demanded decreases from 900.000 pcs. to 810.000 pcs. (-10%) Price elasticity (e ) = % change in quantity demanded/% change in price = -2In this example, change in quantity is twice as high as the change in price.Formula for price elasticity usually yields a negative valueThe higher , the stronger the reaction of demand to changes in price
• Price and costs - Costs as a function of quantity produced (a) linear and (b) degressively increasingtotal cost function and their marginal cost functions: Costs as a function of pricePrice-cost function and marginal cost function for a linear price sales model:
• Price and profit - calculating profit PR = Revenue – CostsPR = q · p – Cf – CvPR = q · p – Cf – cv · qBecause q = a + b·p the profit function is:PR = (a + b·p) · p – Cf – cv · (a + b·p)

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