Product Line Pricing:
Price products at different levels within the same product line.
Consider cost differences, customer perception, and competitor pricing.
Example: Apple pricing its MacBooks by performance and features (Air, Pro, Pro Max).
Optional Product Pricing:
Base product priced separately; add-ons offered for extra charges.
Example: Airlines charging for checked baggage, extra legroom, or meals.
Captive Product Pricing:
Low price for the main product, high prices for required secondary products.
Example: A gaming console is affordable, but games and accessories are expensive.
Product Bundle Pricing:
Combine multiple products at a reduced price.
Encourages sales of less popular items.
Example: Cable providers bundling TV, internet, and phone services.
Value-Based Pricing:
Price reflects perceived value to the customer.
Use tools like the Improvement Value Method or Cost of Ownership Method.
Example: LED bulbs cost more but last longer, offering greater value over time.
Cost-Based Pricing:
Price = Cost + Markup (%).
Easy to calculate but ignores demand and competition.
Example: Selling a widget for $12 after adding a 10% markup to its $10 cost.
Competition-Based Pricing:
Price determined by competitors' pricing strategies.
Useful when products are similar and price-sensitive.
Market Skimming Pricing:
High initial price to maximize profit from early adopters.
Gradually lower price to attract price-sensitive customers.
Example: New tech gadgets are priced high during launch.
Market Penetration Pricing:
Low price to gain market share quickly.
High-risk due to initial low profits.
Example: Streaming services offering cheap subscriptions at launch.
Marketing Channels:
Path products take from production to consumption.
Includes manufacturers, wholesalers, retailers, and customers.
Direct Channels: Manufacturer sells directly to consumers.
Indirect Channels: Use intermediaries like wholesalers or retailers.
Multi-Channel Distribution:
Companies use multiple channels to reach different customer groups.
Example: Apple sells online, in its stores, and through third-party retailers.
Breadth of Distribution:
Intensive Distribution: Available everywhere (e.g., soft drinks).
Selective Distribution: Limited outlets for specialized products (e.g., designer clothing).
Exclusive Distribution: One or few outlets (e.g., luxury cars).
Service Levels:
Self-Service: Customers handle their own shopping (e.g., supermarkets).
Limited Service: Some assistance provided (e.g., department stores).
Full Service: Personalized service for premium products (e.g., luxury stores).
Product Line Breadth and Depth:
Specialty Stores: Focus on specific categories (e.g., shoe stores).
Department Stores: Wide variety, divided into departments.
Supermarkets: Groceries and household goods.
Convenience Stores: Small, quick-access items (e.g., gas station shops).
Relative Pricing:
Discount stores, off-price retailers, factory outlets, warehouse clubs, and premium stores.
Organizational Structure:
Corporate-owned, independent, or franchises.
Determines the point where revenue equals total costs.
Formula: Fixed Costs ÷ (Price - Variable Costs).
Example: A hotel with $100,000 fixed costs and $40 profit per booking breaks even after 2,500 bookings.
Definition: Total profit a company expects to earn from a customer over their relationship.
Key Metrics:
Acquisition cost.
Retention rate.
Average customer profit.
How to Improve LTV:
Better targeting, reduced costs, and improved retention.
Improving Response Rates:
Use targeted messaging and appropriate media.
Reducing Acquisition Costs:
Focus on cheaper marketing channels.
Increasing Retention:
Address dissatisfaction, offer loyalty rewards.
Volvo Truck Advertising:
Ad cost: $2.7M.
Profit per truck: $12K.
Break-even units: 225 trucks.
Result: Sold 266 trucks, generating $32M in revenue.
Kindle Fire Pricing:
Sold at a loss but profited through content sales.
Formula:
Unit Cost = (Fixed Costs ÷ Units Produced) + Variable Costs per Unit
Explanation:
This formula calculates the cost of producing a single unit of a product, taking into account both fixed costs (e.g., rent) and variable costs (e.g., materials and labor). Fixed costs are divided by the number of units produced, and the variable cost per unit is added.
Formula:
Price = Unit Cost × (1 + Markup %)
Explanation:
This formula sets the selling price based on the unit cost and desired markup. Markup is the percentage added to the unit cost to ensure profitability. For example, if the unit cost is $10 and the markup is 20%, the price will be $10 × (1 + 0.20) = $12.
Formula:
Break-Even Units = Fixed Costs ÷ (Price per Unit - Variable Cost per Unit)
Explanation:
This formula calculates the number of units that need to be sold to cover all fixed and variable costs. Fixed costs are the same regardless of how many units you produce or sell, while variable costs change with each unit. The result tells you how many units must be sold to break even.
Formula:
Break-Even Units (with Target Profit) = (Fixed Costs + Target Profit) ÷ (Price - Variable Cost)
Explanation:
This formula extends the basic break-even formula by including a target profit. It calculates how many units you need to sell to cover both fixed costs and achieve a specific profit. For example, if your fixed costs are $100,000 and you want to make $50,000 profit, you will need to sell more units than the basic break-even point.
Formula:
LTV = (PV of Future Profits - Acquisition Costs) ÷ Number of Acquired Customers
Explanation:
Lifetime Value (LTV) measures how much profit a company expects to make from a customer over the entire duration of their relationship. This formula helps businesses understand how much they should spend to acquire customers and how much a customer is worth over time.
Formulas:
Incremental Benefit = Improvement Value × Benefit Weight
Final Price Increase = Sum of Incremental Benefits × Benchmark Price
Explanation:
This method calculates the perceived value of a product improvement. The "Improvement Value" is how much better the new product is compared to an existing one. The "Benefit Weight" assigns a percentage value to each feature (e.g., battery life). The final price increase is based on the total benefit from improvements.
Formula:
Final Price = Benchmark Price × Relative Ownership Cost Ratio
Explanation:
This method focuses on the total cost of owning a product over its lifetime. The benchmark price is the price of a standard product, and the relative ownership cost ratio compares the ownership costs of the improved product (e.g., an LED bulb vs. a regular bulb). This formula calculates the final price based on long-term savings or costs.