Pricing Basic Idea

1
Pricing -- Basic Idea

• Maximum price what customers will pay
• Key is perceived value
• Minimum price must cover relevant costs
• Main Idea
• Set Price at value level or below you have to
  cover costs

2
Pricing Parameters

max
Com. To Value
Relevant Costs
min
0
3
Relevant Costs

• Marginal
• Incremental
• Avoidable
• e.g. RD costs, when are they relevant?

4
Other Main Pricing Ideas

• Keep objectives in mind
• Profit maximization?
• Maximize market share?
• Build good will?
• Build barriers to entry?
• Keep price consistent with positioning
• Format prices consistent with customer
  expectations e.g. Bundled?

5
Pricing below maximum

• Build goodwill
• Induce trial
• Expand customer base
• Soak up market share
• Keep competition out
• Run down experience curve
• Dont know value-based price
• Use of cost-based approach

6
Pricing problem early in TALC

• Customers dont understand value reference
  prices can be way off mark, either high or low
• Still running development costs, which are still
  fairly uncertain

7
Solution to pricing problem

• Careful targeting to those who have perceived
  need and tangible budget
• Careful attention to costs cost plus pricing
  with development customers
• Later, value-based / competitive pricing
• Target using value/cost model

8
Value Cost Model for AnalyzingCustomers
Sales Value Score VC FC
Delivery Customer Service Value Score VC
FC
Cost Percentage percentage of either fixed (FC)
or variable costs (VC)
Value Score contribution to value for
customers customer 1 key component of
value 2 significant component of value 3
minor component of value
9
Pricing Information Products

• High initial costs, low marginal costs
• Value is not understood until experienced
• Low cost of reproduction by users translates into
  strange market dynamics e.g. Napster vs. ASCAP
• Versioning is fairly easy