Notes on Pricing Decisions
Notes on Pricing Decisions
In this note, we will discuss the pricing of a given product or a service. We will only discuss the pricing of an individual product/service and not the pricing across a set of products in a product line. Thus in the discussion that follows, we assume that the pricing decision of the product/service under consideration has no bearing on the profitability of other products/services in the portfolio of the firm.
1. Overview of the Pricing Decision:
While making the pricing decision, it is assumed that the product is given to us. Thus as a first step, we eliminate all those segments/customers who will not buy the product regardless of the price that we charge. For instance, consider the Land Rover case in which the Rover group was to introduce Discovery in the market. Thus we will first eliminate all those segments who will not buy Discovery regardless of the price that we charge. This elimination is done by doing the matching exercise, in which we match the attributes of Discovery with all the important value drivers of the customers except the price. For instance, if Land Rover was to introduce Discovery, the eliminated segments will be (a) the Family segment, since Discovery does not satisfy their important value drivers of interior space, reliability and fuel efficiency, and (b) the Older Traditionalist segment, since Discovery does not satisfy their important value drivers of luxury and exclusivity. Thus by the end of this step, we are left with the Young Adults segment, which we call the broad horizontal segment. Similarly, consider another example where Dell was to introduce a 7lb 3GHz Laptop in the market. Thus, we will first eliminate all those segments that will not buy Dell’s laptop regardless of its price. These eliminated segments will be (a) Mac users, who do not like the Windows OS, (b) Desktop users who see no use in buying laptops, (c) frequent business travelers, for whom7lbs is way too heavy etc. By
In this note, we will discuss the pricing of a given product or a service. We will only discuss the pricing of an individual product/service and not the pricing across a set of products in a product line. Thus in the discussion that follows, we assume that the pricing decision of the product/service under consideration has no bearing on the profitability of other products/services in the portfolio of the firm.
1. Overview of the Pricing Decision:
While making the pricing decision, it is assumed that the product is given to us. Thus as a first step, we eliminate all those segments/customers who will not buy the product regardless of the price that we charge. For instance, consider the Land Rover case in which the Rover group was to introduce Discovery in the market. Thus we will first eliminate all those segments who will not buy Discovery regardless of the price that we charge. This elimination is done by doing the matching exercise, in which we match the attributes of Discovery with all the important value drivers of the customers except the price. For instance, if Land Rover was to introduce Discovery, the eliminated segments will be (a) the Family segment, since Discovery does not satisfy their important value drivers of interior space, reliability and fuel efficiency, and (b) the Older Traditionalist segment, since Discovery does not satisfy their important value drivers of luxury and exclusivity. Thus by the end of this step, we are left with the Young Adults segment, which we call the broad horizontal segment. Similarly, consider another example where Dell was to introduce a 7lb 3GHz Laptop in the market. Thus, we will first eliminate all those segments that will not buy Dell’s laptop regardless of its price. These eliminated segments will be (a) Mac users, who do not like the Windows OS, (b) Desktop users who see no use in buying laptops, (c) frequent business travelers, for whom7lbs is way too heavy etc. By