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Background
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Price is not just a number on a tag
Price comes in many forms. Rent, tuition, fares, fees, rates, tolls, retainers, wages, and commissions are forms of price customer pays.
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Price is made up of many parts When you buy a new car, the sticker price may be adjusted for • • • • • •
Rebates Dealer discounts Add on accessories Insurance Finance fees Taxes
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Price Matters Traditionally, price has been the major determinant of a buyer’s choice. And this is still the case with large segments of buyers across the globe.
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Price Matters Competitive pressures together with dynamic consumer behavior and changing structure of channel members have resulted in a market place that is characterized by heavy discounting and sales promotion.
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Pricing is a Headache! Executives complain that pricing is a big headache – and one that is getting worse by the day. Many companies do not handle pricing well and throw up their hands with ‘strategies’ such as this: “We determine our costs and take our Industry’s traditional margins.”
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Pricing is it is practiced A linear single dimensional approach to pricing is inadequate and risky. Such an approach models a complex and dynamic real life situation through static and simplistic analogues. Almost all existing models for pricing are unidimensional and linear
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Pricing : What we do different M-Price is a multi dimensional dynamic approach which creatively combines four different well established analytical tools to yield advice on price, which is, objective linked and risk optimized.
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The key approaches and proven techniques Technique of Conjoint Analysis is used to find what features and price combination will be most desirable for the target market. What should be the price range within which, optimal price should be explored?
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The key approaches and proven techniques Purchase decisions are often based on what consumers consider the current actual price to be – not the marketer’s stated price. Customers may have a lower price threshold below which prices signal Inferior or unacceptable quality, as well as in upper price threshold above which prices are prohibitive and seen as not worth the money. This paradigm is explored through the well established Van Westendorp methodology
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The key approaches and proven techniques Competitive pressures make it mandatory that our offering is viewed as delivering the best, value- price pay off in the competitive scenario. Metric’s proprietary MOSTER system, advances on the core analysis developed by Researchers at GE.
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The key is in synthesis The data collected from primary and secondary sources and collated through conjoint analysis, Van Westendorp curves and Relative Value Maps is then integrated in econometric models based on Hedonic pricing models and Almost Ideal Demand System (AIDS) to arrive at dynamic demand curves. The demand curves are mathematically analyzed to arrive at profit maximizing price, sales value maximizing price, sales quantity maximizing price for each market segment
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Feature Price Combination Conjoint Analysis
Upper & Lower price thresholds Van Westendorp
Competitive Positioning Relative Value Map
Price Range for further exploration
Narrowed Optimal Price Range
Price policy to gain competitive edge.
Econometric Models Glamorous Models Just Ideal Price Models Dynamic Demand Curves Quantity Sold Maximizing Price
Sales Value Maximising Price
Profit Maximizing Price
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Applicable for all products and services which are branded and differentiated For Example • Automobile – (Cars, Buses,) • White Goods (Air Conditioners, Refrigerators) • Electronic entertainment products (Radio, TV,) • Mobile telephony service • Insurance service • Newspaper • Food products (Jams, Cheese) • Shoes & apparels • Hand sets Not applicable for: • Investment goods • Unbranded commodities • Very small value products with very small interval between repeat purchase (e.g. Soft Drinks) • Addictive products (e.g. Tobacco)
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Conjoint Analysis to find desirable price range for a desirable feature combination for each market segment
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Typical attributes of a value proposition for • The reputation of the supplier Industrial Product
Prioritize these attributes to identify the key Value Drivers
• • • • • • • • • • • • • • • • • • • • • •
Reasonable credit control Professional knowledge of the sale person Initiative of the sale person Creditability of the sale person Professional manner of the sale person The consistent quality of the product The economy of the product Operational Training Quality/price ratio of the product Warranty period The quality of the parts &service products The unification of the parts The price of the parts &service products The service fee The ability to solve problem The response time of the service The service attitude of the engineers The network/area coverage of service The delivery time of the product The delivery time of the parts Logistical flexibility of the product Logistical guarantee for parts
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Thinking about next time you buy this brand, select the option that describes the option you would most likely to buy Spare part Spare part Spare part availability availability availability Modest within 36 hours within 8 hours Application support not available Warranty Period 36 months
Reasonable Application support available Warranty Period 24 months
Excellent Application support available Warranty Period 12 months
Product Delivery Ex stock
Product Delivery 15 days
Product Delivery one month
Price Eu 5400
Price Eu 6,000
Price Eu 6,400
I would not buy any of these
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Relative Value Map (RVM) RVM takes a ratio of price satisfaction and quality satisfaction and analyzes relative competitive strength of each player in the market segment. This is based on Metric’s internationally popular Moster® system
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Theoretical basis A Delight Attribute Higher performance of these attributes generates delight for the stakeholder
For example Value Added Service
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Threshold Analysis based on Moster System Performance
Delight Delight
Loyal Volunteers positive word
Threshold Critical zones
Satisfaction
Dissatisfaction Threshold
Dissatisfaction Will never BUY again
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Price Satisfaction
Relative Value Map B D A
Equal Value Line
C
Quality Satisfaction M- Price®
Econometric Models
The Econometric models, estimated through maximum likelihood ratio method yield demand curves combining different class of inputs. We use the state of Art Hedonistic Price Models (HPM) & Almost Ideal Demand Systems (AIDS)
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Hedonic pricing model A hedonic model of prices is one that decomposes the price of an item into separate components that determine the price. A hedonic model does not necessarily separate all the factors that could be separated, only those that affect the usefulness to a buyer of what is being sold.
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Hedonic pricing model
One use of Hedonic Models is to adjust measures of inflation. The difference this makes is most significant for products that are not directly comparable with those that were sold in the past because technology has improved.
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Consider an entry level personal computer bought today compared with one bought ten years ago: the price is not greatly different, but it is much cheaper than the price of a similar computer bought ten years ago. The adjustment that is needed is more complex than it may appear, as it should reflect the increase in usefulness (strictly speaking utility) of a product to customers. A computer that is ten times more faster with ten times as much memory etc. is not necessarily ten times more useful to a customer, and it is the increase in usefulness that is being measured. The actual Hedonic Modelling can be quite complex, as shown by the description witch follows
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Hedonistic Price Models (HPM) Uh = g (x) + ∑ aih (cn) g(zi) + 0.5 ∑ ∑ bij .g(zi) Uh
is Utility
x
is Expenditure
zi
is Product Features
cn
are Market segment Characteristics
g, a, b are system characters
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An Almost Ideal Demand System Model (AIDS) The Almost Ideal Demand System (AIDS) model of Deaton and Muellbauer has enjoyed great popularity in applied demand analysis. Starting from a specific cost function, the AIDS model gives the share equations in an n-good system as
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where wi is the share associated with the ith good, is the constant coefficient in the ith share equation, is the slope coefficient associated with the jth good in the ith share equation, pj is the price on the jth good.
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X is the total expenditure on the system of goods given by
in which qi is the quantity demanded for the ith good.
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P is the price index defined by
that gives rise to the linear approximate AIDS (LA-AIDS) model. In practice, the LA-AIDS model is more frequently estimated than the nonlinear AIDS model.
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METRIC METRIC Consultancy (UK) Limited 211, Tollgate Road, Beckton, New Ham , London, E6 5XW Phone :020 7474 7886
Email:
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