Pricing for Management Consultants & Business Analysts

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Pricing for Management
Consultants
A Practical guide on how to analyze pricing and
find optimal solutions

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Consulting firms sometimes help optimize pricing. You have to be very careful in this sort of
projects because a small change may have a huge impact both on topline and bottom-line.

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Analyzing changes in pricing is not easy as you have to take into account the
relations between the products and the long term impact on the customer behavior

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In this course I will teach how to perform fast and
efficiently different types of analyses related to pricing.

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This presentation will help you analyze current
prices and find optimal pricing on the level of
top consulting firms

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How the presentation is
organized

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In business you have to make a lot of important decisions
In this course I will teach how to analyze fast and efficiently pricing during
consulting projects. You will also learn the essential concepts useful in pricing

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Price Setting Techniques Price Perception
Essential Concepts in
Pricing
Pricing in B2B Services
Pricing in Consumer Goods
& Retail

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What you will see in this presentation is a part of my online course where you
can find case studies showing analyses along with detailed calculations in Excel
Pricing for Management Consultants &
Business Analysts
$190
$19
Click here to check my course

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Essential Concepts in Pricing

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Essential Concepts in Pricing
– Introduction

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Pricing is pretty difficult as it has a lot of impact on the strategy, consumer satisfaction and most
of all on the profits of the firm. We will start by looking at the essential concepts in pricing

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Psychological aspects of
the price
Pricing Components
Why Pricing is so
important?
Pricing Elasticity
In this section we will discuss the following elements

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It is a profitability driver
affecting the top line
It is an image or positioning
lever
Price impacts customer
lifetime value (LTV)
Can be used to achieve
strategic / tactical goals
Will change during the
product life cycle
Price has a lot of different meanings

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The good thing about the price is that you can achieve much more by lifting the
price than just cost cutting. Below a nice example
Cost decrease by 10% Price increase by 10%
Base situation
Volume
 300 K units  300 K units  300 K units
Price
 $ 30 / unit  $ 30 / unit  $ 33 / unit
Unit cost
 $ 15 / unit  $ 13.5 / unit  $ 15 / unit
Fixed cost
 $ 100 K  $ 90 K  $ 100 K
Profit
 $ 4.4 M  $ 4.9 M  $ 5.3 M

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Pricing quite often depends on the value / benefit that the customer gets from
the product. There are 3 main options
Monetary
Benefit
 I bought this because I believe if
offers a great value for money
 I bought this because I believe it
was so damn cheap
Customer approach Examples of such products
 Private label products
 Entry price products
Approach to pricing
 Low price strategy aimed at market penetration
and high margin volume instead of high unit
margin
 Usually less demanding mass market or the
customer of low-cost players
 The main competitive tool is pricing
Utilitarian
Benefit
 I bought this product as it fully
meets my needs
 Customized built-in wardrobe in
a small apartment that enables
to fully use the scarce space
 Medium to high price strategy
 More demanding segments of the mass market
 The main competitive tools include quality and
functionality, to a lesser extent price
Psychological
Benefit
 I bought this because it
represents me / my status
 I bought this because having it
makes me feel good
 BMW / Audi / Ferrari vs Toyota  High to outrageous prices aimed to achieve high
unit margin
 The most demanding market segments, very
often niche markets
 The main competitive tools include quality and
prestige, almost never price

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The price also has to be perceived as fair. A fair price must be expressed by the
right numbers – it is all about perception:
Ending of the
price
 Research indicates that prices ended with 0, 5, 7, 9 are viewed as more natural; for example the price of USD 8.76
looks weird and is perceived as weird
Description
Decimal part
 For prices in excess of USD 10.00, sometimes even for prices in excess of USD 100.00, decimals of 0.99 are viewed as
natural; there is no statistically significant difference between the perception of 5.90 and 5.99 so why leave o.09 on
the table?
 Typically for prices in excess of USD 100.00, decimals of 0.90 or 0.95 are better perceived than for example 199.99;
the latter could be viewed as a proof of the sellers' greed and as such might not be liked by customers
 The higher the price, the fewer decimals; it is better to price 599.00 than 599.90
High prices
rules
 For high end products or professional services prices should be ‘rounded’; a lawyer who charges 999.00 per hour is
perceived as inferior to the one who charges 1000 per hour; it looks like the former’s services are on sale now; also, it
is better to price a high end TV 4900.00 than 4999.00 unless we want to underline the sale / promotional nature of
the price

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On top of that a price is fair if it looks so on customer’s mental pricing scale;
this mental pricing scale is affected by several factors:
Prior experience
How much other paid
Recollection of price promo
Brand perception
Common sense
Comparison
Sale

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How we charge the
customer?
How the price is presented
to the customer
Regular Price Level
Discounting Policy /
Promotion Policy
Pricing Policy Price Awareness
When we are talking about prices we have to remember that there are
different concepts involved
Price Perception Price Setting Techniques

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Let’s start with a short definition
 Shows how the demand will change if you move the price
 It gives the percentage change in quantity demanded in response to
a 1% change in price
Price Elasticity of
demand
=

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To measure the price elasticity we use the following formula
% Change in Demand
Price Elasticity =
% Change in Price

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Let’s have a look at an example
1 000
10
2 000
8
1 000
-2
Current Level Future Level Difference
100%
-20%
% Difference
% Change in Demand
Price Elasticity =
% Change in Price
100%
=
-20%
= - 5
Price
Demand

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Price Elasticity will impact what you should do with the price
Price Elasticity = 0
 The demand is highly inelastic
 In other words the demand does not react to price changes – is fixed
 You can increase the price as much as you want
Price Elasticity < 1
 The demand is inelastic
 The demand is moving slower than the change of price
 The reaction of the demand is not as strong as the change in prices
 It may make sense to increase the prices
Price Elasticity > 1
 The demand is elastic
 The demand is changing more than the change of the price
 The reaction of the demand is much stronger than the change in prices
 Under certain conditions it may make sense to decrease the prices

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Check the video for more details
Click here to go to the video

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Price Setting Techniques
– Introduction

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Now let’s have a look at different ways to set prices. We will briefly go through the theory, but we
will mainly concentrate on short case studies that will help you understand different techniques.

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Value Based Pricing
Price Points & Price
Segmentation
3 Approaches to Pricing
Price Bundling
Complementary Product
Pricing
Unbundling Pricing
Price Change in the Product
Life Cycle
Price Discrimination Dynamic Pricing

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There are 3 main approaches to price setting. We will discuss how they differ,
when you use them and what are the pros and cons of every approach.

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Let’s see the 3 approaches
Pricing Approach
Cost-plus pricing Value-Based Pricing Competition Based Pricing
 You first calculate the cost of
producing, delivering, marketing
and selling the product or the
service
 You assume margin you want to
earn (as a percentage or per unit)
 You use the costs and the
assumed margin to calculate the
price for the customer
 You disregard costs altogether
 You estimate what value your
product or a services generates
for your customer. This is done
usually in money
 You use the value estimation to
determine the prices of the
product / service
 The value may differ for different
groups
 Therefore the price may also
differ for different consumers
 In this approach you mainly look
at the price of already existing
products offered by your
competitors
 The price may be at the same
level, below current competitors
or above them

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Let’s have a look a short example
Pricing Approach
Cost plus pricing Value Based Pricing Competition Based Pricing
Cost of the product = 10
Margin per product = 4
Average value for the customer
= 40
Competitors price = 20
Cost plus price = 14
Value Based Pricing
= 40
Competition Based Pricing
= 20

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Now let’s try to present it on a graph
Price of a product using different approaches
In USD per 1 product
10
14
40
20
Cost of the product Cost plus price Value Based Price Competitor Based Price

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How you can do Value-based
Pricing

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Just as a reminder there 3 approaches
Pricing Approach
 You first calculate the cost of
producing, delivering, marketing
and selling the product or the
service
 You assume margin you want to
earn (as a percentage or per unit)
 You use the costs and the
assumed margin to calculate the
price for the customer
 You disregard costs altogether
 You estimate what value your
product or a services generates
for your customer. This is done
usually in money
 You use the value estimation to
determine the prices of the
product / service
 The value may differ for different
groups
 Therefore the price may also
differ for different consumers
 In this approach you mainly look
at the price of already existing
products offered by your
competitors
 The price may be at the same
level, below current competitors
or above them

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We will mainly concentrate on the Value-based Pricing
Pricing Approach

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There are some ways in which you can implement Value-Based Pricing
Pricing Approach
Cost plus pricing Value-Based Pricing Competition Based Pricing
Similar products with different
price points (i.e. fashion, food)
Basic products with potential
paid upgrades (i.e. cars,
airlines)
1 price but discounts for
specific groups of customers
Use value metrics to estimate
the price (i.e. SaaS)
Dynamic Pricing (i.e. Airlines)
Multiple prices for the same
products (i.e. e-commerce)

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Value Based Pricing – Process

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Implementing the value-based pricing is a 5-step process
Define Customer
Segments
Estimate their
willingness to pay
Pick the mechanism
to implement value-
based pricing
Test the mechanism
on a sample
Implement after
finding the optimal
solution
 Carry out market
research
 Divide the market
into segments,
buying personas
 Try to estimate the
size of the
segments
 Map the
competition for
every segments and
their prices
 Pick segments you
are targeting
 For selected
segments test the
willingness to pay –
how much they are
happy to pay for
your product /
service
 Select the
mechanism to set
the price close to
the deliver value
 Present the product
/ services with the
selected
mechanism and the
price points to a
sample of
customers from
your segments
 Modify the
mechanism and the
price level using the
feedback
 Implement the
optimal solution
everywhere

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How to check willingness to
Pay

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Checking the willingness to pay can be described using a 5-step process
You carry out a
survey among
customers from your
segments
Create a map using
their responses
Determine the
potential price range
Test specific price
points
Implement after
finding the optimal
solution
 You ask them at
what price they
would consider the
product to be: too
cheap, too
expensive, cheap
but good value for
money, expensive /
high side
 For selected
segments test the
willingness to pay –
how much they are
happy to pay for
your product /
service
 The optimal price
range will be in the
middle of the graph
 You want your
prices to target
center mass where
customers find
value from your
product, don’t
consider it too
cheap, but still
consider it a good
deal
 Pick a specific point
within the selected
price range
 Test the price
points on a sample
of customer
 Implement the
optimal solution
everywhere

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Let’s have a look at the questions you may to determine the willingess
to pay
Too cheap
 At what price would you consider the product to be priced so low that
you would feel the quality couldn’t be very good?
Example of quetions to be asked
Cheap / Value for
money
 At what price would you consider the product to be a bargain—a great
buy for the money?
Expensive / High end
 At what price would you consider the product starting to get expensive,
so that it is not out of the question, but you would have to give some
thought to buying it?
Too Expensive
 At what price would you consider the product to be so expensive that
you would not consider buying it?
 10
 20
 30
 60
Example of answers

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0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0 40 80 120 160 200 240 280 320 360 400
Too Cheap Cheap / Good Value Expensive / high end Too Expensive
Let’s have a look at an example of responses we got for a product
% of responses
Price Points

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0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0 40 80 120 160 200 240 280 320 360 400
% of responses
Price Points

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0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0 40 80 120 160 200 240 280 320 360 400
% of responses
Price Points

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0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0 40 80 120 160 200 240 280 320 360 400
% of responses
Price Points

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0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0 40 80 120 160 200 240 280 320 360 400
% of responses
Price Points

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How much value you should
leave

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In Value Based Pricing you set the prices using the value that the product gives your
customer. We will talk briefly about the customer surplus that you should leave.

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 This is the difference between the value that the customer
experiences and the price he paid for the product
 The customer surplus will differ for every customer as his
perception of the value will be different
 When you set the price using the value-based approach you want to
leave some customer surplus so that the customer does not feel
cheated, taken advantage of
Customer Surplus =

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Let’s have a look at a few examples of the relations of value and price for
products. In the case of Product A you can consider increasing the price
20
5
15
Value Price Consumer Surples
Product A – comparison of the value and price

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In the case of Product B the price leaves pretty decent consumer surples
20
15
5
Product B – comparison of the value and price

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In the case of Product C the consumer surples is too small and we are creating
opportunities for competitors to enter
20 19
1
Product C – comparison of the value and price

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In the case of Product D we have negative consumer surples. The customer still
buys but he will definitelly leave us at first opporunity
20
25
5
Value Price Negative Consumer Surples
Product D – comparison of the value and price

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Price Points & Price
Segmentation

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In many cases, similar products are available at different prices next to each
other in the same store. Those different prices we call price points.

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In many cases, similar products are available at different prices next to each
other in the same store. Those different prices we call price points.

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Let’s have a look at example of T-shirts
$ 5 $ 10 $ 19 $ 29 $ 199 $ 599
Price Points
Type of
products
 Basic 1-color
T-shirt from
fashion
discounter
 1 Color T-shirt with
statements or
pictures
 Branded, limited edition T-
shirts supported by celebrity
 Luxury brand T-shirts
 Branded multicolor T-shirts with statements,
pictures and additional functionalities
Segments Segment A
Segment B
Segment C
Segment D
Segment E
Segment F Segment F

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As a producer you may decide to occupy different price points
Producers Fashion Discounter
Fast Fashion
Boutique Producers
Luxury Brands
Hypermarkets
General Marketplaces
$ 5 $ 10 $ 19 $ 29 $ 199 $ 599
Price Points
Type of
products
 Basic 1-color
T-shirt from
fashion
discounter
statements or
pictures

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At some point you may also decide to expand or shorten the price range
Producers Fashion Discounter
Fast Fashion
Boutique Producers
Luxury Brands
Hypermarkets
General Marketplaces
$ 5 $ 10 $ 19 $ 29 $ 199 $ 599
Price Points
Type of
products
 Basic 1-color
T-shirt from
fashion
discounter
statements or
pictures

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You can also use the price point analysis to identify potential gaps
where you can introduce new products
# of SKUs 100 2 50 150 10 20
$ 5 $ 10 $ 19 $ 29 $ 199 $ 599
Price Points
Type of
products
 Basic 1-color
T-shirt from
fashion
discounter
statements or
pictures

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Coffee New Price Points
– Case Introduction

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Let’s see what will be the impact on the Margin of
introducing new price points in a coffee shop chain

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A few information about the chain
100 location in Eastern Europe
Currently, they sell 2 sizes
They want to introduce 3rd size
Estimate the impact on Gross
Margin

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Complementary Product
Pricing

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Certain needs require the customer to buy a few products together
to fulfill his needs. Those products we call complementary.

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Car
Let’s have a look at some examples. A good examples is a car related products
Basic Product Complementary Products
Spare Parts
Fuel / Electricity
Maintenance Service

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Razor
Similar situation we have in the case of shaving
Blades
Shaving cream / foam
Aftershave

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Coffee Machine
Similar situation we have in the Nespresso
Capsules

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In case of complementary products you have 2 options when it comes
to pricing
Prices every product separately
 In this case you disregard the fact the
demand for one is connected to the
demand of the other complimentary
products
Price product jointly
 In this case you take into account the
connections and you want to maximize
the profit

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Let’s have a look at a short example of video game consoles
Video game console
 400
Games
 50
Price per unit
 350  10
Full costs per unit
 50  40
Profit per unit
 1  20
# of units you buy in 4 years

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The profit per 1 player can be show in the following way
Profit from the console + Profit from the games
=
Total Profit from 1
customer
Profit from the games = Profit per 1 game x
# of games that the
customer buys
Total Profit from 1
customer
Profit from the console +
= Profit per 1 game x
# of games that the
customer buys
850 50 +
= 40 x 20

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If I lower the price of console by 100 assuming I will make players buy more
games I will get higher profit per 1 customer
Total Profit from 1
customer
Profit from the console +
# of games that the
customer buys
850 50 +
= 40 x 20
950 -50 +
= 40 x 25

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On top of that you can have an increase in the overall profit because you will
attract more players
# of customers x
Total Profit from 1
customer
=
Total Profit from all
customers
10 M x 850
=
8 500 M
10 M x 950
=
9 500 M
12 M x 950
=
11 400 M

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In some cases you also change the price of the complementary product to get a
higher price
Total Profit from 1
customer
Profit form the console +
# of games that the
customer buys
850 50 +
= 40 x 20
1 200 -50 +
= 50 x 25

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Let’s sum up the tactics when it comes to complementary products
Tactics
Lower the price of the basic
product to increase the demand for
complementary products
product to attract new customers
product and increaser the prices of
complementary products
 Price of basic product is decreased
 Price of complementary product isn’t
changed
 The demand for the complementary
product increases
 Price of complementary product isn’t
changed
 Lower price of basic product attracts
new customers to the buy the basic
product and later on complementary
products
 Price of complementary product is
changed
 If the demand for complementary
products does not change (we assume
that customer does not care or isn’t
aware of) you may earn more per 1
customer

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Razor Producer – Complementary
Pricing – Case Introduction

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Imagine that you are working for a company producing razors & blades. You have
to set the pricing in such a way not to jeopardize the disposable razor sales.

83
They have been mainly selling
disposable razors
They wan to introduce the razors
with exchangeable blades
Think what should be the pricing for
the razor and blades
A few information about the firm
Pick the best option

85
In some cases you want to bundle two or more products and sell them
as one set. Usually the bundle costs less than individual products

86
Let’s have a look at a short example. Let’s imagine that we have Product
A and Product B. We can sell them separately or as a bundle
Product A Product B Bundle of A & B
$ 20 $ 30 $ 40

87
People who have bought the bundle
You have to be very careful how you price the bundle. With wrong set of
prices you may loose money on bundling
People who were buying both products
but separately
People who were buying only 1
product
People that weren’t
buying any of your
products

88
Let’s have a look at an example. We sell separately product A and B
100
customers
40
bought only A
20
bought only B
40
bought A and B
(separately)
10
20
30
Price per
unit
5
10
15
Cost per
unit
5
10
15
Profit per
unit
200
200
600
Total
profit
1 000
Total

89
After the bundle was introduced, we earn less despite having more customers
110
customers
40
bought only A
20
bought only B
10
bought A and B
(separately)
10
20
30
Price per
unit
5
10
15
Cost per
unit
5
10
15
Profit per
unit
200
200
150
Total
profit
950
Total
40
bought the bundle
(A & B in 1 set)
25 15 10 400

90
Cosmetics Price Bundling –
Case Introduction

91
Now we will have a look at a cosmetics producer, and we will
try to see what will be the impact of creating a new bundle.

92
Below some information about the firm we will be analyzing
The sell face creams & shampoos
They consider creating a bundle of
those 2 products
They will 10% discount on products
in the bundle
Help them estimate the impact on
revenues and gross margin

94
In some industries especially B2B the pressure on prices is so
big that firms decide to unbundle their services and prices.

95
In some industries especially B2B the pressure on prices is so big that firms
decide to unbundle their services and prices
Bundle of Services
$ 40
Service 1
Unbundled Services
$ 20
Service 2
Service 3
$ 20
$ 20

96
Let’s have a look at an example of wholesaling
Wholesaling
Receiving Goods
Unbundled Services
Warehousing
Sending goods to
stores
Collecting money
 Price per piece
 Price per pallet a day
 Price per piece per km
 % of collected money

97
Let’s have a look at an example of healthcare
Healing the patient
Admitting to the
hospital
Unbundled Services
Preparation
Performing the
Operation
Recovering
 Price per hour of
people involved
 Price action performed
 Fixed price
 Price per day

98
Wholesaler Unbundling Pricing

99
Imagine that you are working for a Drugstore Wholesaler that wants to unbundle its services
(provide direct distribution instead of wholesaling service). Help him estimate the impact.

100
A few information about the firm that we will be analyzing
Their revenues are equal to USD 300 M
Their current Gross Margin is only 3%
They want to unbundle their services
Estimate what will be the impact on the
Gross Margin

101
Regular prices vs discounts

102
Let’s have a look at 3 approaches to managing the price & discounts
Every Day Low Prices
 Strong positioning
 High demand
 Defensible position
High-Low
 Medium Margins
 You can use the discounts to influence
customer behavior (generated traffic,
increase frequency of purchase, sell
more)
High Fixed Price
 Strong positioning
 High Margins
Pros (+)
Cons (-)
 You have 1 low price
 You don’t give any discounts
 You have relatively high price
 You give from time to time discounts
 You have 1 high price
 You don’t give any discounts
Description
 Low margins
 Difficult to attract new customers fast
 People learn the pattern and use it
against the firm (buy mainly at discounted
price)
 You create an appetite for big discounts
 Limited demand
 Difficult to attract new customers fast
Examples  Discounters  Fast Fashion
 Most of the e-commerce
 Luxurious products
 Apple

103
Price Changes in the Product Life
Cycle

104
Let’s see how the price of a product will change in the Product Life Cycle
 Low
Development Introduction Growth Maturity Decline
Sales
Profits
 Medium & growing  High  Medium & declining
Quantity sold
Price
 Medium  Medium  Medium / Low  Low
 Very High  High Medium  Medium / Low  Low

105
Computer Games Pricing

106
Imagine that you are working for a video game producer. You have to decide
on the pricing strategy in each and every stage of the Product Life Cycle.

107
They sell all over the world
The game goes through 4 cycles.
The all last in total 5 years
They use 3 channels: Retailers, own
& 3rd party digital distribution
Estimate the revenues & gross
margin given the assumed pricing

109
Price discrimination is an old concept that
can fully be used thanks to technology.

110
In Price Discrimination, we start with the notion that the product has a
different value for different customers
Customer A Customer B Customer C Customer D
Value Price

111
If this is the case, then it makes sense to have different prices for different
customers or groups of customers.
Customer A Customer B Customer C Customer D
Value Price

112
Price Discrimination can be achieved in many different ways
Price Discrimination
1 price with many
discounts
Multiple prices for the
same product
Dynamic Pricing
Base Products &
Upgrades
Value Metrics

113
Price for adults – Monday to
Thursday
Let’s have a look at some examples of applying multiple prices
Cinema – multiple prices
Price for adults – Weekend
Price for Kids – Monday to
Thursday
Price for Kids – Weekend
Price for Woman – Ladynight
Price for family ticket
Price for people enetering
directly the site
E-commerce – multiple prices
Price for people that came
from price comparison tools
Price for people on the
marketplace
Price for people that came
from facebook ad
Price for people that have
loyalty card

114
Discount for paying on time
Let’s have a look at some examples of giving different discounts to different
groups
Aluminium profile – 1 prices
many discounts
Discount for paying cash
Discount for purchasing in a
specific period
Volume discount
Additional disocunt for
promoting the supplier
Discount for kids & students
Public transport – 1 prices
many discounts
Discount for elderly
Discount for donating blood
Discount for being registrated
in the region

115
Price per number of emails
sent
Let’s have a look at some examples of using value metrics
Software for mailing – value
metrics
Price per contacts on the
mailing lists
Price per user / seats
Price per number of mailing
lists
Price per number of leads /
reaction
Price per number of flights
Airplane maintenance – value
metrics
Price per miles flown
Price per flight hours
Price per number of checks

116
Fashion Retailer Pricing

117
Imagine that you are working for a PE fund that has just bought a fashion Retailer. You
have to estimate the impact of introducing special discounts for cardholders.

118
A few information about the firm that we will be analyzing
The company has 2 000 stores
So far they have used only regular
prices with seasonal discounts
They consider offering card holders
permanent discounts of 30%
The customer will have to pay for the
card USD 30 a year

120
In Dynamic Pricing, you set flexible prices based on current or forecasted
demand. In other words, there is a big fluctuation in the prices.

121
In most cases you are decreasing the prices for low seasons (low demand)
and increasing the price for high season (high demand
1 2 3 4 5 6 7 8 9 10 11 12
Low season

122
1 2 3 4 5 6 7 8 9 10 11 12
Low season
Decrease the price

123
1 2 3 4 5 6 7 8 9 10 11 12
Low season
Decrease the price
Increase the price

124
Dynamic pricing is applied for example in the price of airplane tickets

125
Dynamic pricing is useful in the following situation
High fixed costs
It’s difficult to fast scale up or down
operations
Consumers attach different value to
products / services
High price elasticity
Customer has limited ability to learn
the logic behind price changes…
…or customer most likely will not
apply the learnings in the future
There is no reason why the customer
cannot buy more of your product

126
Dynamic pricing is useful in the following situation
High fixed costs
It’s difficult to fast scale up or down
operations
Consumers attach different value to
products / services
High price elasticity
Customer has limited ability to learn
the logic behind price changes…
…or customer most likely will not
apply the learnings in the future
There is no reason why the customer
cannot buy more of your product

127
Dynamic pricing
in Consulting

128
In dynamic pricing you identify the low seasons and try to sell them at
lower price or at higher price
25%
50%
75%
100%
88%
63%
13%
43%
88%
83%
63%
50%
1 2 3 4 5 6 7 8 9 10 11 12
Low season

129
There are 2 opposite approaches to treat low seasons
Emergency
approach
 You keep the people during low seasons waiting for desperate
customers that needs the project now
 Since you have the resources you can help him, yet the price goes
up significantly
 Such a structure can be a part of your regular contract – at certain
time during the year, month, week you charge the client with
higher price or above certain number of man-hours; for shorter
reaction time
The logic behind
Price in low season with
respect to high season
 150%-200%
Fire sale
approach
 In this approach you sale with discount because the resources
will be lost if not used
 50-80%

130
Airlines Dynamic Pricing

131
Let’s imagine that an airline is considering moving from single price
to dynamic pricing. Check under what conditions it makes sense.

132
They have 200 planes
Currently they have single price and plane
utilization of 70%
They consider implementing dynamic
pricing using 5 categories
The plane utilization will grow to 87%

133
Business Analysts
$190
$19
For more details and content check my online course where you can find case
studies showing analyses along with detailed calculations in Excel

135
Price Perception
– Introduction

136
In many cases it is more important to manage the prices perception rather than real prices.
We will discuss in this section what is a price perception and how to use it to your advantage.

137
What influences Price
Perception?
What is Price Awareness?
What is Price Perception?
Price Image

139
 Price level perceived by the customer
 Quite often the perceived price is lower or higher than the real price
 Price Perception is influenced by current price level but also other
things like discounts, historical prices, prices for the most popular
products, price labels used, communication etc.
Price Perception =

140
$ 100
Price perceived may be lower than the real one. This usually suggests high
value for the customer or good presentation of the price
Real Price
$ 90
Price Perceived
>

141
$ 100
Price perceived may be higher than the real one. This usually suggests that the
firm is not good in communicating the price to customers
Real Price
$ 110
Price Perceived
<

142
There are plenty of reasons why you have to measure price perception
Customer acts using price perception
and not real prices
Quite often it is cheaper to change
price perception than real prices
You can change the price perception by
changing limited number of prices
In some cases it is more important to
change things around price
Price perception depends not only on
your prices
Things done by your competition will
impact price perception
Price perception may change over time
even if you don’t change real prices
Price perception will differ for specific
customer segments

143
What influences Price
Perception?

144
There are plenty of things that can influence price perception. Below some
examples of what influences the price of a consumer products
Price labels (size, color)
Exposition of specific products in the
store
In-store & external communication
Look & Feel of the store (both online
and offline)
Leaflets / Brochures
Sales Reps & Cashiers
Naming of special prices
Promise of EDLP
Previous experiences Price in other channels / categories

146
 If you want to influence Price Perception you should measure
whether customers are aware of prices at all
 Price Awareness is measured in percentage of the customers that
know roughly the price of the product
 This will differ from product to product; from customer to customer
Price Awareness =

147
Let’s imagine that a producer of cosmetics that offers 8 products wants to change its
price perception. He decide to measure the price awareness for every product.

148
Let’s have a look at results from a survey
Price awareness by products
% of people that knew roughly the price of products
80%
50%
90%
30%
40%
70%
20%
10%
Product A Product B Product C Product D Product E Product F Product G Product H

149
If you moved all prices it would be costly. There is a cheaper way to change the
price perception by exploiting the price awareness
80%
50%
90%
30%
40%
70%
20%
10%

150
We should concentrate only products where the price awareness is high. This
will be much more efficient and cheaper
80%
50%
90%
30%
40%
70%
20%
10%

152
 Shows how customers perceive specific elements related to the
price for example: regular prices level, price promotions / discounts,
consistency of price strategy etc.
 You can use it to compare 2 different products of different firms
Price Image
=

153
Below an example of price image done for 2 different firms
0
20
40
60
80
100
Regular price level Promotions /
Discounts
Price emotional
impact
Assortment Image Price Fairness Value for money
level
Consitency of price
strategy
Price Transparency
Firm A Firm B
Price image for 2 firms – perceived values for different criteria
Importance of specific criteria
% of people that thought that criteria is the most important
25%
19%
12% 10% 10% 10% 9%
5%
Regular price level Promotions /
Discounts
Price emotional
impact
Assortment Image Price Fairness Value for money level Consitency of price
strategy
Price Transparency

154
Let’s have a look at definition of each and every criteria
Regular Price Level
 Is the overall regular price level satisfactory?
Description of the scenario
Promotions / Discounts
 How attractive are promotions / discounts offered
Price emotional impact
 How customers feel about the prices? Are they happy paying the price
Assortment Image
 What is the general price perception of the category of products
Price Fairness
 Are the prices set in a fair way?
Value for money
 The relation of value to price
Consistency of price
strategy
 Is the customer able to understand the price changes
Price transparency
 How easy it is to find and read prices

155
Price Awareness vs Price
Elasticity

156
High
Low
High
Low
Price
awareness of
the category
Price elasticity of the category
We can divide their assets in the following way
Unimportant items with highly elastic demand
 Customers don’t know or don’t care how much
the product costs
 They will buy significantly more of those
products if you lower the price
Important items with highly elastic demand
 Customers know how much they cost
Important items with inelastic demand
 They will not buy more products if you lower
the price
 They will not buy fewer products if you raise
the price
Unimportant items with inelastic demand
the product costs
the price
the price

157
High
Low
High
Low
Price
awareness of
the category
If you want to influence price perception you should concentrate only
on the product that the customer is aware of
 Customer don’t know or don’t care how much
the product costs
 Customer know how much they cost
 Customer know how much they cost
the price
the price
the product costs
the price
the price

158
High
Low
High
Low
Price
awareness of
the category
If you lower the price of Important items with high elastic demand,
there will be a big impact on the sales as well. It’s not always a good
idea
the product costs
the price
the price
the product costs
the price
the price

159
Pricing in Consumer Goods
& Retail

160
Pricing in Consumer Goods &
Retail – Introduction

161
Now let’s have a look at some issues related to pricing of consumer goods.
We will also have a look at some more advanced case studies.

162
Main Issues in Pricing in SMCG Main Issues in Pricing in Retail
Main Issues in Pricing in FMCG
Price changes – impact on the
basket of coffee chain – case
study
Pricing in multichannel – case
study
Switching from selling a product
to selling a service –
smartphone case study

163
Main challenges in
Pricing of FMCG

164
There are number of challenges when it comes to pricing of FMCG
Aligning the price points
with the brand
perception & strategy
Managing price and
price perception across
channels
Setting the prices to
minimize the
cannibalization
Price discrimination for
a specific market
Prices wars between
retailers & other
channels
Prices bundling &
unbundling
Managing different price
points for different
markets
Managing discounts for
customers and retailers
Smart shopping
One-offs that force you
to play with the prices
Looking for potential
price gaps

165
Main challenges in
Pricing of SMCG

166
There are number of challenges when it comes to pricing of SMCG
with the brand
Managing price and
channels
minimize the
cannibalization
Managing discounts for
customers and retailers
Moving away from 1-off
payment to subscription
Moving away from
product to service
Pricing complementary
products
Managing different price
points for different
markets
Pricing for direct-to-
consumer distribution
Pricing older version of
your products

167
Main challenges Pricing
in Retail

168
There are number of challenges when it comes to pricing of Retailer
with the brand
Managing price and
channels
minimize the
cannibalization
Considering the role of
the product
Pricing of Private Labels
Price comparison sites
and aggregators
Price transparency
High-Low vs Everyday
Low Prices
Considering the back
margin from Producers
One-offs that force you
to play with the prices
Smart Shopping

169
Pricing dilemma
– Case Study

170
Imagine that you have a chain of physical stores and on-line store. What pricing
would you use
On-line belonging to retail
chain
Off-line retail chain
?
$ 100 $ 90
On-line market

171
Establish what is the
structure of the market?
 What is the current share of on-line in the market ?
 Is it growing?
Decide what you want to
have in terms of share of
on-line in your sales?
What price difference
between on-line and off-
line is acceptable
What price difference is
noticeable?
 What is the current share of on-line in your sales ?
 Do you want to be above or below the market?
 What price difference between on-line and off-line customer treat as fair?
 Do we want to be fair?
 What price difference is noticeable?
 Do we want to stay unnoticed?
How you would estimate the potential for growth?

172
would you use
On-line belonging to retail
chain
Off-line retail chain
?
$ 100 $ 90
On-line market
 The difference in prices is fair if it’s not
bigger than 6%
 The customer notices / cares if the
difference in prices is up to 3%

173
would you use
$ 90 $ 100
$ 93
Fair prices
$ 97
Practically the same prices Practically the same prices
Here you are not on-line competitive
$ 94

174
would you use
$ 93
Do you want the
on-line to have
bigger share in
your sales than it
has in the whole
market?
Yes
No
Do you want the
difference
between on-line
and off-line to be
fair?
Do you want the
difference
between on-line
and off-line to be
fair?
Yes
No
Yes
No
$ 93<
> $ 94
$ 98
$ 100
$ 100
$ 93- $ 100 $ 100

175
What will be the effect of the price
increase – Introduction

176
The impact of the price change on your profit will depend on a few
factors
How big the increase is
What your competition does?
How aware of prices are the
customers?
Price sensitivity
The role of the product you
are increasing the price
Components of the average
basket

177
Imagine that you want to estimate the price change impact for a small
chain of local coffee shops
20 location in Poland
Sell coffee, cakes, sandwiches and
quiches
3 different motives for going there

178
What will be the effect of the
price increase – Solution

179
Imagine that you want to estimate the price change impact for a small
chain of local coffee shops
20 location in Poland
Sell coffee, cakes, sandwiches and
quiches
3 different motives for going there

180
If we look just at coffee gross margin, we should increase the price of coffee by
9%. If we look at the total gross margin, 4% price increase makes more sense
0
2 000
4 000
6 000
8 000
10 000
0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 21% 22% 23% 24% 25% 26% 27% 28% 29% 30%
0
5 000
10 000
15 000
20 000
0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 21% 22% 23% 24% 25% 26% 27% 28% 29% 30%
Gross Margin – Only for Coffee vs price increase
In thousands of USD
Gross Margin – Coffee and Cakes vs price increase
In thousands of USD

181
From SMCG to service –
Introduction

182
Imagine that you work for a car producer that wants to give certain
discount for those who exchange their old car for a new one

183
Imagine that you work for a car producer that wants to give certain
discount for those who exchange their old car for a new one

184
There are plenty of reasons for that on the customer side
Restriction imposed by the cities
Higher awareness of the low asset / SMCG
utilization
On-demand mentality
Convenience becomes the most important
value proposition
Too specialized maintenance
Fast change in the product – the customer
wants the new one
Lack of stable job / cash flow
Preference not to burden yourself with
contracts, especially long-term

185
However, there are plenty of reasons for the producers of SMCG to play
along
You can bundle the product with services
with higher margin
You can align your goals with the
customers' goals
The revenues become more predictable
You build a customer base with which you
don’t loose contact
You can use the customer base to up-sell
and cross-sell
It’s easier to plan and develop the business
You can optimize other elements of the
value chain i.e. maintenance
You remove certain risks i.e. price wars
become less frequent during the contract
duration

186
From SMCG to service – Case
Introduction

187
He currently sells around 600 K
smartphones and has a bas of
around 1 M customers
He has to acquire new customers to
cover for the lost ones and grow
He considers switching to offering
annual subsription model
Imagine that you are working for a smartphone producer that considers
instead of selling smartphones to offer contracts with different duration

188
From SMCG to service – Case
Solution

189
Just as a reminder you are working for a smartphone producer that
considers instead of selling smartphones to offer contracts
He currently sells around 600 K
smartphones and has a bas of
around 1 M customers
He has to acquire new customers to
cover for the lost ones and grow
He considers switching to offering
annual subsription model

190
As you can see if we switch to the smartphone as a service we can
drastically increase our revenues
Revenues by years
In millions of USD
877 913 949 985 1 022 1 058 1 094 1 130 1 166 1 202 1 239
648 675 702 729 756 783 810 837 864 891 918
2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
If sold as a service If sold as a product

191
The structure of the revenues will be different as well for both situations
Revenues 2020
In millions of USD
600
440
48
158
280
If sold as a product If sold as a service
Revenues from selling phones / contracts Revenues from cross-selling Revenues from reselling phones

192
As you can see if we swith to the smartphone as a service we can drastically
increase our Net Margin
Net Margin
In millions of USD
405 416 426 436 444 452 459 465 470 473 476
289 297 305 313 320 326 332 337 341 345 347
2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
If sold as a service If sold as a product

193
Business Analysts
$190
$19

195
Pricing in B2B Services
– Introduction

196
Pricing of B2B services drastically differs from pricing of consumer goods. In B2B
the buyer is more rational and has a much bigger knowledge of the market.

197
In this section we will have a look at the pricing in 2 industries
Consulting
Airplane Maintenance
Services

198
Price positioning in
consulting
Discount policy in
consulting
How you can price
consulting projects?
Dynamic pricing in
consulting
How to sell at a lower price
and keep high margins in
consulting
Which price formula is the
best for my profits – case
study in MRO

199
As we said we will look at 2 industries
Consulting
Services

200
So let’s move to the first industry
Consulting
Services

201
How you can price consulting
projects

202
The most useful pricing models are….
Fixed fee
 Difficult to define scope
 Non-standard project
 Scope evolving
Times & Materials
 Simple projects
 Projects with big buffers
 Projects where you want to hide the fees
Success / performance fee
 When performance can be measured by external KPIs
 To supplement previous methods
Limits
 To limit certain spending's esp. in the case of time and
materials limits (floors an caps are used)
Per usage
 This is used in many technical industries where you
cannot control the immediate result of the consulting
so link it with the usage / availability of certain
resource
Description
Example
 $ 100 K
Markups
 Markups can be a part of fixed fee structure and times
and materials
 Markup is put on purchases done by consulting
company for the project
 $ 200/h
 Traveling costs
 Food costs
 % of Target achieved
 $ 100 K for achieving
certain goal
 $ 200/h but no more
than $ 100 K
 $ 10/flight hour
 $ 20 K/plane
 15% on costs incurred

204
Price is usually driven by mainstream players
20
30
Smaller management consulting
companies
SMI pwc, EY, Deloitte McKinsey, BCG
Estimated price per consultant per month used in Poland
In thousands of USD

205
Most small companies set their prices at around mainstream players
10
20
30
companies
In thousands of USD

206
When you price your project you should not be cheaper than 20% than
the mainstream
10
16
20
30
companies
In thousands of USD

207
There are plenty of good reasons why not to give lower prices
If you are starting you will be force to stick
to this pricing for long time (low rotation of
customers)
Competing on price is not sustainable in
consulting unless you have managed to
turn the service into a product
Low price gets you into a price war with
other small companies
Makes more sense to rather sell at higher
price and over-deliver than cut-down on
price

208
You should build your pricing in the following order
Senior people and more in-depth knowledge
Dedication to the customer and flexibility
Concentration on delivering value – results not just presentation
A bit lower pricing

210
I recommend not to discount at all. Instead you can use plenty of other
techniques
Increase the scope within the same
price
Decrease the scope to adjust to the
proposed by customer price
Unbundle the project and create 2-3
pricing plans
Shift the work to them

211
To show you let’s imagine that you were asked to price a Vendor Due
Diligence project for a Retailer
Gather Data and Conduct
Market research
Analyze
Prepare presentation
Phases of the project Markets within the scope Price
In thousands of USD
Team size and timeline
 4 consultants
 3 months
 192

212
I recommend not to discount at all. Instead you can use plenty of other
techniques
Increase the scope within the same price
Decrease the scope to adjust to the proposed
by customer price
Unbundle the project and create 2-3 pricing
plans
Shift the work to them

213
To show you let’s imagine that you were asked to price a Vendor
Due Diligence project for a Retailer
Market research
Analyze
In thousands of USD
 4 consultants
 3 months
 192
Participate in talks with
potential investor

214
192
96
128
64
Full blown Vendor Due Dilligence - 2
countries
Full blown Vendor Due Dilligence - 1
country
Limited Vendor Due Dilligence - 2
countries
Limited Vendor Due Dilligence - 1
country
In thousands of USD

215
Market research
Analyze
In thousands of USD
 2 consultants
 2 months
 40
 100
 80
 220 or 192 if all parts are
bought
 4 consultants
 3 months
 3 consultants
 1 month

216
Market research
Analyze
In thousands of USD
 To be done by the Client  To be done by the Client
 50
 80
 130
 50% - Client
 50 % - SMI – 2 consultants
for 3 months
 3 consultants
 1 month

217
How to sell cheaper the project
and keep high margins?
Introduction

218
My customer was a DIY/ home improvement retailer chain that had 70
stores in Eastern Europe
DIY look Brands

219
They wanted to do performance improvement project in their retail
chain
 Optimize their internal processes that are performed in the stores
 Achieve lower costs and higher quality (if possible) of processes
Goal of the
project
 Process modification
 Testing
 Implementation in the whole retail chain
Phases

220
211
117
200 200
SMI Option 1 SMI Option 2 Competitor 1 Competitor 2
My proposal was giving them faster results cheaper and was building on
their strengths
Cost of the project
In thousands of USD
36 33
52 52
SMI Option 1 SMI Option 2 Competitor 1 Competitor 2
Time needed for full implementation
In weeks

221
How to sell cheaper the project
and still high margins?
Example

222
The meeting totally changed the approach to the project, and I
learned a lot
There were 2 people present: PM (Deputy
COO) and COO
There were 2 other companies pitching for
the project
Scope was different than I thought
My competitors offered the same price like
me but for smaller scope
DIY felt strong in implementation but not
that strong in finding new things
They did not want the project to be done
to them but to learn
For them the shorter the better
DIY was very price (cash outflow) sensitive

223
During the meeting I already modified the proposal and offered them to
do the project much faster and for a fraction of the price
I would do it much faster than what they
have assumed
They would give me a big team of senior
people
They would do the implementation on
their own
They would listen to me and act fast
I would have full power during the process
optimization
COO would participate in the workshop

224
During the meeting I already modified the proposal and offered them to
do the project much faster and for a fraction of the price
• Observation of process in
real life in 1 of the store
• Analyses of the formal
description of the process
• Analyses of available data
• Proposal of KPIs needed to
set goal for each and every
process
• Preparation of list of data
and format for data entry
• Workshop
• Data gathering
• Data preparation according
to provided formats
• Analyses of the process as is
especially its efficiency and
costs
• Redesign of the process
• Creation of tools supporting
the execution of the new
process
• Test of new processes in
chosen locations
• Modification of processes
• Creation of manuals
supporting the new process
• Implementation of new
redesign process in the
whole chain
• SMI
• DIY
• DIY • SMI
• DIY
• SMI
• DIY
• DIY
Execution
Description
Observation and initial
analyses
Data gathering
Process
optimization in
1 store
Modification of
the process for
other
Implementation
in the whole
chain

225
211
117
200 200
50
SMI Option 1 SMI Option 2 Competitor 1 Competitor 2 SMI Option 3
My proposal was giving them faster results cheaper and was building on
their strengths
Cost of the project
In thousands of USD
36 33
52 52
16
SMI Option 1 SMI Option 2 Competitor 1 Competitor 2 SMI Option 3
Time needed for full implementation
In weeks

227
In dynamic pricing you identify the low seasons and try to sell them at lower
price or at higher price
25%
50%
75%
100%
88%
63%
13%
43%
88%
83%
63%
50%
1 2 3 4 5 6 7 8 9 10 11 12
Low season

228
There are 2 conflicted approached to treat low seasons
Emergency
approach
 You keep the people during low seasons waiting for desperate
customers that needs the project now
 Since you have the resources you can help him, yet the price goes
up significantly
 Such a structure can be a part of your regular contract – at certain
time during the year, month, week you charge the client with higher
price or above certain number of man-hours; for shorter reaction
time
The logic behind
Price in low season with
respect to high season
 150%-200%
Fire sale
approach
 In this approach you sale with discount because the resources will
be lost if not used
 50-80%

229
Which price formula is the best for
my profits – Introduction

230
Now we will try to see which price formula is better for aircraft
maintenance service company
2 sites – in Poland and Croatia
Consider 4 different formulas
Consider 3 different scenarios

231
Materials
Scenario 1
 $ 30 K
Number of
manhours needed
 3 000 man-hours
Probability of the
scenario
 30%
Scenario 2
 $ 20 K
 3 400 man-hours
 25%
Scenario 3
 $ 15 K
 3 800 man-hours
 45%

232
Materials
Times & Materials
 Cost of Materials
increased by 15%
markup
Labor
 $ 50 per 1 man-
hour
 We look at the real
man-hours needed
Fixed Fee
 $ 25 K
 $ 140 K
Mixed Option 1
 $ 25 K
 Fixed: $ 140 K
 On top of that 15%
of the labor cost
calculated using
Times & Materials
formula
Mixed Option 2
 $ 25 K
 Fixed: $ 140 K
 On top of that for
all man-hours
above 2 800 we
use the Time &
Materials formula
but using the price
of $ 90 per 1 man-
hour

233
Which price formula is the best for
my profits – Solution

234
Just as a reminder we were trying to decide which pricing formula is the
best for the MRO organization
2 sites – in Poland and Croatia
Consider 4 different formulas
Consider 3 different scenarios

235
It seems that the Mixed Option 2 price formula is the best solution
Gross Margin
In thousands of USD
90
58
84
117
Times & Materials Fixed Fee Mixed Option 1 Mixed Option 2

236
Business Analysts
$190
$19

237
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