11-11-2024 Pricing Strategy a aT, TRICHY Prof. Satish S. M. —— + Pricing is often understudied but overused IM Points to Ponder...11-11-2024 ———— IIM Points to Ponder... * Netflix growth in India * Grew engagement by 30% in the Q1 of 2023 by lowering the price by 20-60% + Jan 31, 2022: Marico’s MD and CEO, Saugata Gupta - the company has engaged in three rounds of price reduction for Saffola and Parachute in the last four months + Do you know what is the market share of Parachute and Saffola? IIM Points to Ponder... + Jan 31, 2022: Marico’s MD and CEO, Saugata Gupta — the company has engaged in three rounds of price reduction for Saffola and Parachute in the last four months * Do you know what is the market share of Parachute and Saffola? + Parachute ~ 59 % (in coconut oil) + Saffola—73% (super premium refined oil) * Despite such a dominant market share, why do they indulge in price cut?11-11-2024 ———— + How's this linked to expected post-pandemic economic recovery? Points to Ponder... 4 M Points to Ponder... i eo The letters of economic recovery + Economic Recovery Patterns11-11-2024 ———— + How’s this linked to expected economic recovery post-pandemic? IIM Points to Ponder... + K-shaped economic recovery IIM Points to Ponder... + How’s this linked to expected economic recovery post-pandemic? + K-shaped economic recovery + AK-shaped recovery happens when different sections of an economy recover at starkly different rates + Households atthe top ofthe pyramid are likely to have seen their incomes largely protected, ‘and savings rates forced up during the lockdown, increasing fuel in the tank’ to rive future consumption ‘+ Mesnuiile, households atthe bottom are likely to have witnessed permanent hits to jobs {and incomes11-11-2024 ———— * Hence understanding of strategic pricing is very important IIM Points to Ponder... IIM Points to Ponder... + Hence understanding of strategic pricing is very important + However, pricing is not everything * Pricing is part of the value offered to consumers * Allthe Ps, SCs and environment has an impact11-11-2024 ———— + The central government has amended the Legal Metrology (Packaged IIM Points to Ponder... Commodities) Rules 2011 + Making declaration of MP in Indian currency inclusive of tax + Omitted the Rule 5, which defines the Schedule Il prescribing the pack sizes of various types of commodities + Pack size restrictions are removed + From Apri 1, mandatory unit pricing for pre-packed goods IIM Points to Ponder... * From, + How much more to charge customers?, to + Figure out how and why firm’s should be charging them?11-11-2024 ee IIM Points to Ponder... PRICING IS THE HEART OF A BUSINESS. IT AFFECTS EVERYTHING YOU. DO AND IS AFFECTED BY EVERYTHING YOU DO IM rich UPR Cue cacy kid pa eueratalvereeirae casera) NE hye Ble oo See ee cat poet11-11-2024 ———— IIM Points to Ponder... “Only when the tide goes out do you discover who’s been swimming naked.” Warren Buffet IIM Points to Ponder... * High inflation prompted many companies to hike prices in 2023 * But did these increases cover all the costs?11-11-2024 ———— + What do you mean by Pricing or Market Power? IIM Pi ig Power IIM Pricing Power * What do you mean by Pricing or Market Power? + Refers to a company’s ability to raise prices without reducing demand in their products * We define ‘pricing power’ as the ability to raise prices beyond the rate of cost increases; otherwise, it's simply considered ‘throughput power.’11-11-2024 ———e + What do you mean by Pricing or Market Power? IM Pricing Power + With the threat of deflation on the horizon, will this further squeeze profit margins in 2024? — From 2,700 companies surveyed ver 90% inoreaced thar revenues at year I I Pricing Power RICHY11-11-2024 4 ———e I Pricing Power RICHY [Nearly 80% of companies used price increases to cope with rising costs and preserve SIMON.+ profitmarginsiast year KUCHER id you implement price intents) at wae the primary reason forthe pie increas) you lostyear™ Implementea? I Pricing Power = yet ony 65% of companies had genuine pricing power ast yer, with significant11-11-2024 ———— ‘icing Power Price realization rates have increased significantly, but stil fallahor of reaching even SIMON? 50% oftheir targets KUCHER Hom much f your intial planned pie mereses) you schew ater decctng daceuts, rebates promotional ‘ies? IIM Pricing PowerMK IM IM 11-11-2024 ———— Pricing Power — Different Dimensions Can a firm successfully maintain its premium price versus the competition? Can the firm periodically raise its product or service prices without reducing demand? Does the firm have pricing leadership to hike prices and establish new market anchors without losing customers? Ifa new entrant comes in with lower prices, can the incumbent continue to retain its higher price without losing market share? Is the firm’s pricing power sustainable? Does it work at improving the value it offers to customers? Pricing Power Do you know * Page Industries and Vedant Fashions? 1311-11-2024 MK ee IIM Pricing Power + Now, you might recognize, * Page Industries (Jockey) and Vedant Fashions (Maanyavar) * Affordable luxury brands IIM Pricing Power — Page Industries nano oops AL ae Ei11-11-2024 ———— IIM Pricing Power — Vedant Fashions Grose Margin Finanells of Vedent Fashions td IIM Pricing Power - Nestle Financials of Nestle India EBITDA Margin11-11-2024 Points to Ponder... + What is Marketing? IIM Points to Ponder... + What is Marketing? + Marketing is satisfying customer at a profitIIM Pe 11-11-2024 * Recent post by Marcellus Investment managers made three observations about Indian companies + Most sectors are highly competitive, and most firms have weak pricing power + Most firms hike product prices to offset the impact of inflation in raw material cost and operating expenses * Bharti Airtel: over the period F¥O7 ~ FY17 (before Jio) retained its market leadership with a market share of 23%, But its ARPU declined at a CAGR -8% over these ten years IIM Points to Ponder... + Most firms hike product prices to offset the impact of inflation in raw material cost and operating expenses + Interglobe Aviation: Indigo Airlines has grown its market share over the last decade from 15% FY10 to 50% in FY20; but its revenue per passenger growing at only 1% CAGR over FY 10-20 * Asian Paints: Dominated decorative paint industry for several decades with its current market share 50%; but hiked product price by less than 3% CAGR over the last two decades 711-11-2024 MK ee IIM Points to Ponder... * Recent post by Marcellus Investment managers made three observations about Indian companies + Most sectors are highly competitive, and most firms have weak pricing power + Most firms hike product prices to offset the impact of inflation in raw material cost and operating expenses + When analysing companies, have a framework to assess price hikes, or the lack thereof, through the lens of pricing power aK —— IM Pricing is all about customer value “Price is what you pay. Value is what you get.” = Warren Bult, Berkshire Hathaway 1811-11-2024 ———e IIM Study by McKinsey & Co cuy 6 IM Study by McKinsey & Co ‘Tho power of one [perenne SP co cpa pce11-11-2024 MK ee IIM Pricing Trends + A decrease of 1% in average prices has the opposite effect * Bringing down operating profits by 8% if other factors remain steady * Managers may hope that higher volume will compensate for revenue lost from lower prices & thereby raise profits * But this rarely happens; volumes would have to, * Rise by 18.5% to offset the profit impact of a 5% price cut!III!1 IIM Pi + Power to Consumers + Customer Service: Excellence is the new standard and average is no longer good enough + Excellent - WTP of 23% higher than current price + Average - WTP of 5% + More data and insights; less guesswork + Technology, data and analytical tools have transformed pricing 2011-11-2024 ———— IIM Pi g Trends + Dynamic Pricing / Individualized Pricing + Moved away from one-price-fits-all to dynamic and personalized pricing + Exg., Tesla’s insurance product using ‘real-time driving behaviour’ (Oct. 2021 in Texas) IIM Pricing Trends aIIM Pi g Trends 11-11-2024 ———— + Tesla released an example that shows how the premium can change month to month depending on your score: Safety Score Monn Frm 95 88 92 98 96 93 eanene IIM Pricing Trends Safety Score for Rating 80 90 95 88 2 98 + Dynamic Pricing / Individualized Pricing Monthly Premium $121.00 $121.00 $97.00 $130.00 $111.00 $83.00 + JSW MG Motor’s Windsor EV innovative price model 2024 2211-11-2024 ———— IIM Pi g Trends + Dynamic Pricing / Individualized Pricing * JSW MG Motor’s Windsor EV innovative price model 2024 + Battery-as-aservice ‘+ Windsor EV (Cross-over Utility Vehicle) ~ split their two-part pricing + Fixed component for Vehicle (8. 999k) ‘+ Avvariable component based on battery usage (Rs. 3.5 per km) IIM Pricing Trends * Digitalization + Radical changes in price transparency + Easier to change prices with changes in demand or supply * Price as a KPI 2311-11-2024 ———— IN vl Pricing Trends + Globalization of Pricing + How to set prices across border? + Pricing as part of the Innovation Process + Price research has integrated to innovation process —— IM Perceptions of How Much Value Companies Capture 2411-11-2024 ———— IIM Importance of Price in B2B * Factors influencing purchase decision in B2B + Delivery period - + Price - 28% + Technology - 19% + Brand - 16K + Availabilty of parts - 14% IM Importance of Price in B2B * Factors influencing purchase decision in B2B across DMU + Technical specialist : Brand Name & Price - 24% + Users - Brand Name - 28% + Rest all price and delivery period was more important 2511-11-2024 ———— IIM Strategic Pricing TRICK * Three principles * Value-based pricing + Proactive rather than Reactive + Objective driven Cotas Metres, Fenees, Controle Sore Re er ey 2611-11-2024 ———— * The Value Creation Gap = Potential — Actual Value IIM The Value Cascade * Value Communication Gap = Actual — Perceived Value + Price Structure Gap = Perceived Value — Target Prices + Price Policy Gap = Target Price - Willingness to Pay * Price Setting Gap = Willingness to Pay ~ Actual Prices + Price Competition Gap = Actual Prices — Sustainable Profit —— ILM Value Creation Product-Led Product ——> Cost ——+ Price ——+ Value ———+ Customers Customer-Led Customers» Values. + Prices —~ Costs. + Products a711-11-2024 K —" IIM The Value-Pricing Total Economic Value \ rected le 7 | Consumersincniveo Purchase = [Perceived Value — Price] Product Price. ———| Firm’s Incentive to Sell = [Price - COGS) Cost of Goods Sold K —— IIM Demand Curve for a Firm’s Concert Grand Pianos 2811-11-2024 ———— IIM Price Elasticity of Demand Veco sate Okt bina tate IIM Course Purpose Doychnge marc matey aniicogen uty + Trying to understand how to gain market or pricing power + Understand the principles of pricing + Pricing to deliver perceived price closer to total economic price + Different strategies companies adopt in their pricing 29IIM Evaluation Components 11-11-2024 ee Evaluation Component Type Weightage Ch Quiz Individual 15% (End Term Tnelvidual 40% Ci Project Group 30% (C&: Gass Participation / Individual & Group 15% Assignment 30