Apple & Pricing

Published on June 15, 2013 by Lea Steadman and Tracy Okolo

We would like to start off by first saying that we are huge fans of Apple products, between the two of us we own at least one of each Apple product including, iPhone, iPad and MacBook Pro. We had never before thought of the pricing strategies behind these products. However, after researching the topic we realized that we, as well as everyone reading this who owns an Apple product, have fallen victim to Apple’s pricing strategies including, price decoys, high price references, obscure reference prices and most definitely bundled price components.

According to Ben Kunz, of the Bloomberg BusinessWeek, Apple defends it’s pricing using all of the methods mentioned above, however we feel that customers have been most susceptible to their method of bundling price components to hide additional costs. This is because we are avid app store visitors. Since there always seems to be an Apple product nearby customers are always spending money on books, apps, videos and music, and even more now that we have multiple devices. This is not something we had thought about before this research; not only did we pay for meticulously priced items, but we continue to spend money monthly with Apple.

Bloomberg BusinessWeek writer Kunz states that, “The pricing strategy is brilliant. By staging a series of perceived technology innovations and then adding price decoys, reference prices, obscurity and bundling, Apple makes us willing to pay more to do the same stuff we did 30 years ago: read magazines, type messages, watch shows or make phone calls.”

Although we doubt we’ll be able to stop using the app store anytime soon. We now know that Apple planned for me to use it all along. We find that Apple is a great example of using many different pricing strategies to compete in the technology market. They have shown amazing pricing discipline and a real dedication to understanding customer value and willingness-to-pay. The next chapter in Apple’s pricing strategy is to compete against Samsung as they are making strong inroads as a disciplined follower. We cannot wait to see what Apple has in store!

Reference

Kunz, B. (2010, September 6). How Apple plays the pricing game – Business – US business – Bloomberg BusinessWeek | NBC News. Breaking News & Top StoriesWorld News, US & Local | NBC News. Retrieved June 10, 2013, from http://www.nbcnews.com/id/38980367/ns/business-us_business/t/how-apple-plays-pricing-game/#.UbUg_5U9kYE

Why Value-based Pricing Reaches Millennials

Published on June 10, 2013 by Nettisha Holas & Joelle Baird

As graduate students learning about pricing strategies, we would like to share our thoughts on value-based pricing. Value-based pricing focuses on the customer’s perceived value of the product and the features that are offered. If done correctly, value-based pricing can be a very profitable pricing strategy. It promotes the benefits and performance features of a company’s products. As a result, it increases the customer’s willingness to purchase. While value-based pricing offers numerous advantages to companies, there are also quite a few limitations as well. Since this is not the most commonly used pricing strategy, there are a few barriers to consider. First, it’s difficult to define value because it’s subjective and differs between people and products. Secondly, it requires critical resources and data that is difficult to obtain such as focus groups, surveys and price elasticity tests. Lastly, implementing this strategy usually requires a major organizational transformation and value mindset. Most companies’ price is based on the cost of producing the product and how much ROI they need to make budget.

Targeting millennials (born in late 1970-2000) almost requires a company to use value-based pricing. Millennials entered their adult lives during the deepest recession in American history since the Great Depression. Because of high unemployment, rising college tuition, and modest income levels, many are struggling to make ends meet – they’re strapped for cash and especially price driven. They seek products that promise fun and help them on their quest to live well for less. Offering this group a product requires a fair price and an extreme promotion of features and benefits. Value-based pricing is designed for all companies, big and small, technological and innovative. Technology companies such as Apple do this extremely well. Value in this type of market focuses on six categories that are considered beneficial to the customer: product quality, delivery capabilities, services, vendor characteristics, self-enhancement, and ease of doing business. Apple is top of the line when it comes to innovative technology and offers one of the best quality products in the market. Apple customers feel a sense of self-enhancement from owning an Apple product. Customers are not focused on the price but the value of the Apple products.

Although value-based pricing is imperative for reaching millennials, it can also beneficial to include this type of strategy in your existing pricing model. Consumers want a fair price but also need to know what they are getting for the price. Segmenting and testing pricing is crucial when settling on a price. While traditional methods might seem more appealing to executives, the gain from profit margins are much greater from using value-based pricing. Implementing value-based pricing is not easy but the long-term benefits can outweigh the initial difficulties.

Pricing and Organizational Design

Published on June 2, 2013 by David Carroll and Kortney Marszalek

Pricing may arguably be one of the most powerful components of value. With a focus on managing pricing, companies may see the benefits in their bottom-line within weeks. What most companies don’t realize is that without an effective organizational design that supports strategic pricing, the potential opportunities are not being utilized and companies can be missing out even when they are devoting all of efforts. A Boston Consulting Group publication, “Organizing for Pricing,” reveals that a 1 percent increase in price realization can often have an impact on profits that is four times greater than a 1 percent reduction in fixed costs.” In addition, information from the Professional Pricing Society stated that less than 5% of Fortune 500 companies have a full-time function exclusively dedicated to pricing. With so few companies that are devoting time and positions to pricing, pricing isn’t getting the attention it deserves.

Though pricing is still an underutilized concept to many companies, effective organizational design is key to effective pricing. Organizing for Pricing states that, “managers who lack an understanding of the basic price-volume-profit tradeoff develop the wrong pricing strategies and set price levels that are either too high or too low.” Developing a strong pricing capability throughout the organizational structure of your company will promote consistent, targeted, and developed pricing strategies that will benefit the entire organization and the bottom-line profits.

There is much research available there are four main components of an effective pricing capability: Structure and Responsibilities, Policies and Processes, Incentives and Compliance and Platforms and Tools. Detailed descriptions for each are available here and is a great starting point for companies that want to begin their journey into pricing.

Pricing and its Strategic Dimension

Published on May 25, 2013 by Manika Kumari, Nora Suehr, and Patricia Thiel

Pricing, when done correctly, can help your revenue and increase your bottom line which could help improve company profits. Having an incorrect pricing strategy can be disastrous though, as evidenced by JC Penney Inc. JC Penney recently rehired Mike Ullman as CEO who then quickly reinstated much of their previous “inflate and discount” pricing strategy which had been eliminated by Ron Johnson, former Apple CEO. While Johnson was the CEO of JCP, he removed all discounts and sale promotions leaving a “Fair and Square Every Day” pricing structure which had not been vetted with consumers. During his time in Penney’s C-Suite, Johnson saw a steep decline in customer count, sales revenues, and profits; primarily due to customers no longer believing they were being given a perceived value by JCP. Not only did JCP fail to understand what the customers wanted, the store itself lacked product differentiation because they eliminated many of their own branded products which left homogenous offerings for consumers. It is important when deciding what pricing strategy is needed for your company to first evaluate and execute relevant customer segmentation.

The most commonly adopted pricing orientations are competition, cost and customer. However the most progressive one is customer-focused pricing. Customer based pricing orientation focuses on determining what value the customer will receive from the product or service in exchange for the price they pay. It is all about what customers would be willing to pay based of their perceived worth. Customer value pricing strategies consists of perceived value pricing, performance based pricing and willingness-to-pay based pricing, all of which are based on what is believed the customer will be ready to pay. It is also essential that companies realize that they cannot treat all their customers the same. If they gain their competitive advantage in tailoring their offerings depending on exactly what customers are looking for and eliminating what they do not desire, then they can price their offerings according to different user need segments. This can help companies succeed in carrying out efficient price realization and avoiding leaving any money on the table!

Teaching Pricing to MBA Students

Only 9% of business schools offer an elective in pricing. Generally, pricing is included in general marketing classes, product development classes, or finance classes. I am privileged to offer a Strategic Pricing summer class at Carlow University in Pittsburgh (MBA758). This is an online class with 15 working professionals who have a strong desire to learn more about pricing and value management.

Spreading the message of pricing is an important process and it starts in business schools. If we plant the seeds of pricing science and strategy early on, future leaders will have the right knowledge foundation to continue learning and to hire the right type of pricing professionals. Digital StudentsAs part of the pricing class, I have given these 15 students the assignment to write a guest blog on the topic of value and pricing to be placed on my web site and to be disseminated on the social media scene. Over the next 7 weeks, we will hear from them on what they learn, feel and consider important in pricing. I have invited them to join the Professional Pricing Society Linked In group and to start a discussion thread. I hope you can support me in commenting on their thoughts and in encouraging them to keep learning. Thanks for your support!

Contact Stephan

  +1 (484) 347-1458
  sliozu@gmail.com