Strategic pricing for profit: Extract STRATEGIC PRICING FOR PROFIT EXTRACT. CPA Australia Ltd

Transcription

1 STRATEGIC PRICING FOR PROFIT EXTRACT CPA Australia Ltd

2 Strategic pricing for profit:: Extract CONTENTS Course overview 1 Learning objectives 1 Course content 1 Additional resources 2 Knowledge assessment 2 Symbols 2 1. The case study Company profile Organisational structure Value creation Wine industry supply model Your role as Finance Manager Financial reports First half FY20X2 X Pricing techniques Introduction Market based pricing Price taker the current market price Market price stable or fluctuating Time delays create time bombs Activity Activity Commodities Variations on market based pricing Critique and opportunities Profit targets and return on investment Cost based pricing Mark-ups Activity Activity Margins Activity Which cost to use variable or full cost? Special event or one-off pricing Critique and opportunities Cost plus pricing Value based pricing Win-win Shared risk-reward pricing Activity Critique and opportunities Power based pricing Monopoly Duopoly and oligopoly Monopsony Two-part pricing Captive market Product line pricing 27 2 CPA Australia Ltd 2016

3 2.6.1 Base level product with options Stepped product and price points Menu based pricing Bundling products Product life cycle pricing Pricing through the life-cycle Activity Total cost of ownership pricing Transfer pricing Motivation Taxation Segmented pricing Psychological pricing Price points Preferred numbers Value for money Activity Discounting Loss leading Predatory pricing Volume based discounts Activity Channel discounts Timing based discounts The cannibalisation dilemma The perpetual sale dilemma Burning your most loyal customers dilemma Trashing the brand dilemma Other types of pricing Innovative pricing Regulated pricing Compensated pricing Freemium pricing Summary Activity Linking pricing with strategic position and competitive strategy Introduction Market definition Geographic location Types of customers Types of product Activity Which market to focus on? Competitive strategy Competitive strategy based on product offering Activity Competitive strategy based on approach to playing the game Competitive strategy based on results Desired strategic position Activity Sustainability Actual strategic position and competitive strategy Matching prices with your strategy and position Summary 53 CPA Australia Ltd

4 Strategic pricing for profit:: Extract 4. Integrating pricing and budgeting Introduction Pricing, demand and organisational capacity Activity Competitor responses to pricing Successful integration a price policy Pricing policy Summary Pricing rules and regulations Introduction Legislation Anti-competitive agreements Activity Cartel conduct Predatory pricing Resale price maintenance Consumer protection Misleading and deceptive conduct Pricing deceptions Activity Summary Conclusion Next steps 68 Glossary 69 Appendix: Economic formulas for elasticity 72 Suggested answers 74 4 CPA Australia Ltd 2016

5 1. THE CASE STUDY Case study: Vineyard2U Pty Ltd Throughout this course we will refer to the Vineyard2U Pty Ltd Case Study. This case study takes us through a range of pricing related decisions for a small to medium-sized business. You will be performing the role of Finance Manager as you work through the course content, so it is important for you to be familiar with the information about this case study before you begin. 1.1 COMPANY PROFILE Vineyard2U Pty Ltd (V2U) is a private company owned by a combination of private investors and private equity funds. V2U has been operating for just over four years. The first three years were spent developing the business concept, operating systems and marketing capability. The company is now in the second year of a three-year growth phase, with plant and facility enhancements completed over the last 12 months. It is now early January 20X3 and the business has just completed its first half of the 20X2 X3 financial year. The business model is primarily to purchase high quality bottled wines in cost-effective quantities from domestic producers and to pack, market and distribute these wines to retail and wholesale customers. Retail customers are individual consumers located throughout Australia. Wholesale customers include small bottle shops, restaurants, theatres and clubs with small volume requirements, and customers with special requirements. The unique features and benefits V2U offers its customers are: An extensive range of choice. Mixed packs of wines as ordered by the customer. Speedy delivery to anywhere in Australia. Prices lower than retail outlets (bottle shops), and equal to wine clubs and discount suppliers. V2U establishes and maintains close relationships with small and growing vineyards and wine producers in each of Australia s key wine regions (including the Hunter Valley, Barossa Valley, Margaret River and Yarra Valley). The ability of V2U to place large orders and make payments in 30 days or less enables the business to keep supplier costs low. The purchased wine is housed in a purpose-built warehouse facility awaiting repackaging and despatch to fulfil customer orders. Marketing to the key market segments has been identified as a core competency and efforts have been made to develop this ability in the last few years. CPA Australia Ltd

6 Strategic pricing for profit:: Extract Campaigns are conducted on a monthly basis targeting retail customers who meet the specific demographic set found to be most responsive. Additional campaigns targeting wholesale customers are conducted, developing a niche outside the high-volume, big-name liquor outlets and restaurant trade. These campaigns include direct marketing via mail, phone and online, as well as sponsoring events and advertising. They have been successful in bringing new customers to V2U, and a valuable database and marketing system is now ready to be exploited to generate additional orders from existing customers. The desired outcome of the marketing campaigns is to deliver sales opportunities or leads for the V2U Sales Team to convert into customer orders. For retail customers, the sales focus is on explaining the main benefits of the offer and highlighting the overall value and savings to be made. The benefits to wholesalers are lower prices, and savings on packing, logistics and marketing. A successful conversion of a sales opportunity to an order must then be quickly packed and despatched by the V2U Production Team, ensuring delivery within the customers expectations. 1.2 ORGANISATIONAL STRUCTURE V2U s organisational structure is presented in the figure below. Note that the Operations Manager coordinates all of the outsourced functions (human resources, training, legal counsel, and information and communications technology), although all senior managers engage with consultants. Figure 1: V2U organisational chart Board of Directors General Manager (Gerry Smith) Finance Manager (Yourself) Marketing Manager (Mandy Jones) Sales Manager (Sam Brown) Operations Manager (Oscar Green) Accounts Receivable Campaign & Database Coordinator Sales Team x 4 Production Team x 4 Accounts Payable Product Coordinator Outsourced functions: Human Resources Training Legal Counsel Information & Communications Technology 1.3 VALUE CREATION V2U s organisational value creation model is presented in the figure below. The figure reveals the range of transformational and enabling activities that are required for the organisation to operate successfully. 6 CPA Australia Ltd 2016

7 Figure 2: V2U organisational value creation model Transformational activities Enabling activities Resourcing and infrastructure Service Sourcing Strategy and control Distribution Value creation (End product) Receiving Operations Marketing Sales Product and marketing development V2U transformational activities Sourcing V2U will purchase approximately 36,000 dozen bottles of wine over the course of a year. This wine will be sourced from between different wineries depending on the vintage output in the associated regions for that year. The average annual order from a supplier will total 700 dozen bottles and range across a number of products. On a regular and ongoing basis, V2U needs to replenish stock levels with viable products at a costeffective price. The sourcing function includes negotiating purchase terms of replenishment stock (including quantity, price, delivery date and payment terms). Additionally, V2U is required to source packaging for the final orders to be packed into and shipped. This packaging consists of the outer cardboard case (12-bottle or 6-bottle), an internal divider (to protect and prevent bottles from clashing), as well as tape, glue and labels. These items are procured under long-term contracts from established packing suppliers. Receiving Wines and packaging materials that have been purchased by V2U need to be efficiently received, stored for later packaging, and paid for in accordance with the agreed terms. All stock purchases are delivered by the supplier to V2U s central warehouse. Marketing The key objective of the marketing activity within the V2U value creation model is the generation of viable sales opportunities. These are achieved through the conduct of monthly marketing campaigns throughout the year. The sales opportunities will be when prospects respond to the marketing offer and contact the V2U Sales Team, or consent to be contacted, via phone or . A prospect may be a completely new contact for V2U, or a previous customer of the business being contacted with a new offer. Additionally, a cold call list may be purchased or prepared from existing customer data with each contact on the list designated as a sales opportunity. Separate marketing campaigns are conducted to target retail prospects and wholesale prospects. While the mechanics of the campaigns are very similar, the product and offer will differ significantly. CPA Australia Ltd

8 Strategic pricing for profit:: Extract The Marketing Department strives to conduct one direct mail campaign and one point of sale or event marketing campaign each month. Point of sale or event campaigns may be conducted in bottle shops or other liquor sales outlets; at sporting, artistic or music events; or even at wedding expos, and food and wine fairs. Direct mail, or cold call campaigns are a more automated and simpler exercise, but with higher costs. Sales The first objective of the Sales Team at V2U is to make contact with the customer (preferably by phone but, if not, then by ). Even if a mailed or faxed order has arrived with all details filled out, a brief phone call will reinforce the value and benefits of the offer and will improve prospects for future sales. A phone or contact with the customer is a sales opportunity generated by the various marketing campaigns. There are approximately 60,000 sales opportunities for new customers and 48,000 for existing customers generated each year. Having attained the first objective of establishing contact, the second objective is to convert the contacted sales opportunity to a sale and achieve an optimal order size from the customer. With approximately one in five contacts being converted to a sale (slightly higher conversion rate for existing customers), the sales team averages one sale every quarter hour over the year. This equates to roughly 24,000 orders per year. Operations The Operations function within the V2U value creation model coordinates all the activities required to move warehoused stock from its storage location into position for efficient packing and readiness for despatch. At any given time of year, there are between 9,000 18,000 dozen bottles held in stock encompassing different products. These bottles need to be housed efficiently and packed into 24,000 orders over a year which equates to orders per day. The smallest order will only comprise a six-bottle case, while large orders may be 5 10 dozen bottles. Each order requires the bottles to be removed from the original packing case and repacked to the order quantity and specification into V2U packaging. The packed order is then sealed and labelled, and the order documentation is attached. Packed orders are stacked in consignment batches for more efficient despatch and delivery. Tallying up all stock movement and insertion of bottles into packs, the average order will take roughly 15 minutes to complete. Distribution All packed orders from V2U to customers are transported by external transport suppliers. The Distribution function is a set of activities that interface and manage the provision of this service. There will be orders shipped from the V2U warehouse per day, totalling 24,000 per year. With this many despatches, effective ongoing tracking is the key to ensuring packages reach their intended destination and are not misplaced (which would lead to time-consuming corrective action). Additionally, the Distribution function ensures that waste packaging is removed from the warehouse on a regular basis. Service Service to the V2U customers has a number of activities which provide overall value to the business and seek to increase the generation of repeat and referral business. The key activities undertaken to service customers include: Receiving and resolving customer queries and complaints. Managing and meeting customer expectations with regard to delivery speed, correct product delivery, quality of the product, and price. 8 CPA Australia Ltd 2016

9 Seeking additional feedback on how the product and service provided may be improved. Capturing all information gained and utilising this for marketing, sales and operations improvements. Following up and collecting trade receivables (debtor accounts). V2U enabling activities Strategy and control Strategy covers the overall vision, mission, values and goals of the organisation. Such areas provide a guiding force that drives the organisation s culture and confirms the underlying purpose of the organisation. While formal strategic planning at V2U only takes place on an ad hoc basis, strategy implementation is ongoing and permeates throughout the organisation as it evolves. In order to keep the organisation on track, and to protect valuable resources, V2U has implemented a variety of control mechanisms. These internal controls range from having formal policies and documented procedures, to physical security measures, management and financial reporting. Resourcing and infrastructure This covers the overall procurement and coordination of V2U s business resources (e.g. human, financial, technological), as well as management of existing assets that enable the organisation to function (e.g. warehouse, packing equipment, IT hardware and software). Such resources and infrastructure enable the constructive components of the value creation model to operate in alignment. Even as a small to medium-sized enterprise, V2U purchases the services of numerous suppliers which are required to maintain the business as a going concern. In the case of these service needs, the suppliers are specialists in their area and capable of meeting V2U s needs in an economically feasible manner. V2U s resourcing and infrastructure activities include financial management, asset management, and procurement. Ensuring that the appropriate people are placed and retained in positions within the business is essential. Employees are the most valuable suppliers to the business and so it is important for V2U to maximise their effectiveness and value. V2U outsources human resource services to a single supplier which advises and deploys solutions that are utilised by internal staff. Product and marketing development An ongoing capability that is discernable and inherent within the V2U business is the development of products that will be brought to the market and which are complemented by the development and ongoing promotion of the V2U brand. The products comprise a selection of wines at a certain price, packed in customer-selected configurations, ordered and delivered to customer needs. The development of these products requires the ongoing capture and maintenance of data that relates to the effectiveness of various configurations of product offerings, thereby enabling accurate design of features that will be attractive to the market. The delivery of attractive product offerings to the market is supported by the envelopment of a complementary V2U brand. This enables the product offering to be more than just information provided to the customer it becomes symbolic, engenders personality and creates a stronger and familiar connection with the customer. Development of products involves actions primarily relating to database management and customer focus groups. The objective is to retain a record of data that can be extracted and extrapolated to determine the required components of a marketing offer and indicate the likelihood of future success. CPA Australia Ltd