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01
Pricing
Strategy forBiz MarketsCase Analysis Price Like a Retailer, Not a Widget MarketPresented by
Victor Lee, Grace Lee, Nelson Leong Kin Yit, Sophia Lian
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01Parker Hannifin Corporation (NYSE: PH) -
manufacturer of motion and control technologies. Founded in 1918; publicly traded on the NYSE
since December 9, 1964.
One of the largest companies in the world in motion
control technology and employs around 39,873people.
As of 2010, Company ranked 230 in the Fortune
500.
introduction
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Fluid Connectors Instrumentation Filtration HydraulicsAutomation
Climate & Industrial Controls Sealing and ShieldingAerospace
Parker - divided into EIGHT
technology groups.
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Manufacturer of motion control products,
including fluid power systems,
electromechanical controls and related
components.
It makes components used in everything
from the space shuttle to a mechanism thathelped tilt a faux steamship for the movie
"Titanic."
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02DESCRIBE THE PROCESS IN PERFORMINGDESCRIBE THE PROCESS IN PERFORMING
AN AUDIT OF THE FIRM]S PRODUCTAN AUDIT OF THE FIRM]S PRODUCT
LINE TO IDENTIFY THE BEST ANDLINE TO IDENTIFY THE BEST AND
WORST PRODUCTS FOR PROFITWORST PRODUCTS FOR PROFIT--MARGINMARGIN
EXPANSION.EXPANSION.
question one
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Profit Margin Expansion
In long-term reference, a measure of acompany's net profit margin in the
latest reported quarter divided by profit
margin in the fiscal year
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PARKERS STRATEGY
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We can't price them
just off the cost. We
have to price them off
of the value to the
customer and
competitive levels on
the marketplaceDonald E. WashkewiczDonald E. Washkewicz
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Know the PriceKnow the Price--Setting DecisionSetting Decision
Process :Process :
Set Strategic Pricing ObjectivesSet Strategic Pricing Objectives
Estimate Demand and the Price Elasticity of DemandEstimate Demand and the Price Elasticity of DemandEstimate Demand and the Price Elasticity of DemandEstimate Demand and the Price Elasticity of Demand
Determine Costs and their Relationship to VolumeDetermine Costs and their Relationship to Volume
Examine Competitors Prices and StrategiesExamine Competitors Prices and Strategies
Set the Price LevelSet the Price Level
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Set Strategic Pricing ObjectivesSet Strategic Pricing Objectives
Achieve market share from 14 % to20%
Price product at the best value. No. 1 motion control company
everywhere in the world
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Estimate Demand and PriceEstimate Demand and Price
Elasticity of DemandElasticity of Demand
How do organizational buyersvalue the product?
Economic value
Cost saving/revenue gain
Commodity value
Value that customer assign to
product feature
Differentiation value
Unique from competitors
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Product Category Explanation
1. Core products Commodity-type products in a highly
competitive market
2. Partially differentiated group A Some differentiation adds value for
customer
3. Partially differentiated group B Niche products with no exact
competitive matches
4. Differentiated products or
systems
Highly engineered solutions
5. Specials and classics Custom-designed products or one-
of-a-kinds
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Costs & their Relationship to Vol.Costs & their Relationship to Vol.
Cost implications:
Proportion of product cost
Variation of cost at different level
Economies of scale
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Problem
$3 billion a year on materialsand services but no one triesto add up and order from oneperson.
Solution Strategic purchasing program
Reduced number of suppliers,
and collaborates more closelywith them on productdevelopment to save money
ABC approach
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Examine Competitors Prices
and Strategies & Set Price
Level Price can make a differential
advantage over competitors. Hypercompetitive rivalries:
Parker has competitors in eachproduct category
Crane, Eaton, HoneywellInternational, IMI, Invensys,Kaydon and Watts WaterTechnologies
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Product Category Explanation Price Adjustment
1. Core products Commodity-type productsin a highly competitive
market
Aligned prices withmarket. Changes were -3%
to +5%.
2. Partially differentiatedgroup A
Some differentiation addsvalue for customer
Increased prices upto 5%
3. Partially differentiatedgroup B
Niche products with noexact competitive matches
Increased prices upto 5%
4. Differentiated products
or systems
Highly engineered
solutions
Increased upto 25%
5. Specials and classics Custom-designed productsor one-of-a-kinds
Increased over 25%
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Provide a set of specific pricing guidelines
that managers should apply as the
traditional cost-plus approach is phased
out and a value-based approach to pricingis implemented.
03Question two
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Cost-plus Pricing
This type of pricing includes the variable
costs associated with the goods, as well
as a portion of the fixed costs of operating
the business.
(average variable cost + % allocation of
fixed costs)(1+ mark up%).
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Value-based Pricing
It sets selling prices on the perceived
value to the customer, rather than on the
actual cost of the product, the market
price, competitors prices, or the historical
price.
The goal of value-based pricing is to align
price with value delivered. Price for anyindividual customer can be customized to
reflect the specific value delivered.
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Cost-plus vs Value-basedCost plus
suited to businesses that
deal with large
volumes/which operate in
markets dominated by
competition on price.
ignores your image and
market positioning. And
hidden costs are easily
forgotten, so your true profitper sale is often lower than
you realise.
Value-based focuses on the pricecustomers are willing to pay,based on the benefits yourbusiness offers them.
depends on the strength of thebenefits you can provide tocustomers.
charge according to the valueyou offer customers.
it can alienate potentialcustomers who are driven onlyby price and can also draw innew competitors.
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Value-Based Approach
Define the key market segments
Isolate the most significant drivers of value incustomers business
Quantify the impact of your product/service,particularly for those features that are uniqueand different from competitors offering
Develop pricing strategy and marketing plan
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Step1
Parker Hannifin Corporation market segment
- original equipment manufacturers (OEMs)- replacement markets in various manufacturing and processindustries
Step2
Customer interview - identify and measure value
Value driver(power generation technology)
Cost drivers
- create value by economic savings Revenue drivers
- add incremental value by facilitating revenue or marginexpansion.
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Step 3
Impact
- Quantify the impact of the product or service on each value
driver in customers business
(e.g. Lower installed and life-cycle costs for water injection)
Step 4
Comparison
- estimate the incremental value
- isolate features that are unique and different from competitors
(e.g. parker store perform fittings, pumps and walk-up repairs)
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When a new CEO took over Parker Hannifin Corp.,
- 1/3 of Parker's parts offering unique customer value were
priced on a cost-plus basis- parts that are custom-engineered for their customers which
should have commanded premium prices.
Introduction of value-based pricing resulted in- invested capital from 7% in 2002 to 21% in 2006
- per share value by 88% compared with a 25% gain in the S&P
500.
Value-based pricing certainly means that prices of items with
unique features should go up to match customer value, but it
also may mean that prices of less competitive items should go
down to maintain or expand market shares.
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THEENDThank you forlistening