PRACTICALLY THEORETICAL TAKEAWAYS FROM THE SCIENTIFICALLY EMOTIONAL WORLD OF PRICINGJD DILLON

PRODUCT CAMP SILICON VALLEY

MARCH 2017

BUT FIRST, A WORD FROM OUR SPONSOR

"The single most important decision in

evaluating a business is pricing power.”Warren Buffett

PRACTICALLY THEORETICAL TAKEAWAYS FROM THE SCIENTIFICALLY EMOTIONAL WORLD OF PRICING

PRICING IS EMOTIONALJUST ASK MY LATE GRANDFATHER

½ Price @

Podiatrist

PRICING IS EMOTIONAL: REFERENCE PRICECOMPARISON TO PERCEIVED ALTERNATIVES

Different Alternative

14X Price Increase

PRICING IS EMOTIONAL: EXPENDITURE EFFECTSIZE OF PURCHASE IMPACTS PERCEPTION OF PRICE DELTA

Where does $595 Matter More?

PRICING IS EMOTIONAL: FAIRNESS EFFECTGENERAL PERCEPTION TIED TO SELLER’S MOTIVES

$-

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

Tic

ke

t P

ric

e

26 Different Ticket Prices (Snapshot on 13 December)

United Flight from SFO to JFK (3 January 2013)

Start a riot on your next flight

PRACTICALLY THEORETICAL TAKEAWAYS FROM THE SCIENTIFIC EMOTIONAL WORLD OF PRICING

PRICING IS SCIENTIFICSTRATEGIC ANALYSIS FOR A CORPORATION (APPLE)

APPLE Annual Ending 9/16 %

Revenue $215.6B

COGS $131.4B 61%

OPEX $24.2B 11%

Operating Income $60.0B 28%

1.4%

2.2%

0.4%

3.6%

Rev Incr

COGS Decr

OPEX Decr

Price Incr

Profit Result from 1% Changes

Pricing is the

#1 Profit Lever

PRICING IS SCIENTIFICTACTICAL ANALYSIS FOR A REGION & PRODUCT SET (SSD)

Regional Data Prior YearPrice

ChangeConstant Volume

Constant Margin$

Revenue $1,445,786

Unit Cost $410.46

Unit Price $674.03 (20%) $539.22 $539.22

# of Units 2,145 2,145 4,375

Margin % 39%

Margin$ $565,365 $276,198 $563,340

Margin$ cut in ½ [or] Unit Quota Doubled

PRACTICALLY THEORETICALTAKEAWAYS FROM THE SCIENTIFICALLY EMOTIONAL WORLD OF PRICING

PRICING CAN BE THEORETICAL…FOUR COMPLEMENTARY PRICING THEORIES

Cost Margin Financial: Return on Fixed & Variable Costs

Price Customers Cust Sat: Willingness To Pay (WTP)

Price Competition Market Share: Price is Tool to increase SOM%

Reference

Value

Differentiated

ValueMaximize Value: Charge what it’s worth

ObjectivesTheory

… BUT DON’T BE TOO THEORETICALJC PENNY PRICING STRATEGY LAUNCHED IN FEBRUARY 2012

Became unprofitable & share price cut in ½ during

Ron Johnson’s 17-month tenure as CEO of JC Penny

PRACTICAL THEORETICAL TAKEAWAYS FROM THE SCIENTIFICALLY EMOTIONAL WORLD OF PRICING

PRACTICAL TAKEAWAYS… AND CREATIVELY LOWER PRICE AS A LAST RESORT

PRACTICAL TAKEAWAYSINVERT YOUR MINDSET TO IMPROVE PRODUCT DEVELOPMENT

BECOMES

CostProduct Price Value Customer

Customer Value Price Cost Product

PRACTICAL TAKEAWAYSPRICING REQUIRES DISCIPLINE, PROCESS, & STRUCTURE…

PRACTICALLY THEORETICAL TAKEAWAYS FROM THE SCIENTIFICALLY EMOTIONAL WORLD OF PRICING

THE SVBN SHOULD TAKE AWAY THAT PRICING…

… is theoretically practical & scientifically emotional

… hence demands discipline and creative management

ONE MORE TIME, FROM THE ORACLE…

"The single most important decision in

evaluating a business is pricing power.”Warren Buffett

PRACTICALLY THEORETICAL TAKEAWAYS FROM THE SCIENTIFICALLY EMOTIONAL WORLD OF PRICINGJAMES (JD) DILLON

JIM.DILLON@YMAIL.COM

(408) 772-3169

PRICING IS SCIENTIFIC (APPENDIX)MATHEMATICS AROUND 1% STRATEGIC PRICE CHANGES

APPLE P&L $B Rev Incr COGS Decr OPEX Decr Price Incr

Revenue $215.60 $217.76 $215.60 $215.60 $217.76

COGS $131.40 61% $132.71 $130.09 $131.40 $131.40

OPEX $24.20 11% $24.20 $24.20 $23.96 $24.20

Operating Income $60.00 28% $60.84 $61.31 $60.24 $62.16

Pricing Impact 1.4% 2.2% 0.4% 3.6%

PRICING IS SCIENTIFIC (APPENDIX)MATHEMATICS AROUND 20% TACTICAL PRICE CHANGES

Regional Data Prior YearPrice

ChangeConstant Volume

Constant Margin$

Revenue $1,445,786 $1,156,629 $2,359,091

Unit Cost $410.46 $410.46 $410.46

Unit Price $674.03 (20%) $539.22 $539.22

# of Units 2,145 2,145 4,375

Margin % 39% 24% 24%

Margin$ $565,365 $276,198 $563,340

Delta P /GM% Margin$ # of Units

20/39 -51% +104%