Pricing: A Value-Based Approach

MBA Sharia
March 28, 2014
Understanding customer’s wants
Understanding customers’ wants is the
foundation for building the marketing mix
consisting of:
 A product meeting the wants
 An information program conveying the value
 A distribution program making the program
readily available
Pricing Decision
• Has a broad scope
• Has a highly levered effect on net income
• Getting pricing right is a big deal
Profits = [Price – Cost] * Unit Sales
- There is often more emphasis on the Cost and
Unit Sales parts of the profit equation than
Price
- Price is seen as determined by the market or
something we really don’t have much control
- Marketers miss great profit opportunities
Determine Customer Value and
Sensitivity to Pricing
• Pricing should be driven primarily by the value
to the customer
• There a number of ways in which this value
can be estimated
• This value analysis should be complemented
by an analysis of just how important price is in
the customer’s decision making process
Example
• How important is the price of the stent to the
doctor in choosing which one to insert?
– Not very. Because this is a life-or-death situation
for the patient, product performance is the key.
– The doctor is knowledgeable, sophisticated
decision maker and would prefer not to shift away
from the “usual brand”
– The doctor perhaps is not the one paying for the
stent
A systematic approach in judging
price sensitivity
1. Product Category Factors
Price sensitivity tends to be lower in low-cost
product categories
2. Who Pays?
Situations vary from ones wherein the decision
maker pays no portion of the cost, to shared cost
situation (e.g., the decider pays some percentage of
the cost), to cases where the decision maker bears
fully responsible.
A systematic approach in judging
price sensitivity (2)
3. Competitive Factors
A number of competitive factors influence price sensitivity.
Price sensitivity is higher to the extend that:
A. The decision maker does not perceive significant
difference in alternative products
B. The more knowledge a decision maker has about
alternative products and their prices
C. It is easy to compare products and their price schedules
D. It is easy for the decision maker to switch products
A systematic approach in judging
price sensitivity (3)
4. Reference Prices
Reference prices are subjective formulations
in the customer’s mind and thus are possibly
influenced by many factors including the firm’s
marketing program
– What is seen as “fair”
– A competitor’s price for a similar item
– The price last paid for the item
– What others are paying for the item
A systematic approach in judging
price sensitivity (4)
5. Price/Quality Relationships
In some categories, particularly ones in which
product quality is difficult to judge by inspection
before purchase (e.g., perfume, consulting services),
price can be used as cue to product quality.
Assessing a product’s value to
customers
The major methods of assessing this value,
whose applicability varies by situation, are:
• Judgments based on an understanding of the
buyer’s cost structure
• Surveys in which customers are asked either
directly on indirectly about value
1. Cost Structure Studies
• One assesses the “true economic value” (TEV)
to a customer
• TEV is provided which is based on
understanding the competitive alternatives,
the price and performance of those
alternatives, and the buyer’s costs.
1. Cost Structure Studies (2)
TEV has two major components:
TEV = Cost of the Alternative + Value of
Performance Differential
2. Customer Surveys
Two fundamentally different methods are
commonly used to obtain price response data
from customers:
A. Directly asked for reaction to certain prices,
price changes, or price differentials
B. Infer the response from an analysis of data
on customers’ expressed preference for one
product over another
1. Direct Questioning
It is simple, easily understood, and inexpensive,
but has important limitations. It can:
• Induce unrealistically high price consciousness
in respondents
• Suffer from bias in that respondents may be
reluctant to admit that they cannot afford a
premium product  overstate willingness to
pay
2. Preference-Based Inference:
Conjoint Measurement
• Relatively new
• Powerful procedure to overcome some of the
limitations of the direct questioning method
• Its superiority stems from the fact that the
questions replicate the realistic scenario of a
customer facing an array of competitive
alternatives with different features and prices
and having to chose among them.
Customizing Price to Value Delivered
The four primary methods of customizing prices
are:
1. Product line sorting
Offering “high-end” products with many features
for the high-value customer and more basic models
for lower value.
2. Controlled availability
3. Price based on buyer characteristics
4. Price based on transaction characteristics