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Economic Value - Pricing Strategy Lecture

Management (Central Luzon State University)

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Economic Value
The Guiding Force of Pricing Strategy 1. Collect and analyze Competitive Reference
Prices
Economic Value 1.1 Identify Competitive Alternative
• The value that is key to developing effective
pricing strategy or exchange value Example:
• Value refers to the total savipngs or satisfaction A manufacturer of uniforms, thought they had an 85
that the customer receives from the product percent market share. However, rudimentary
• Economists refer to this as use value or the market research quickly revealed that customers
utility gained from the product. considered competitive offerings not just from other
uniform manufacturers, but anyone who sold
Two Forms of Economic Value clothing such as department stores and discounters.
1. Monetary value represents the total cost savings Consequently, when viewed against this larger
or income enhancements that a customer accrues as backdrop of potential uniform vendors, it was found
a result of purchasing a product out that the client only had a 35 percent share of the
⮚ It is the most important element for market and they were shocked to learn that they
most business-to-business purchases. were missing many more sales opportunities than
• Example: they had originally thought.
When a manufacturer buys high-speed
switching equipment for its production line from 1.2 Establish the competitive reference
ABB, a global electrical equipment manufacturer, it price
gets products with superior reliability that minimize  requires gathering accurate price data and
power disruptions. For many of ABB’s customers, ensuring that it is comparable to the pricing
the benefit of fewer power disruptions has high for your product
monetary value because it translates into tangible  you must ensure that competitive prices are
cost savings associated with avoiding plant measured in terms familiar to customers in
shutdowns. the segment (for example, price per pound,
price per hour) and are stated in the same
2 . Psychological value refers to the many ways units as your product
that a product creates innate satisfaction for the
customer Example:
• many price comparison tools available today
 Example: from vendors like Google Shopping, Shoppee
A Rolex watch may not create any tangible and Lazada that allow users to quickly scan for
monetary benefits for most customers, but a certain competitive price points
segment of watch wearers derives deep *competitive prices are more difficult to obtain
psychological benefit from the prestige and beauty because of industry-wide practices of
associated with ownership to which they will unpublished prices or because prices are
ascribe some economic worth. negotiated individually with customers

Consumer products often create more 2. Estimating Monetary Value

psychological than monetary value because they - Monetary value drivers are tied to the
focus on creating satisfaction and pleasure. customer’s financial outcomes via tangible
cost reductions or revenue increases.

In Quantifying Monetary Value you have to

understand how the product category affects the
customer’s costs and revenues.

How to Estimate Economic Value

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Example: Regardless of the attributes tested, the value

Quantifying Monetary Value estimates derived from a conjoint study can then be
A hybrid car, for example, provides used as an input to a variety of pricing decisions.
monetary benefits such as lower fuel and
maintenance costs. Typical of most end consumer Value Based Market Segmentation
monetary value drivers, fuel and maintenance Market Segmentation
costs can be quantified using readily available data; Facilitate pricing commensurate with actual value
Toyota’s online calculator is a tool to help perceived and delivered to customers
consumers estimate the financial benefits of
purchasing one of their cars. Market Segmentation
 one of the most important tasks in marketing
3. Estimating Psychological Value
• Psychological value drivers such as satisfaction  The goal of any market segmentation is to
and security, by virtue of their subjective divide a market into subgroups whose members
nature, do not lend themselves to estimation via have common criteria that differentiate their
qualitative research techniques like in-depth buying behaviors.
interviewing.
⮚ Quantitative techniques is used to estimate the  Identifying and describing market subgroups
worth of a product’s differentiated features. in a way that guides marketing and sales
decision-making makes the marketing and
Conjoint Analysis—a technique developed in the pricing process much more efficient and
late 1970s and early 1980s that can discern the effective.
hidden values that customers place on product
features. The basic approach is to decompose a
product into groups of features and then provide Six-Step Process of Value-Based Segmentation
customers with a series of choices among various
feature sets to understand which they prefer 1. Determine Basic Segmentation Criteria
- makes it possible to estimate the value of - Choosing appropriate segmentation criteria
different feature sets in starts with a descriptive profile of the total
driving willingness-to-pay and, ultimately, the market to identify obvious segments and
purchase decision. differences among them
o In consumer markets, basic
Example: demographics of age, gender,
• A flat screen TV can be described in terms of and income
attributes such as size of screen, number of o 2. Enterprise firmographics such as
pixels, and brightness. In a conjoint study, each revenue, industry, and number of
of these attributes is divided into levels that can employees
be tested. For instance, screen size might be
broken into 36 inches, 42 inches, and 52 inches, Segmentation Criteria
as a means to estimate the relative value placed
on greater screen size. - Inputs for this basic analysis can include
existing segmentation studies, industry
Example: databases, government statistics, and other
• Similarly, conjoint is a common approach to secondary sources.
estimating brand value because it enables - Outputs include buying patterns, customer
brand to be treated as any other attribute. descriptions, a preliminary set of current
• Treating brand as another attribute in the choice customer needs, and a provisional list of
decision allows us to understand how customers unmet customer needs.
might value a 36-inch Sony TV relative to a 42-
inch Samsung model. 2. Identify Discriminating Value Drivers

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Value Drivers- are purchase motivators that  Your primary segmentation should
vary the most among segments but which account for your company’s capabilities
have more or less homogenous levels and constraints as well as customer
within segments needs
o This allows you to focus your
5. Create Detailed Segment Descriptions
attention on what’s most important
 segments should be described in
to each customer segment.
everyday business terms so that
o In-depth interviews probing how and
salespeople and marketing
why buyers choose among communications planners know what
competitive suppliers provide the kinds of customers each segment
additional input required in represents
identifying discriminating value
drivers Characteristics of Three Printer Customer
Segments
3. Determine Your Operational Constraints
6. Develop Segment Metrics and Fences
and Advantages
 it’s important to recognize that
 examine where you have operational
segmentation isn’t truly useful until you
advantages
develop the metrics of value delivery to
 which value drivers can you deliver more market segments and devise fences that
efficiently and at lower cost than others encourage customers to accept price
policies for their segments
 Which value drivers are constrained by your
resources and operations?  Metrics - are the basis for tracking the
value customers receive and how they
 Experience, capital spending plans, pay for it.
personnel capabilities, and overall company
strategy are among the inputs to this step. Example:
 Use the discipline of activity-based costing Car rental companies once used a distance-
to build a customer behavior spectrum based value metric and charged customers for
mapping your true costs serving different the mileage traveled in addition to the time
customers. used
 Examine competitive strengths and  Fences - are those policies, rules, programs,
weaknesses on key drivers as closely as you and structures that customers must follow to
can. qualify for price discounts or rewards.
Example: minimum volume requirements, time-
based membership requirements, bundled purchase
4. Create Primary and Secondary Segments requirements, prices paid
 This step combines information about o Some fences can also force customers to
how customer values differ and about
pay higher prices regardless of the seller’s
your costs and constraints in serving
costs
different customers.
o Choose metrics and fences that establish
 In theory, your primary segmentation is
and enforce premium prices for high-
based on the most important criterion
value segments, and allow feature
differentiating your customers

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repackaging and unbundling to appeal to

low-value and low-cost-to-serve segments

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