956301
Price management
4th Session Learning Outcomes:
After engaging with the materials and exercises of this session
plus the readings and other material, you should, be able to:
• Explain the customer perception driven pricing
• Customer valuation
• Price to Benefit
• Neutral Pricing
• Penetration Pricing
• Skimming Pricing
Customer Perception Driven Pricing
• With evolutionary products, Customers…
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have experience with the product category
can conceptualize potential variations on those products
understand the value of the benefits delivered
hold price expectations
can make informed tradeoffs between competing
alternatives.
Example:
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Breyer’s Ice cream with Hershey’s Chocolate Chips
Case Forklifts with automatic vs. manual transmissions
Security software bundled with online data backup offerings
Tide with color safe bleach
Customer Valuations Vary
-- Customers will place different value on a product than the
producing firm, both greater and lower valuation
– Greater valuations can derive from customers having
alternative uses for a product than was originally intended
by the producer, or from satisfying a need greater than
was anticipated.
– Lower valuations can derive from customers perceiving a
wider variety of alternatives than originally anticipated, or
no longer needing a set of benefits delivered.
Example: Mango Juice
• While fresh mango juice is common within tropical areas, it is harder to
find in more northern latitudes
• Potentially, a new hot consumer product
• Mango juice is relatively expensive to produce in relation to other juices,
such as grape or orange
• Producers vary between offering pure Mango Juice and Mango Fruit
Blends
What should we expect to find
when we identify products on the
price versus value plane?
Constructing Price to Benefits Maps
• Executive Approach
– Identify competing products and their features , benefits, and prices. Position them on
the price to value map according to management impressions of the valuation of
competing benefits
• Consumer Research Approach
– Measure the level of perceived benefits and perceived price for a number of
products, as well as the variation in prices in which customers are indifferent
to changes.
– Plot the products according to the mean perceived price and mean perceive
benefits. Use the variation in prices to define ellipses of uncertainty about the
mean price and benefits for the products.
Price Variability in Autos
• Large variation of prices for a similar good within
the same category
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Tata Nano $2500
Chevrolet Malibu $28,000
Bentley Flying Spur $170,000
a factor of 68 between the lowest price production car
and the highest price product auto
• What justifies the price difference: Benefits
• Benefits based pricing is a direct extension of the
economics of pricing
Price to Benefits Map
• Price Boundary Theory
• The price to benefits map
plots the position of
products in terms of
perceived products and
perceived benefits….
– Visual representation of
how customers perceive
the value trade off.
Bentley Flying
Spur
Perceived Price
– Identify relevant competing
alternatives
– Define the value differential
– Pricing accordingly
BMW 7 Series
Lexus LS
Chevrolet Malibu
Tata Nano
Perceived Benefits
Price to Benefits Map
Mango Juice Conjoint Analysis Results
$6.00
Perceived Value
$5.50
$5.00
$4.50
$4.00
$3.50
$3.00
Mango Fruit Mango Fruit Pure Mango, Pure Mango,
Blend,
Blend,
Premium
National
Premium
National
Niche Brand
Brand
Niche Brand
Brand
Product Features
Pricing Areas
• Value Equivalence Line
– Where price increases
proportional to benefits
increases
– Excess benefits beyond what
is captured in price
• Value Disadvantaged
– Priced higher than what
would be justified based on
the measure of benefits alone
Perceived Price
• Value Advantaged
Value
Equivalence
Line
Value
Disadvantaged
Zone of
Indifference
Value
Advantaged
Perceived Benefits
Value Advantaged
• more benefits than
expected at a given price
Value
Equivalence
Line
– Some authors refer to products
priced in the value advantaged
zone as suffering from
“unharvested value” because the
company has the opportunity
with products that are “value
advantaged” to raise the prices.
– Consider it a pricing error
– Ex: selling front row seats at the
same price as back seats in a
large theatre
Perceived Price
• Unharvested Value
Value
Disadvantaged
Zone of
Indifference
Value
Advantaged
Perceived Benefits
Value Advantaged (Cont.)
• Market Share Taking
– Warning: deliberately pricing
products in the value
advantaged zone is likely to
instigate(arouse) a
competitive reaction, such as
a potential price war,
harming overall industry
health
Perceived Price
– Customers perceive that
more benefits are delivered
at a given price through the
value advantaged product,
and rationally choose to
select that product.
Value
Equivalence
Line
Value
Disadvantaged
Zone of
Indifference
Value
Advantaged
Perceived Benefits
Value Advantaged (Cont.)
• Hyper-competition
• Autos and gas mileage
• DRAM decreases in costs per kb each
time a new photolithography
standard becomes available
• LCD TV’s, computer processors, etc
likewise enjoy such costs reductions
over time
– Aggressively pricing new
technology that offers
significant costs advantages
over legacy technology is a
common trait in certain
markets. Forms the basis for
the concept of
Hypercompetion.
Perceived Price
– Certain product categories,
technology driven sectors in
particular, enjoy sequential
improvements in product
quality over time
Value
Equivalence
Line
Value
Disadvantaged
Zone of
Indifference
Value
Advantaged
Perceived Benefits
Value Advantaged Positioning
imposes a threat on competitors
Value Disadvantaged
•
At the other end of the spectrum,
companies will at times price a
product high in comparison to the
perceived benefits of that offering.
Value
Disadvantaged
• Usually results in a loss of
market share
Perceived Price
• Missed Opportunities
– Some authors refer to this as
missed opportunities, as the
firm could have sold a higher
volume if their prices were
more inline with expectation
levels
– Consider it too a pricing error
– Ex: Unsold advertising space
within a poplar magazine
Value
Equivalence
Line
Zone of
Indifference
Value
Advantaged
Perceived Benefits
Value Disadvantaged (Cont.)
Can be stable if the product does
offer superior benefits along a
dimension not measured
– Can be used effectively to
capture profits from a segment
that seeks value and derives
benefits from a source of
features or placement that is
along another dimension than
that measured.
– Ex: Bentley Silver Spur @
$170,000 vs. Porsche 911 GT2 @
$194,000
– Both priced relatively high, but
for a sedan seeking buyer, the
Porsche is priced too high as it
fails to provide luxurious
seating. Meanwhile, for the
performance seeking buyer, the
Bentley Silver Spur is priced to
high for the level of
performance sought.
Value
Equivalence
Line
Value
Disadvantaged
Perceived Price
•
Zone of
Indifference
Value
Advantaged
Perceived Benefits
Value Disadvantaged (Cont.)
In this case, it is suggested that the
market be segmented, and generate
specific Price to Benefits maps for
the independent market segments.
– i.e. luxury sedans as one segment
and luxury sports cars as another
segment
Value
Equivalence
Line
Value
Disadvantaged
Perceived Price
•
Zone of
Indifference
Value
Advantaged
Perceived Benefits
Value Disadvantaged Positioning challenges
the need to capture customers
Dispersion in Perceived Price (Cont.)
• Within the market, a single product
may be sold at a number of
different prices, and the perceived
price may at times vary away from
the actual transaction price
• Hidden price vs. explicit price
statements
– Phone tariff structures of
incumbent vs. new entrant
• Usage rates and flat fees… price
per unit can vary
– Distribution Channel and Locations
– each gives variation in price.
– Promotional discounts
• Couponing and price promotions
• Can create challenges in cross
channel cannibalization.
Perceived Price
– Varies between customers
Large
Dispersion in
Perceived
Price
Perceived Benefits
Dispersion in Perceived Price
– Customer may place an
expected price on a
product based upon the
last time they purchased
that product, however due
to changes in economic
situations, the price will
change over time.
Especially true during
inflationary times.
Perceived Price
• Perception mismatch
Large
Dispersion in
Perceived
Price
Perceived Benefits
Dispersion in Perceived Benefits
Perception of benefits gained from
utilizing a product varies among
customers – orientation of segmentation
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•
Most common error, to include to
multiple and disparate market segments
as one in making a Price to Benefits map
Poor marketing communication
techniques
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Can be due to miscommunication of the
benefits where some MarComm focuses
on one set of benefits while other
MarComm focuses on another set of
benefits, leaving the recipients of the
message confused as to the exact set of
benefits or their value – Can be an area
to “fix” within the company
Arises naturally when different segments
pay attention to promotional activity
differently. Some segments are more
responsive to marketing communication
than others, driving a dispersion in
perceived benefits (McDonalds Healthy
Choices)
Perceived Price
•
Large
Dispersion
in
Perceived
Benefits
Perceived Benefits
Dispersion in Perceived Benefits
Common also in experience and credence
goods,
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the benefits of the product can only be poorly
perceived prior to purchase, if they are ever
observed (credence goods)
customers with direct and recent exposure to
the product are likely to have a more accurate
reading of the benefits than those with less
exposure to the product
Dispersion in risk tolerance affects benefits
perception
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Risk aversion and aversion to change may
cause many customers to discount the
perceived benefits, while other customers
seek the benefits precisely because they bring
about change
Also seen in business markets, where
executive management seeks change and
improvement while mid-level management
seeks stability and steady career
improvement
Perceived Price
•
Large
Dispersio
n in
Perceived
Benefits
Perceived Benefits
Benefit Sources
• Functional benefits
– physical nature or performance characteristics of the product
– Examples: Cars, jewel clarity and size, square footage &
neighborhood,
• Process benefits
– lowering transactional costs
– quicker, safer, easier, reduced search costs, etc
• Relationship benefits
– accrue to the customer from a mutually beneficial relationship
with the seller
– emotional connection to the brand or sales representative,
loyalty rewards, information provisions, - lower search costs or
design costs.
Market Confusion
Perceived Price
Simultaneous Dispersion in Perceived Price and Benefits
Large Dispersion in Perceived
Benefits and Price
Leading to poor purchases, and
ultimately brand betrayal or lost
opportunities
New Product Positioning or Repositioning
• Key Pricing issue in Product
Launch/Repositioning is where on the Price to
Benefits map should the product fit?
– Where is the customer addressable horizon?
• Customers from a higher price / higher benefit region?
• Customers from a lower price / lower benefits region?
– Where are the adjacencies from which the new
product will take market share or grow the market?
– What is the likely response of the nearest competitor?
– Is the new position defensible?
New Product Positioning or Repositioning (Cont.)
• Value Equivalence
• Value Advantaged
• Value Disadvantaged
Perceived Price
• Choices:
Value
Equivalence
Line
Value
Disadvantaged
Zone of
Indifference
Value
Advantaged
Perceived Benefits
• Pricing along the Zone of
indifference
• Will capture profits in
proportion to benefits
• Safest from a pricing
perspective. Puts pressure on
other marketing levers,
distribution and promotion, in
driving volume
Perceived Price
Price Neutral
New
Product
Perceived Benefits
Penetration Pricing
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•
Pricing at a low level compared
to level of benefits offered
Using price as a means to gain
market share
Can come from increasing the
level of benefits of a product,
but leaving the price
unchanged, thus driving the
product into the value
advantaged zone
Perceived Price
•
Likely
Competitive
Response is a
Price Decrease
New Product
Priced to
Penetrate the
Market
Perceived Benefits
•
•
Easy from a promotion
perspective, but can be deleterious
for the firm
– Substantial loss of potential
profit
– Can incur a negative
competitive response
Potential competitive response
– Most likely direct response is a
price decrease by
competitors,
– Less likely is a benefits increase, as
these take time through reengineering the product
– Show who is most affected.
For Example ... ??
Perceived Price
Penetration Pricing (Cont.)
Likely
Competitive
Response is a
Price Decrease
New Product
Priced to
Penetrate the
Market
Perceived Benefits
Skim Pricing
competitors comparable price
to benefits offer
• Price in the value
disadvantaged zone
• Skim profits from early
customers with the
expectation of lowering
prices later
Perceived Price
• Pricing high with respect to
New Product
Priced to Skim
the Market
Perceived Benefits
• Perceived as a Safe move
from a competitive
response perspective,
however
– Can be a pricing error in
terms of forgone profits
from missing volume
target
– Provides insufficient
motivation for the market
to purchase the product at
the higher price point,
given the alternatives
Perceived Price
Skim Pricing (Cont.)
New Product
Priced to Skim
the Market
Perceived Benefits
In-Class exercise
Q5 – Q7 (Page 74) : Questions are about the price and benefit !!
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SUMMARY
Explain the customer perception driven pricing
Customer valuation
Price to Benefit
Neutral Pricing
Penetration Pricing
Skimming Pricing