Pricing Strategy Reviewer PDF

**Lesson 5: Price and value communication: Strategies to Influence Willingness-to-Pay** **Prices** should reflect **VALUE** - applying the idea of value creation will contribute to an economic system in which firms that are more adept at creating value for customers are most rewarded wit...

**Lesson 5: Price and value communication: Strategies to Influence Willingness-to-Pay** **Prices** should reflect **VALUE** - applying the idea of value creation will contribute to an economic system in which firms that are more adept at creating value for customers are most rewarded with higher margins and market value. **Value communications** - is about justifying the prices charged in terms of the value of the benefits provided. **A. ROLE OF PRICE &VALUE COMMUNICATION** \- to convey your value proposition in a compelling manner to accomplish three goals: **Effective value and price communications require:** - a deep understanding of customer value - combined with a detailed understanding of how and why customers buy - to formulate messages that actually influence purchase behaviors A **MAJOR GOAL** for value communication is to [provide our customers the information needed to justify paying a higher price.] **Challenges of Marketers** - Value of the is not communicated well - B2B settings the agent is not incentivized to figure out the relative value proposition of the product. - Marketers assumed that market demand is fixed, and market alone will determine the price of the product - Need to sell the product to those buyer who know or understand the value of the product. **EXAMPLE:** **B. ADAPTING THE MESSAGE FOR PRODUCT CHARACTERISTICS** - the step in developing a value message is determining which customer perceptions to influence - the goal is to help the customer recognize the linkages between a product's most important differentiated features and the salient value drivers **Marketers have to:** - understand the value drivers that are deemed most important to a customer segment. - help the customer recognize the linkages between a product's most important differentiated features and the salient value drivers **TWO DIMENSIONS THAT FRAME A COMMUNICATIONS STRATEGY** **1. The type of value delivered/sought** - ECONOMIC - PSYCHOLOGICAL **2. The degree of buyer involvement** - The level of involvement tends to increase when the purchase is more expensive. **C. STRATEGIES FOR CONVEYING VALUE** **C.1 Economic Value (monetary or psychological)** **FORMULA:** **Total Economic Value (EVE)=Reference Value+Differentiation Value** **An Economic Value Estimate (EVE)** - is a framework used to calculate and communicate the economic value of a product or service to a customer - quantifies the benefits of a product in monetary terms, helping to justify its price by showing how it delivers more value than competing alternatives **STEPS in calculating EVE:** **1. Identify the Product\'s Value Drivers** - Understand Key Benefits: Identify the key features and benefits of the product that drive value for the customer. For instance, does it save time, reduce costs, improve efficiency, or enhance performance? - Customer's Priorities: Determine which of these benefits matter most to the customer. Tailor the value estimate to the customer's specific needs and pain points. **2. Estimate Reference Value** - Competitor Comparison: The reference value is the price the customer would pay for the closest competitive product. Start by identifying the competing alternatives your customer could choose. - Cost of Competitor: Look at the price of the competitor's product or service that offers a similar set of features. This becomes the baseline (or reference value) for the EVE calculation. **3. Quantify Differentiation Value** - Additional Benefits: If your product provides additional benefits or unique features over the competitor, quantify the monetary value of those differences. This is the differentiation value. - Cost Savings: Calculate how much money your product saves the customer compared to competitors (e.g., energy savings, lower maintenance costs). - Increased Productivity: Estimate the time saved or increased efficiency that results from using your product. Convert that time into monetary value. - Risk Reduction: If your product reduces the risk of downtime, defects, or other problems, estimate the financial impact of avoiding those risks. - Higher Revenue: If your product helps customers generate more revenue (e.g., by improving sales or customer satisfaction), calculate that additional revenue **4. Calculate Total Economic Value** - The total economic value of your product is the sum of the reference value (from the competitor) and the differentiation value (from the unique benefits your product provides). - Reference Value: \$1,000 (the price of the competitor\'s product) - Differentiation Value: \$500 (extra savings in time, cost, or added benefits) - Total Economic Value (EVE): \$1,500 **LESSON 7: PRICING POLICY - Influencing Customer Expectations And Purchase Behaviors** - defines the rules and conditions for price discounts or surcharges that could be applied to a transaction within a segment - pricing policies involving things like an upcharge for rush orders or a discount for must-take orders to which the customer commits far in advance of shipment - should be transparent because their goal is to influence customer behavior **Price Expectations** - A customer's willingness-to-pay an offered price is not determined solely by whether that price is fair or reasonable when compared to economic value. - If customers come to expect that some change in their purchasing behavior will enable them to get the same product or service at an even better price, then the regular price becomes no longer acceptable. - change in behavior (of a buyer) is an unanticipated consequence of poor or non-existent policies that fail to account for the impact of the seller's behavior on the buyer's future price exceptions - Expectations drive buyer behavior when responding to prices Example: a retail consumer may believe that a new fall fashion is well worth the price asked for it in September, but not buy it if she expects that the store, following its past behavior, will have a 20-percentoff sale within the next month. - to avoid creating customer expectations that a seller's prices can be manipulated by adopting purchasing policies that disconnect price from value, sellers facing repeat customers need to anticipate the expectations that their pricing policies create for customers. - a company can change its customers' expectations by adopting pricing policies designed to influence those expectations positively Example: Some retailers have changed the expectations that it is better to wait for a sale by offering "30-day price protection," enabling deal-sensitive shoppers to buy now and receive a credit for the difference between the price paid and a sale price offered within the next 30 days **THE EMERGENCE OF STRATEGIC SOURCING** - Strategic sourcing is the process of developing channels of supply at the lowest total cost, not just the lowest purchase price. It expands upon traditional purchasing activities to embrace all activities within the procurement cycle, from specification to receipt and payment of goods and services **POLICIES FOR PRICE NEGOTIATIONS** - It requires developing a long-term strategy supported by pricing policies that are applied consistently. To develop good policies for price negotiation, it is necessary to treat every proposal or request for a price exception not as a one-off event but as an opportunity to create or change a policy that would be applied to all similar situations in the future. - If a firm has few clearly defined or consistently followed policies, a lot of potential deals will end up as requests for price exceptions. As new, well thought- out policies are put in place, customers and sales reps will learn that ad hoc exceptions to policies will not be granted. The only requests for special pricing that should be considered are those involving situations not already covered by a policy. Putting a "no exceptions" stake in the ground is a key to making pricing decisions that are profit-enhancing. - **Good policies** cannot magically make pricing of your product or service profitable, but poor ones can certainly undermine your ability to capture prices justified by the value of what you offer. - **Good policies** lead customers to think about the purchase of your product as a price-- value trade-off rather than as a game to win at your expense. - **Pricing Policies** are an essential part of any pricing strategy designed to capture value and maintain ongoing customer relationships. **Airlines have transparent pricing rules like:** - low prices only when purchased well in advance - charges for making changes - no transfer of tickets to another passenger - **One Price Policy** -- every customer pays the same price for a product. **LESSON 8: PRICE LEVEL - Setting Prices that capture a Share of the Value Created** **SIX-STEP PROCESS FOR SETTING PRICES** 1. **Define the reasonable price range** - Defining the viable price range starts with defining the highest and lowest price points that a business might sustainably charge for the product or service. - The feasible Price Ceiling is defined by the product's value proposition - Feasible Price Floor for a product is the price of the next-best competitive alternative **PRICE CEILING and the PRICE FLOOR represent the "reasonable price range"** - **Price Ceiling** is defined by the economic value - below the price of the next-best competing alternative - **Price Floor** is defined by the product's variable cost 2. **Make strategic choices** - pricing objectives must be set - define pricing objectives in terms of the share of differentiating value that the firm attempts to capture in its price - sustainable profitability should be considered in setting the price, as low price will, other things being equal, induce customers to migrate to a new product or service more quickly 3. **Assess breakeven sales changes** - relationship between changes in Price, Volume and Profitability is to be considered in determining where to set price levels - establishing the breakeven sales change necessary for a potential price change to be profitable "What percent change in sales would be necessary for a proposed price change to maintain the same total profit contribution after a price change?" 4. **Gauge price elasticity** - shows exactly how responsive customer demand is for a product based on its price - is a measure of how reactive the marketplace is to a change in price for a given product 5. **Account foe psychological factors** Thoughtful price and value communications can often decrease price sensitivity 6. **Communicate new prices to market** - communicate the rationale for the change, especially when there is potentially an issue of "fairness." How to Communicate Fairness (price increase) - Send a letter, e-mail, or press release to all customers. - Avoid being opportunistic by attempting to gain share by compromising on the increase - consider non-price mechanisms to "raise" prices and lessen the customer impact. **PRICE LEVEL** - **Setting Prices** that capture a Share of the Value Created *Price setting usually comes down to using informed judgment to find a price that balances costs, customer value, strategic goals, and potential competitive responses.* GOD BE THE GLORY!