Price to Value Chapter 4-6

Agenda What should we expect to find when we identify products on the price versus value plane? What does it mean to be priced to value? Value advantaged? Value disadvantaged? What are the common pricing practices while launching a new product? When launching a new product, which competitors are most likely to be threatened?

Price Variability in Autos Large variation of prices for a similar good within the same category – Tata Nano $2500 – Bentley Flying Spur $170,000 What justifies the price difference: Benefits Benefits based pricing is a direct extension of the economics of pricing

Price to Benefits Map

Conjoint Delivers Price to Value

Value Equivalence line

Zone of Indifference Around the value equivalence line is a zone of indifference – Small variations in price or benefits around the value equivalence line have non measureable effect on sales volume Not all products will fall along the value equivalence line – Outside of this zone of indifference, lies the value advantaged zone and the value disadvantaged zone. – Products lying in the value advantaged or disadvantaged zones are either priced significantly lower or higher than the corresponding levels of benefits, as perceived by customers Elasticity is a key ingredient for determining the width of this zone.

Value Advantaged

At the other end of the spectrum, companies will at times price a product high in comparison to the perceived benefits of that offering. 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 Usually results in a loss of market share Value Disadvantaged

Customer perceptions 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 Delphi Approach – Use a defined or identified market transaction prices and independent expert evaluations of 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.

Dispersion in Perceived Price

Dispersion in Perceived Benefits When different customers hold different beliefs regarding the benefits of a product. – Most common error, to include to multiple and disparate market segments as one in making a Price to Benefits map Poor marketing communication techniques – Arises naturally when different segments pay attention to promotional activity differently. – 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

Functional benefits – physical nature or performance characteristics of the product – Examples: Cars, jewel clarity and size, 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. Benefit Sources

Market Confusion Simultaneous Dispersion in Perceived Price and Benefits Perceived Price Perceived Benefits Large Dispersion in Perceived Benefits and Price Leading to poor purchases, and ultimately brand betrayal or lost opportunities