1. Pricing Strategy & Tactics – Chs. 1-3
Define Strategic Pricing & 5 elements of a pricing strategy: (1) Value creation, (2) Price and offer structure (3) Value communication, (4) Pricing policy, & (5) Price setting;
Define Value and explain its role in pricing strategy;
Show how value-based segmentation enables companies to more profitably align its offerings with differences in what consumers are willing to pay; and
Examine mechanisms to maintain segmented structures: (1) Price-offer configuration, (2) Price metrics, & (3) Price fences.
MKTG 6214
Glenn Voss

2. 2 Cases in course packet at Study.net
MKTG6214 Course Materials
Textbook:
The Strategy and Tactics of Pricing, 5th edition, 2011, Nagle, Hogan, and Zale
Cases:
2 Cases in course packet at Study.net
Password: MKTG6214
Springfield Nor’easters case available online
User Name:
Password:
Lectures and Discussions:
In conjunction with cases & handouts of slides

3. Assessment & Grade Distribution
2 Written Case Analyses 20
(completed in groups of 1-6)
Final Examination 10
Total 30
Cox Recommended Grade Distribution
A/A- 40%
B/B+ 50%
B-… 10%

4. Date
Topics
Text Readings
Class Discussion
8/23
Strategic Pricing & Value Creation
Chapters 1-3
Russian Technology
8/30
Price Setting & Value Communication
Chapters 4-6
9/6
Pricing Strategy over the Life Cycle
Chapters 7-8
Akash Rathod
B2B Pricing
9/13
Case Analysis
Atlantic Computers Case
9/20
Financial Analysis & Costs
Chapters 9-10
Springfield Case
9/27
Competition
Chapter 11
Rick Lester
TRG Arts
10/4
Final Review
Virgin Mobile Case
10/11
Final exam

5. Modeling the Marketing Process
SWOT Analysis
Company
Customers
Competitors
Collaborators
Context
Market Segmentation
Selection & Targeting
Product/Service Offering Positioning
Revenue & Profits
Create Value
Sustain Value
Product/Service Offering
Place/ Channel
Promotion/ Communication
Pricing
Customer Relationship Management
Communicate,
Capture & Share Value
Customer
Acquisition
Customer Retention

6. The Strategic Pricing Pyramid
Price
Level
Price setting
Pricing
Policy
Negotiation Tactics &
Criteria for Discounting
Communicate, Capture, & Share Value
Price/Value Communication
Communication, Value Selling Tools
Price Structure
Metrics, Fences, Controls
Value Creation
Economic Value, Offering Design, Segmentation
Create Value
The purpose of this slide is to introduce a framework for thinking of Pricing Strategy and the foundational elements that support price. Pricing is more than just a number, or a lever that managers pull to reset price. Pricing is a capability, a “resource” that the company invests in to support its pricing in the marketplace. Other similar resources include Purchasing, Engineering, Research and Development, or Field Sales. According to this “resource-based” view of pricing, the strength of a firm’s pricing capability depends on investments in organizational structure and personnel, training in pricing skills, pricing information technology systems to manage costing, pricing, and customer data, and clearly articulated pricing policies, tools, procedures, standards, goals, and strategies.
The Strategic Pricing Pyramid highlights the point that “price level” is like the “tip of an iceberg” -- the 10% visible to the marketplace (i.e, the price) is supported by the other 90% of pricing strategy that is invisible, but critical to pricing success. The Pyramid includes 5 key elements, building from the bottom up:
Value Creation: the very foundation of pricing strategy -- understanding the economic value that customers receive and segmenting markets based on value;
Price Structure: the menu of prices that enable customers to trade off price paid for value received -- using tools such as price metrics, and segmentation fences.
Value Communication: Educating customers about the value they actually receive -- bringing perceptions of value into line with actual value.
Pricing Policy: The discipline of pricing -- the rules, policies, and procedures customers and employees follow for different pricing configurations.
Price Level: Is determined by all previous layers in the pyramid
Discussion Questions:
Ask students to answer the following question: “why might customers tell you that your price is too high?” Record the answers on the board while looking for responses such as 1. Customers don’t understand the value of the offering ) communication problem, 2. We don’t set prices to capture the full value of our offering (value creation and pricing problem), or 3. It’s a tactic designed to see if the customer can get a lower price (policy and discounting problem). After listing 7-8 items, point out how few of them actually are related to the actual price of the product.
How much do you think companies invest in the purchasing department versus a pricing department -- how many people are assigned to purchasing? How much is spent on information technology, on training, etc. And compare that to what a company might invest in its pricing organization.
Price setting is just the “tip of the iceberg” of a profitable pricing strategy.

7. Value-Based Pricing The Value-based Pricing Process CUSTOMER
Effective pricing strategies should be based on three factors:
Competition
Costs
Pricing
Strategy
Customers
Objective: Maximize the difference between the value created for the customer and the company’s costs to provide that value.
The Value-based Pricing Process
CUSTOMER
VALUE
PRICE
COST
PRODUCT

8. Value Creation Defining VALUE Use Value (Utility)
Monetary gain (or savings) from using a product/service offering
Psychological benefits (or costs) associated with using a product/service offering
Economic Value
Calculated using reference value and differentiation value
Reference Value
Refers to the price of the consumer’s “best” alternative.
Differentiation Value
Refers to the value of whatever differentiates the offering from the alternative(s). Can be positive or negative.
Total economic value represents the maximum price that a fully-informed consumer would be willing to pay for a product/service offering.

9. Economic Value Estimation Framework
Positive
Differentiation Value
Negative Differentiation Value
Costs unique to doing business with you
Your unique value delivery
Price to capture a share of this value
Reference Value
Total Economic Value
Price of Customer’s Next Best
Alternative
This slide shows the basic method for determining the "economic value" to the customer. Economic value estimation is the price of the customer's best alternative (called the reference value) plus the value of what differentiates the offering from the alternative (called the differentiation value). Economic value estimation is an especially useful sales tool when buyers are facing extreme cost pressures and are, therefore, very price sensitive.
There are several basic components to economic value estimation. First, identify the closest competitive product to the firm’s product offering. This is the reference product; its cost is the “reference value.” Second, identify all positive factors that differentiate the firm’s product from the competitive reference product; these are sources or drivers of differentiation value. Once the positive differentiation factors have been identified, estimate what each source of differentiation value is worth to the customer. This is done by quantifying the savings and gains that customers would realize by using the firm’s product rather than the competitor’s. In business-to-business contexts savings relate to cost savings, such as savings on salaries, training, inventory, overtime wages, etc. Gains usually are derived from sales volume gains the customer might realize by using the firm’s product, or profit margin gains the customer may be able to realize by selling to customers at higher prices.
Third, estimate the negative differentiation value, which reflects sources or drivers of value on which the firm’s product is inferior to the competitor’s product. Finally, sum the reference value and differentiation value to determine the total economic value the customer would receive.

10. Economic Value Estimation
Example – Heavy equipment manufacturer
Higher residual value = $1200
Add’l warranty cost = -$1050
Parts inventory program savings = $1250
Total offering economic value
$79,950
Invoice processing consistency savings = $1500
Differentiation Value = $7,450
How much of the Differentiation Value do you Capture versus Share with your Customers
Fuel economy savings = $2200
Increased revenue from higher uptime = $2350
This example shows an economic value estimation for a heavy equipment manufacturer. Though the graphic shows the value drivers cascading upward, the value model has the same basic structure presented earlier (slide #3):
Reference value: For this customer (or customer segment) the closest competitive alternative is priced at $72,500.
Positive Differentiation Value Drivers: There are 5 value drivers in this analysis. The highest value drivers for this customer segment are “Higher Uptime” and Fuel Economy,” accounting for over 60% of differentiation value. This pattern might be different for other customer segments that might realize greater value from other value drivers. This variation in value drivers becomes the basis for value-based market segmentation, discussed later in the chapter.
Negative Differentiation Value: Buyers of this particular heavy equipment will incur greater warranty costs of ~$1,000, which must be subtracted from Positive Differentiation Value to determine the net differentiation value that buyers receive.
Total Differentiation Value is $7,450.
Adding Reference Value to Differentiation Value yields Total Economic Value of $79,950.
Ask students: What price would you charge for this heavy equipment? Prior to this estimation many might recommend a price at or below the competitor’s price ($72,500). But how do their recommendations change in light of the economic value shown here?
Competitive alternative for this customer = $72,500
Reference
Reference price
= $72,500

11. Economic Value Analysis
Step 1: Identify Reference Value
Reference value is calculated as the price of the best perceived alternative, not necessarily the next best competitive alternative, with regard to form, function, effectiveness, and/or efficacy.
Step 2: Estimate Differentiation Value
Determine the value drivers – those attributes that impact customer perceptions and purchase choice
Are they monetary gains or cost savings?
Are they psychological benefits or costs?

12. What type of differentiation value does a brand name provide?
Comment regarding differentiation value
In most cases, the components making up differentiation
value can be quantified to some extent. Some consumers,
however, will pay more for a product simply because of the
brand name – despite the fact that the tangible value
of the product may be substantially lower than alternatives
available to them. Therefore, the brand name can often be
a component of the differentiation value (brand equity).
What type of differentiation value does a brand name provide?

13. Economic Value Analysis
Step 1: Identify Reference Value
Reference value is calculated as the price of the best perceived alternative, not necessarily the next best competitive alternative, with regard to form, function, effectiveness, and/or efficacy.
Step 2: Estimate Differentiation Value
Determine the value drivers – those attributes that impact customer perceptions and purchase choice
Are they monetary gains or cost savings?
Are they psychological benefits or costs?
Identify attributes that differentiate between your product and the competitive reference product. What benefits or costs are associated with your product? How can you quantify each benefit and cost?
Gather data that can be used to assign the monetary amount to each value driver (e.g., in-depth customer interviews, surveys, focus groups)
Focus on the underlying customer business model (what drives the business model will typically drive the value perceptions of the customer)
Value drivers can vary across customers & across time
Determine the value derived from a bundle of features

14. Segment E — Budget Shoppers
Estimating Psychological Value Impact of Warranty Length on Willingness to Pay
MKTG 6223    Understanding What Customers Value
Segment B — Innovators
Revenue
Contribution
$4,041,864
(~ 10,100 units)
$ (M)
$626,904
Price ($)
Segment E — Budget Shoppers
$261,496
$2,020,788
(~ 5,800 units)
$ (M)
Price ($)

15. Pricing Russian Technology Quiz
Cost of a Surge (minor)
Labor $ 9,000
Incremental materials, fuel $ 6,000
Lost Production (8 hours to restart.) $80,000
$95,000
Frequency of minor surge per compressor .4 per year
Cost of a Surge (major)
Labor $ 24,000
Incremental materials, fuel $ 11,000
Equipment (new compressor) $180,000
Lost Production (24 hr. To restart) $240,000
$455,000
Frequency of major surge per compressor = .004 per year

16. Pricing Russian Technology Quiz
1. What is the economic value of this product?
2. How close to this value would customers be willing to pay?
3. Why might customers object to paying the full economic value?   
4. What would you do to overcome those objections?
What price do you think Compressor Controls should charge for this product & why?

17. The price of the most basic of commodity products . . . .
Brand
Product of
Notes
Price per
Ounce ($)
Gallon ($)
Acqua Panna – Natural Spring
Italy (Florence)
1 liter glass bottle
16.85
Arrowhead – Mountain Spring
California
Plastic 28-pack
3.03
Dasani – Purified Drinking Water
USA
Plastic
11.36
Evian (Nomad) – Natural Spring
France (Alps)
Plastic 6-pack
15.77
Menehune – Purified Drinking Water
Aiea, HI
10.01
Perrier – Sparkling Natural Mineral
France
Green Glass
10.67
Rosauer’s Finest – Spring Water
Canada
Plastic/Pop Top
2.95
San Pellegrino – Sparkling Mineral
Italy (S.P.)
11.32
Talking Rain – Mountain Spring
Preston, WA
Plastic/Flavored
8.65
Voss – Virgin aquifer
Norway
Clear glass cylinder
23.26
City of Dallas– Residential
Pipes/Lake Water
The relevant question is:
Why are consumers willing to pay relatively steep prices for a commodity product?

18. Price Structure Tactics for Pricing Differently Across Segments
Market Segmentation – organizing the market into homogeneous groups (or segments) that the firm can effectively & efficiently target.
Market Segmentation
Selection & Targeting
Product/Service Offering Positioning
Revenue & Profits
Create Value
Communicate,
Sustain Value
Product/Service Offering
Place/ Channel
Promotion/ Communication
Pricing
Customer Relationship Management
Capture & Share Value
Customer
Acquisition
Customer Retention

19. The Reason for Segmented Pricing
A one-size fits all approach to pricing reduces profitability and intensifies customer pricing pressure
….leaves money on the table for these customers and communicates that value does not have to be paid for… 2
High
Low
Value
Segment Size A B C D 1
Setting price here
Topic: Segmenting Prices
Key Learning Points for Students
Understanding that unsegmented prices constrain the opportunity for profitable growth by limiting volume for lower value customers and limiting margins for high value customers
Teaching Recommendations
This slide can be motivated by posing a hypothetical situation: suppose you were a salesperson on commission based on total revenues. Which customers would you see first? Which customers would you see last? How would your approach to these customers differ? 3
….and misses growth opportunities by pricing these customers out of the market

20. Benefits of Price Segmentation with 5 Segments (A, B, C, D, E)
Percent of Market
Segment Size
Reservation Price = A 5 50
$20 B 15
150
$15 C 35
350
$10 D 25
250
$ 8 E 20
200
$ 6
Total
100%
1000
Maxim. contribution w/:
1 Price ($10)
VC equal to
Contribution equals
2 Prices ($15, $8)
5 Prices ($20  $6)
$10 $5
$250
$2750
$750
$1750 $0
$15 $5
$500
$1500 $8
$1050
$750 $0
$3800
$20 $5
$750
$15
$1500
$10
$1750 $8 $6
$200
$4950

21. Careful Analysis is Required to Avoid Nonprofitable Segmentation & Proliferation
SKU Velocity Analysis focuses on SKUs that drive a majority of revenue & volume
Identify opportunities for SKU rationalization
Focus price improvement efforts on the top moving SKUs

22. Benefits of Price Segmentation Can Change with Ambiguous Reservation Prices
Percent of Market
Segment Size
Reservation Price ≈
30% buy next higher-priced option if target price not available A 5 50
$20 B 15
150
$15 C 35
350
$10 D 25
250
$ 8 E 20
200
$ 6
Total
100
1000
Examples:
You stop at a gas station, get out, and discover that there is only premium gas available. Do you buy or leave?
You go to the ballpark and discover that there are only premium seats available. Do you buy or leave?

23. Mobile Customer Prices Paid per Minute (Virgin Ex 9b)

24. Benefits of Price Segmentation Given Ambiguous Reservation Prices
Percent of Market
Segment Size
Reservation Price ≈
30% buy next higher-priced option if target price not available A 5 50
$20 B 15
150
$15 C 35
350
$10 D 25
250
$ 8 E 20
200
$ 6
Total
100
1000
Maxim. contribution w/:
1 Price ($10)
VC equal to
Contribution equals
2 Prices ($15, $8)
5 Prices ($20  $6)
$10 $5
$250
$3125
$15
$500
$20
$750
$1500
$1750
$8-15
$1785
$375 $8 $0
$180 $6
$200
$4715
$4950

25. Benefits of Price Segmentation Given Ambiguous Reservation Prices & Incremental VC & FC
Percent of Market
Segment Size
Reservation Price ≈
30% buy next higher-priced option if target price not available A 5 50
$20 B 15
150
$15 C 35
350
$10 D 25
250
$ 8 E 20
200
$ 6
Total
100
1000
Maxim. contribution w/:
1 Price ($10)
VC equal to
Contribution equals
2 Prices ($15, $8)
5 Prices ($20  $6)
$10
$5.40
$240
$10
$5.30
$720
$10
$5.20
$1680
$10
$5.10
$365
$10
$5.00 $0
$3000
$15
$5.50
$480
$15
$5.40
$1440
$8-15
$5.30
$1694 $8
$5.20
$700 $8
$5.10
$168
$4482
$20
$5.80
$710
$15
$5.70
$1395
$10
$5.60
$1540 $8
$5.50
$625 $6
$5.40
$120
$4390
Add $.10 in VC for each incremental price point above $6 (higher VC for higher-priced products) & $.10 additional FC per product/price offering greater than 1.

26. Value Based Market Segmentation – pp
Value Based Market Segmentation – pp Steps for Value Based Segmentation
Determine basic segmentation criteria
Identify discriminating value drivers
Determine operational advantages and constraints with regard to those value drivers
Create primary and secondary segments
Create detailed segment descriptions
Develop metrics and fences
Topic: Value Based Market Segmentation
Key Learning Points for Students
To understand the following differences between value-based segmentation and other methods including:
The lack of most segmentation criteria to correlate with prices buyers are willing to pay
The fact that other segmentation criteria give priority to only the customers needs and not the sellers costs to serve those needs
Needs-based segmentations do not estimate the monetary value of high priority customer needs
The in-depth interviews for value based segmentation often uncover a deeper understanding of customer’s benefits
To provide a process for conducting value based segmentation
Teaching Recommendations
An example is given on the following two slides – it would be best to show this overview and then apply it to the example on the next slide for a large commercial printer
Discussion Questions
Why don’t more companies engage in value based segmentation?

27. Three Mechanisms to Maintain Segmented Structures
Price-offer configuration
Price metrics
Price fences

28. Pricing Menus Map Price Structure Help Customers Trade Up or Trade Down
A “Fixed Price, Flexible Offer” Menu
The point of this slide is to help students think of price structure in terms of a “price menu.” CustomersStudents make tradeoffs from among options on price menus for many different product or service choices. This generic menu illustrates some of the principles that underlie menus:
Ask students to consider someone traveling on an airline. The seats on an airline are virtually identical (except for First Class or Business Class seats) and arrive at the same location at the same time. Yet, airlines charge very different prices. Why? For a flight from New York to Los Angeles, you may have paid $800 for a round trip fare when you arrived at the airport at the last minute; the person sitting next to you may have paid $200 as part of a bereavement fare; another may have paid $320, because they paid up front 60 days ago, and so on.
The essence of price structure is segmented pricing – creating a menu that sets different prices for different customer segments. You always set prices for different customers, not for different products. Customers pay; products don’t.
Price menus help customers navigate among different price offerings, each representing a trade off of value received for price paid. In the menu above, price sensitive buyers may prefer the Economy offering, but must understand that for this price they must pay out-of-pocket an additional “25%” for fast turnaround services; and they do not have access to special services such as special processing, long-term contracts, or the option of unbundling some services. However, a person preferring the Premium offering has all of these opportunities bundled into the Premium price, plus access to additional services D and E for additional charges.
Note too that this structure presents a menu of “fixed prices” (non-negotiable) in exchange for your choice from a variety of offers -- “flexible offers”. Many companies employ the opposite of this idea: they offer a fixed product and sell it with flexible prices -- depending on whatever customers say they will pay, which of course is wrong.

29. Examples of Tiered Offers in Software
Standard SRP $219.99
Professional SRP $299.99
All in Standard +
MS Access
Developer SRP $529.99
Development Tools to Build
Own Applications
This slide shows a good example of fences by using product variation. Here two examples show different product variations for different prices, based on the same product technology or product platform.
Discuss how these companies are likely to have differentiated the standard version of the software from the high-priced “professional” version.
Basic SRP $199.95
Pro SRP $279.95
All in Basic +
Create Customized forms,
Tools to Track add’l items
Premier SRP $399.99
All in Pro +
Daily Sales Summary,
Retail Specific Reports

30. Price Offer Configuration Principles For Offer Creation
Toilet on the plane
Beverages
First to Board
Premium Seats
WiFi Access
Topic: Price Offer Configuration
Key Learning Points for Students
Realizing that the value differentiation of a feature to the buyer and the usage ratio (whether a fixed or variable cost) to the seller are important when considering the pricing of products and services
Understanding the difference between wanting to get more margin from the higher-price segment as opposed to more volume from the lower-price segment
Teaching Recommendations
It is recommended that you explain the x and y axis to the students before a discussion of the different areas in this exhibit. Make sure students understand that the fixed cost is not based on the amount that the buyer users but that the variable cost will cost the seller more as it’s volume increases.
The book has excellent examples for each of these groups but it is best to ask students if they can think of any examples.
Discussion Question(s)
What is meant by the term “uglification”? When would it be used?
On-Board Entertainment
Bag Check

31. Price Metrics Criteria For Evaluating Price Metrics - Exhibit 3.4
Potential Metrics 1
Tracks with Differences in Value Across Segments 2
Tracks with Differences in Cost-to-Serve 3
Easy to Measure and Enforce 4
Facilitates Favorable Positioning against Competition
Key Learning Points for Students
Understand the concepts of metrics as the units to which price is applied
Learn criteria for good metrics
Teaching Recommendations
It is interesting to talk about how a better metric can make you more competitive
Discuss metrics which are benefit based rather than feature based
The example on the next slide (exhibit 3-5) is an example of how a metric can make your pricing appear in comparison with the existing pricing to make your product appear more attractive
Discussion Question(s)
Are there any metrics for a product or service you think could be changed to being more benefit based then feature based?
What would be an example of a metric changing and making a company more competitive in the marketplace? 5
Aligns with How Buyers Experience Value in Use
Optimal Metric

32. Value-based Pricing Metrics
Market
Traditional Metrics
Value-based Metrics
Real Estate Want Ads
$ / column inch
$ / property value
Aircraft Engines
$ / engine
$ / hour of use
Information service
$ / minute
$ / download
These are excellent examples of metrics to achieve segmented pricing. Good pricing metrics reflect and track with the value that customers receive. Whether value accrues by usage, by time of access, by size, or any other number of possible dimensions it is key that the price metric track with value. Discuss these examples:
A real estate listing in the newspaper usually is priced based on the “column inch” -- larger ads cost more money. A better metric is to price based on property value -- more expensive properties pay more for an ad; here price paid is proportional to value received when the property sells.
Aircraft engines traditionally sold based on a price per engine; but General Electric (leveraging its financial strengths in GE Capital) found a new metric that appealed to many more buyers -- price based on hours of usage. This eliminated up-front out-of-pocket outlays for engines; light users paid little because they used engines less, and heavy users (large airlines) paid more because they got much more value from their higher usage.
Information services (Verizon, etc.) found that pricing by the minute gave a lot of value away as bandwidth increased and buyers could download much more in less time. They revised their pricing metrics to be based on “downloads.”

33. Example: Innovative Price Metrics Can Unlock Value and Ignite Growth
iTunes
Why did this new pricing model have such an impact on sales?
This is a relevant example for most students. Apple is often noted for its innovative products. But in the case of the iPod, the product technology had been available for years in the form of MP3 players.
It could be argued that the change to the pricing model was more innovative than the basic technology because Apple changed the industry standard price metric from $ / CD to $/song. The impact of this move is examined on the next slide.

34. iTunes’ New Price Metric Re-Aligned Price and Value
Old Metric
$ / CD
New Metric
$ / Song
Overpayment
One (of many) reasons why music sales were declining was because most people bought a CD in order to get one or two songs they really liked. Even if the song was valued highly, it is unlikely that it was worth the $15-$18 that a customer had to pay for a CD.
By unbundling the music and changing the metric, Apple unlocked significant demand for singles that were valued less than the cost of a disk.
Value
Inducement
Value of CD
Price of CD
Value of Song
Price of Song

35. Price Fences
Price Fences are a means to charge different customers different prices.
Types include
Buyer identification fences (e.g., airlines, student/senior, membership)
Purchase location fences (e.g., grocery chains, real estate)
Time purchase fences (e.g., fashion, yield management - hotels, airlines…)
Purchase quantity fences
Volume discount
Order discount
Step discount
Two-part pricing (e.g., printer and cartridges)
Topic: Price Fences
Key Learning Points for Students
To understand the different types of fences
To realize the differences in the types of purchase quantity fences
Teaching Recommendations
Fences are the least complicated way to charge different prices because the are clear and easily definable
The purchase quantity fences are often confused – volume discount is based on the TOTAL amount purchased over time whereas an order discount is for a particular. A step discount is applied to the amount purchased beyond a certain base amount. Two part pricing is shown in the next slide
Discussion Question(s)
Are buyer identification fences fair to other consumers?
When do you pay more just because of the location of purchase?

36. Next Week:
Price Setting and Value Communications or
How to price bottled air to morons…