ESTACIO, CHERIE FAYE T.

PRMSTRA (OTCDP1)

ACTIVITY #2 – MODULE 2: VALUE CREATION – THE SOURCE OF PRICING ADVANTAGE

1. What is the role of value in pricing?

Value is what you called when customers or consumers satisfaction using the product
were met. Economists refer value as use value or the utility gained from the product.

2. Enumerate the reasons why pricing is important.

Price is important to businesses because it reflects the estimation of the value

consumers see in the product or service by marketers and are willing to pay for a product or
service.
- Although costs are influenced by product, location and advertising, price is the
only factor that influences sales, and thus the profits of a company. The price
can contribute to the survival or demise of a company.
- Change in price has a profound impact on the marketing plan, and it can also
impact demand and revenue depending on the price elasticity of the
commodity. Development may be limited by both a price that is too high and
one that is too low. Sales and cash flow may also be adversely affected by the
wrong price.
- Issue arises if the marketer does not set a price that incorporates the other
components of the marketing mix and the business goals, as pricing relates to
how a product or service is viewed by consumers. High quality is
demonstrated by a high price. It comes to mind the word luxury. However, if a
company wishes to position itself as a low-cost supplier, low rates would be
paid. Just as they do with high-end manufacturers, when they see low prices,
customers know what to expect.
- Important Part of Sales Promotion –Many times price adjustments form a part of
sales promotion that a lower price in the short term stimulates interest in the
product.
- Demand regulator –It is a simple law in Economics that price and demand are
inversely proportional. Thereby a seller can either increase the demand or
decrease the demand for his products by setting a low or a high price.
- The economy –The entire economy depends on the price. It is the price which
decides trade and the economy depends on the trading activity in the country.
Price of a product influences profit, rent, interest, wages which are the prices
paid to the factors of production-entrepreneurship, land, capital and labour
respectively. Thus price acts as a regulator of economy, because it influences
the allocation of the factors of production.
- Perception of quality –Several customers develop a perception about the quality
of the product based on its price. To such customers, high price is better quality
and vice-versa. Therefore the right price must be fixed for the product depending
on the customer perception desired.
- Legal aspects –A wrong price may attract legal complications. Therefore a seller
has to consider these factors also while fixing price.
3. How would a company conduct a value-based market segmentation?

There are six process in conducting a value-based market segmentation

1. Determining Basic Segmentation Criteria

The goal of any market segmentation is to divide a market into subgroups whose
members have common criteria that differentiate their buying behaviors. Choosing appropriate
segmentation criteria starts with a descriptive profile of the total market to identify obvious
segments and differences among them. In consumer markets, basic demographics of age,
gender, and income provide obvious discriminators. Enterprise firmographics such as revenue,
industry, and number of employees clearly separate fi rms into nominally homogenous groups.
Inputs for this basic analysis can include existing segmentation studies, industry databases,
government statistics, and other secondary sources.

2. Identifying Discriminating Value Drivers

Having preliminary segmentations in hand, you identify those value drivers— the
purchase motivators—that vary the most among segments but which have more or less
homogenous levels within segments. This allows you to zero in on what’s most important to
each customer segment. In-depth interviews probing how and why buyers choose among
competitive suppliers provide the additional input required. Industry experts, distributors, and
salespeople can provide supplemental information for double checking the value perception
patterns revealed by the interviews.

3. Determining Operational Constraints and Advantages

In this step, you examine where you have operational advantages. Which value
drivers can you deliver more efficiently and at lower cost than others? Also, which drivers are
constrained by your resources and operations? Experience, capital spending plans, personnel
capabilities, and overall company strategy are among the inputs to this step.

4. Creating Primary and Secondary Segments

Primary segmentation is based on the most important criterion differentiating
your customers. Your secondary segmentation divides primary segments into distinct subgroups
according to your second most important criterion. Your tertiary segmentation divides second
segments based on the third most important criterion, and so on.

5. Creating Detailed Segment Descriptions

Value-based segmentation variables can look fi ne to the price strategist, but segments
should be described in everyday business terms so that salespeople and marketing
communications planners know what kinds of customers each segment represents.

6. Developing Segment Metrics and Fences

Metrics are the basis for tracking the value customers receive and how they pay for it.
Fences are those policies, rules, programs, and structures that customers must follow to qualify
for price discounts or rewards. the metrics of pricing offerings, and the fences that maintain a
price structure allows a marketer to expand its profit margins by aligning its prices, service
bundles, and capacity utilization with the different value levels demanded by different
customers.
4. What is reference pricing? Why is it important?

-In comparison to other rivals and the previously advertised price, reference pricing
relates to how much customers expect to pay for a product.
-Reference pricing might refer to a situation where a business offers a price just below
its competitor 's main price.
-Reference pricing also refers to a situation in which a business offers a good at a
significant discount at a reference price previously advertised.

Consumers offer importance to comparing the price of the good with a 'reference
price' while purchasing products. The price they would generally expect to pay or the price
they think the good is worth using all previous details. Companies may seek to establish an
artificially high reference price for its product so that it can later offer discounts Reference
Pricing can be considered unfair competition. There are certain laws about offering discounts on
advertised prices.

5. What is competitive pricing? Why is it important?

It's a technique where companies take into account competing costs while setting
their own pricing. Competitive pricing policy allows you to keep the rivals from losing market
share and clients as it allows the company to monitor the competition. It is perceived to be
one of online shoppers' most significant factors when making their final buying decision.