 MK 612: BRANDING AND PRICING

STRATEGIES

PRICING STRATEGIES

Significance of pricing
Economic Value
Pricing Objectives
 Lecture 4

ROLE AND SIGNIFICANCE OF PRICING

 What is pricing
Price

• The value that consumer exchanges for the benefits of having or using

the product/service

• People look for value they will get for their money (value for money)

• If people think they will get the value they need, they will pay for the

good/service

• Prices can take many forms- interest rates, fees, charges, commission,

salary, rates, honoraria etc

 Natural Price
• The commodity is sold precisely for what it is worth, or for
what it really costs the person who brings it to market .
• The price which is determined by the cost of production
• The price which is sufficient to pay for the rent of the land,
the wages of the labor, and the profits, according to their
natural rates, the commodity is then sold for what may be
called its natural price
 The Market Price
• The actual price at which any commodity is commonly
sold is its market price.
• The price which is determined by the market forces
• It may either be above, or below, or exactly the same
with its natural price.
• The market price of every particular commodity is
regulated by the proportion between
– the quantity which is actually brought to market, and
– the demand of those who are willing to pay the
natural price of the commodity
Significance of Pricing in Marketing
 Significance of Pricing

• Prices, and the resulting sales, determine how much

revenue a company receives
• Prices thus influence a firm’s profits
• Prices also influence the firm’s employment of the
factors of production:
– Natural resources
– Capital
– Human Resources
– Entrepreneurship
 Significance of Pricing
• Pricing is the only mix which generates a turnover for
the organization.
• The remaining 3p’s are the variable cost for the
organization.
• It costs to produce and design a product, it costs to
distribute a product and costs to promote it.
• Price must support these elements of the mix.
• Pricing is difficult and must reflect supply and
demand relationship.
Pricing is about the value gained vs. cost
incurred
 Price vs. Value
• Cutting cost in tough economic times isn’t
always the answer.
• Companies should sell value, not price.
• Price reductions can:
– Cut profits and initiate price wars.
– Cheapen perceptions of brand quality.
• Marketers should strive to convince
consumers that price is justified by value
provided.
 Price vs. Value
• Value refers to the perception of benefits received for what someone
must give up.
• Customer’s perceived value of a product is affected by a marketer’s
pricing decision.

Value = perceived benefits received

perceived price paid
• For the buyer, the value of a product will change as perceived price
paid and/or perceived benefits received change.
• What matters most is not the ability to pay but rather the perceived
value
 Price vs. Value
• The price paid in a transaction is not only financial it can also involve
other things that a buyer may be giving up.
• For example, in addition to paying money a customer may have to
– spend time learning to use a product,
– pay to have an old product removed
– close down current operations while a product is installed or
incur other expenses
– Sacrifice other goods/services.
• Perceived value pricing is that value which customers are willing to
pay for a particular product or service based on their perception
about the product.
 Price vs. Value
• If we can
– Understand what people need
– Create relevant value to meet their needs
– Communicate that value effectively
• People are willing to pay much more than what we imagine
• For instance: For a hotel customer to pay you well he/she needs
– Comfortable and clean bed
– Security –e.g. electronic doors
– Responsive staff
– Feeling like VIP
– Refreshment etc
 Use vs. exchange value
• The word VALUE
– Expresses the utility of some particular object,
– Sometimes the power of purchasing other goods which the
possession of that object conveys.
– The one may be called “value in use;” the other, “value in
exchange.”
– The things which have the greatest value in use have frequently
little or no value in exchange;
– Those which have the greatest value in exchange have frequently
little or no value in use.
– Nothing is more useful than water: but it can be much cheaper
than scarce things.
 Use vs. exchange value

• A diamond, on the contrary, has scarce any value in

use; but a very great quantity of other goods may
frequently be had in exchange for it.

• The value must relate to desire and scarcity to

get something
 The Price Equation: Price Equals Something of Value

© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin

 Price as Seen by Channel Members

© 2006 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin

 Determining Perceived Value
• What value is placed on the end result?
• The cost of alternative solutions to the
customer.
• A function of:
– Prices of comparable (though not identical)
products
– The “value” (+/-) of the product’s differences vs.
the competitive offering
Customer Perception of Value
Economic Value
 Economic value
• Economic value is the maximum amount a consumer
is willing to pay for an item in a free market economy
• Economic Value to the Customer (EVC) is based on
the insight that a customer will buy a product only if
its value to them outweighs the value of the closest
alternative, or when Utility A ≥ Utility B
• Value A − Price A ≥ Value B − Price B
• Therefore, to sell a product, a firm needs to price at
or below its competitor’s price plus the value
advantage its product has to the customer over the
rival product.
Steps in determining the economic value
• Identify the cost of the competitive product or
process (i.e., the reference value)
• Identify all the factors that differentiate the
product.
• Determine the value to the customer of these
differentiating factors (i.e., the differentiation
value)
• Sum the reference value and the differentiation
value to determine the total economic value.
 Economic Value
i. Reference Value
• The price of the consumer’s “best” alternative
ii. Differentiation Value
• The value of whatever differentiates the offering
from the alternative(s).
• Superior performance
• Better reliability
• Additional features
• Lower maintenance cost
• Faster service
 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.
 Economic Value Analysis
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?
 Economic Value Analysis

– 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 drive the value perceptions of the customer)
– Value drivers can vary across customers & across time

– Determine the value derived from a bundle of features

 Economic Value Analysis

3. Estimating Economic 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.
•N.B The negative differentiation value, which reflects
sources or drivers of value on which the firm’s product
is inferior to the competitor’s product.
 Economic Value Analysis

• Economic value to the customer (EVC): the maximum

amount a customer should be willing to pay, assuming
that s/he is fully informed about the benefits of the
product and the offerings of competitors
EVC = Reference Value + Differentiation Value
• EVC is the maximum willingness-to-pay, not actual
willingness-to-pay
• Economic value estimation is a useful sales tool when
buyers are facing extreme cost pressures and are,
therefore, very price sensitive
 An example
• Atlantic Computer has developed software that allows their
servers to host twice as much webspace as its rivals.
• Relative to buying two servers from Atlantic’s competitor, by
buying one doubly efficient server from Atlantic, a firm would
save $4,000 in labor costs, $500 in electricity and $1,500 in
software licenses.
• The price of two servers from the competitor is $6,800.
• How should they price this new software-server combination?
 Answer
• The differentiation value relative to the
closest competitive offering is $4000+$500+
$1,500=$6,000.
• This suggests that the EVC of a server with the
software is $6,000 + $6,800 = $12,800.
Economic Value Estimation Framework

Negative Costs unique to doing

Differentiation
Your unique Positive Value business with you
value Differentiation Price to
delivery Value capture a
share of
this value

Price of Total
Customer’s Economic
Reference Value Value
Next Best
Alternative
Fill in the banks in the following economic
value estimation framework

Costs unique to doing

c…………..
Your unique business with you
value b……………
delivery
d……..

Price of Total
Customer’s Economic
a………………
a……………… Value
Next Best
Alternative
 Economic Value Estimation
Example – Heavy equipment manufacturer
Higher residual Add’l warranty cost
value = $1200 = -$1050
Parts inventory
program savings =
Total offering
$1250 economic value
Invoice processing $79,950
consistency savings
= $1500
Differentiation
Fuel economy
How much of the
Value = $7,450
savings = $2200 Differentiation
Value do you
Increased revenue
from higher Capture versus
uptime = $2350 Share with your
Customers
Competitive
Reference price
alternative for
Reference = $72,500
this customer
= $72,500
 Economic Value Estimation
– 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.
– Negative Differentiation Value: Buyers of this particular heavy
equipment will incur greater warranty costs of ~$1,050, 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.
 Note that:
• 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).
 Communicating EVC to Your
Customers

• Do not assume customers know EVC

• Educate customers is important when
– The product delivers a stream of benefits over time
– The purchase price represents only a small portion of
the product’s overall costs
• The fact that consumers are not buying your
product is not by itself a reason to cut price. It
may be a reason to change your marketing
program to justify the price
Pricing Objectives
 Pricing Objectives
• Profitability Objectives
For-profit firms must set prices with
profitability in mind
– Profit Maximization: point at which the
additional revenue gained by increasing the price
of a product equals the increase in total costs
– Target-Return Objectives: Short-run or long-run
pricing objectives of achieving a specified return
on either sales or investment
 Pricing Objectives
•Volume Objectives
–Sales maximization: A minimum profit level is set
and firms seek to maximizes sales
–Market-share objectives: the goal set for
controlling a portion of the market for a firm’s good
or service
•Meeting Competition: Seeks simply to meet
competitor’s prices
 Pricing Objectives
• Value Pricing:
Pricing Pricing strategy that emphasizes the
benefits derived from a product in comparison to the
price and quality levels of competing offerings
•Prestige Objectives:
Objectives Prices are set at a relatively high
level in order to develop and maintain an image of
quality and exclusiveness that appeals to status-
conscious consumers
 Pricing Objectives of Non-Profit
Organizations

• Revenue maximization

• Cost recovery

• Market incentives

• Market suppression
 For Discussion

Practical challenges of setting prices

 Pricing issues
• Which price level is most profitable?
• What will be the perception of customer on the price
charged?
• How do we get the information about competitors?
• What is the right price?
• Does theory apply?
• How do we integrate theory with reality?
 Challenges of Pricing
• Pricing decisions are creating challenges to many
companies
– Threats to strong brands to counterfeits

– Aggressive discounting

– Intense pricing competition

– Pressure to reduce price

– Threat to airline industry to reduce price

 Class Activity 1
• Identify two firms which are related and experiencing heavy
price competition
• Which firm do you think it is doing better in terms of its
pricing approach and why?
• In a group of two put down not more than 10 pages (Times
New Roman, 12font size, 1.5 line spacing). Submit via Turnitin
before ……..1600hrs.