Tim J. Smith
Pricing Strategy: Setting Price Levels,
Managing Price Discounts, &
Establishing Price Structures
PowerPoint by
Tim J. Smith, PhD
Managing Principal, Wiglaf Pricing
Adjunct Professor of Marketing & Economics, DePaul University
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 4
Price to Value
Exploring the Strategic Framework
Relating the Three Dominant
Approaches to Price Setting
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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?
• Are penetration pricing and skim pricing the only
pricing strategies for launching a new product?
• When launching a new product, which
competitors are most likely to be threatened?
• Stretch Question: When considering the use of
price versus value to capture market share, which
approach is more defensible?
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Price Variability in Autos
• Large variation of prices for a similar good within
the same category
–
–
–
–
Tata Nano $2500
Chevrolet Malibu $28,000
Bentley Flying Spur $170,000
a factor of 68 between the lowest price production car
and the highest price product auto
• What justifies the price difference: Benefits
• Benefits based pricing is a direct extension of the
economics of pricing
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Price to Benefits Map
– Identify relevant competing
alternatives
– Define the value differential
– Pricing accordingly
• The price to benefits map plots
the position of products in
terms of perceived products
and perceived benefits….
– Visual representation of how
customers perceive the value
trade off.
Perceived Price
• Price Boundary Theory
Bentley Flying
Spur
BMW 7
Series
Lexus LS
Chevrolet
Malibu
Tata
Nano
Perceived Benefits
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
EVM Model Delivers Price to Value
Stent Exchange Value Model Results
4000
3500
Evaluated Value
3000
2500
2000
1500
1000
500
0
Standard Stent
Druge Eluting Stent
Strent
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Conjoint Delivers Price to Value
Mango Juice Conjoint Analysis Results
$6.00
Perceived Value
$5.50
$5.00
$4.50
$4.00
$3.50
$3.00
Mango Fruit Mango Fruit Pure Mango, Pure Mango,
Blend,
Blend,
Premium
National
Premium
National
Niche Brand
Brand
Niche Brand
Brand
Product Features
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
The Market Expects Price to Value
Exhaust Fan Prices (Grainger)
$1,600
$1,500
$1,400
Price
$1,300
$1,200
$1,100
$1,000
$900
$800
0
1000
2000
3000
4000
5000
6000
7000
Capacity (CFM)
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Pricing Areas
• Value Equivalence Line
– Where price increases
proportional to benefits
increases
– Excess benefits beyond what is
captured in price
• Value Disadvantaged
– Priced higher than what would
be justified based on the
measure of benefits alone
Perceived Price
• Value Advantaged
Value
Equivalence
Line
Value
Disadvantaged
Zone of
Indifference
Value
Advantaged
Perceived Benefits
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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.
• There is a range of pricing moves that will not impact purchasing behavior
at all
– Range of demand inelasticity, as the next nearest competitor is out of the
comparison metric
– Can be a source of a painless price increase, thus improving profitability
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Variance in Price Elasticity
•
Big Number syndrome
–
–
large changes in price have non-linear
effect on elasticity of demand
Zone of credibility
•
•
•
–
Price Capped
–
–
•
Benefit Floor: Required minimal level of
benefits
Benefit Ceiling : Exceeding a maximum
level, maximum WTP for benefits … more
horsepower in a car becomes unnecessary
Budget constraints
Price category spending constraints
Variance by segment
–
different customer segments have
different price sensitivities
Variance with time
–
•
•
off invoice discounts vs. on receipt
discounts have different effects on
perceived price
Creating demand vs. shifting shares
–
•
daily, monthly, or annual payment
schemes can affect price sensitivity
Variance by discounting method
–
•
customer needs change over time, product
lifecycle and expectation of growing
benefits for same dollar
Variance by price communication method
–
Benefit Bracketed
–
•
Below expectation price the offering has no
credible value.
Above expectation price and customers do
not believe it is possible to deliver that
many benefits
•
market growth by lowering price of item or
is it just steeling a fixed share
Cross-product elasticity.
–
–
–
Switching between categories: cars vs.
bicycles
As aluminum became cheaper, it displaced
steel in beverage cans, later displaced
itself by plastic
Paper or plastic bags
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Value Advantaged
•
•
At times, companies will choose to price
aggressively, thus providing more benefits than
expected at a given price
Hypercompetition
–
–
–
Some authors refer to products priced in the value
advantaged zone as suffering from “unharvested
value” because the company has the opportunity
with products that are “value advantaged” to
raise the prices.
Consider it a pricing error
Ex: selling front row seats at the same price as
lawn seats in a large amphitheatre
Certain product categories, technology driven
sectors in particular, enjoy sequential
improvements in product quality over time
•
•
Unharvested Value
–
•
•
•
–
–
Autos and gas mileage
DRAM decreases in costs per kb each time a new
photolithography standard becomes available
LCD TV’s, computer processors, etc likewise enjoy
such costs reductions over time
Aggressively pricing new technology that offers
significant costs advantages over legacy
technology is a common trait in certain markets.
Forms the basis for the concept of
Hypercompetion,
See D’Aveni
Market Share Taking
–
–
Customers perceive that more benefits are
delivered at a given price through the value
advantaged product, and rationally choose to
select that product.
Warning: deliberately pricing products in the
value advantaged zone is likely to instigate a
competitive reaction, such as a potential price
war, harming overall industry health
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Value Disadvantaged
•
•
At the other end of the spectrum,
companies will at times price a product
high in comparison to the perceived
benefits of that offering.
Can be stable if the product does offer
superior benefits along a dimension not
measured
–
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
•
Can be used effectively to capture profits
from a segment that seeks value and
derives benefits from a source of features
or placement that is along another
dimension than that measured.
Ex: Bentley Silver Spur @ $170,000 vs.
Porsche 911 GT2 @ $194,000
Both priced relatively high, but for a sedan
seeking buyer, the Porsche is priced too
high as it fails to provide luxurious seating.
Meanwhile, for the performance seeking
buyer, the Bentley Silver Spur is priced to
high for the level of performance sought.
In this case, it is suggested that the market
be segmented, and generate specific Price
to Benefits maps for the independent
market segments.
–
i.e. luxury sedans as one segment and
luxury sports cars as another segment
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Constructing Price to Benefits Maps
• 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.
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Dispersion in Perceived Price
Within the market, a single product
may be sold at a number of different
prices, and the perceived price may at
times vary away from the actual
transaction price
–
Varies between customers
•
Hidden price vs. explicit price
statements
–
•
–
–
Usage rates and flat fees… price per
unit can vary
Distribution Channel and Locations –
each gives variation in price.
Promotional discounts
•
•
•
Phone tariff structures of incumbent
vs. new entrant
Couponing and price promotions
Can create challenges in cross channel
cannibalization.
Perception mismatch
–
Customer may place an expected price
on a product based upon the last time
they purchased that product, however
due to changes in economic situations,
the price will change over time.
Especially true during inflationary
times.
Perceived Price
•
Large
Dispersion in
Perceived
Price
Perceived Benefits
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Dispersion in Perceived Benefits
•
Perception of benefits gained from utilizing a product varies among customers – orientation
of segmentation
–
•
Poor marketing communication techniques
–
–
•
Can be due to miscommunication of the benefits where some MarComm focuses on one set of
benefits while other MarComm focuses on another set of benefits, leaving the recipients of the
message confused as to the exact set of benefits or their value – Can be an area to “fix” within the
company
Arises naturally when different segments pay attention to promotional activity differently. Some
segments are more responsive to marketing communication than others, driving a dispersion in
perceived benefits (McDonalds Healthy Choices)
Common also in experience and credence goods,
–
–
•
Most common error, to include to multiple and disparate market segments as one in making a Price
to Benefits map
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
Dispersion in risk tolerance affects benefits perception
–
–
Risk aversion and aversion to change may cause many customers to discount the perceived benefits,
while other customers seek the benefits precisely because they bring about change
Also seen in business markets, where executive management seeks change and improvement while
mid-level management seeks stability and steady career improvement
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Perceived Price
Dispersion in Perceived Benefits
Large
Dispersion in
Perceived
Benefits
Perceived Benefits
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Benefit Sources
• Functional benefits
– physical nature or performance characteristics of the product
– Examples: Cars, jewel clarity and size, square footage &
neighborhood,
• 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.
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Market Confusion
Perceived Price
Simultaneous Dispersion in Perceived Price and Benefits
Large Dispersion in Perceived
Benefits and Price
Leading to poor purchases, and
ultimately brand betrayal or lost
opportunities
Perceived Benefits
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
New Product Positioning or
Repositioning
• Key Pricing issue in Product Launch/Repositioning is where
on the Price to Benefits map should the product fit?
– Where is the customer addressable horizon?
• Customers from a higher price / higher benefit region?
• Customers from a lower price / lower benefits region?
– Where are the adjacencies from which the new product will
take market share or grow the market?
– What is the likely response of the nearest competitor?
– Is the new position defensible?
• Choices:
• Value Equivalence
• Value Advantaged
• Value Disadvantaged
– For Each, why would you take one stance vs. another?
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
•
•
Pricing along the Zone of
indifference
Occurs when there is a opening in
the Price to Benefits map that is
currently un-served
– From whom will you see a
response, those closest to you in
the Price to Benefits map.
•
•
•
Somewhat unlikely to have a
strong competitive response
Will capture profits in proportion
to benefits
Safest from a pricing perspective.
Puts pressure on other marketing
levers, distribution and promotion,
in driving volume
Perceived Price
Price Neutral
New
Product
Perceived Benefits
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
•
•
•
•
Pricing at a low level compared to level
of benefits offered
Using price as a means to gain market
share
Can come from increasing the level of
benefits of a product, but leaving the
price unchanged, thus driving the
product into the value advantaged zone
Easy from a promotion perspective, but
can be deleterious for the firm
–
–
•
Substantial loss of potential profit
Can incur a negative competitive
response
Potential competitive response
–
–
–
Perceived Price
Penetration Pricing
Likely
Competitive
Response is a
Price
Decrease
New Product
Priced to
Penetrate the
Market
Perceived Benefits
Most likely direct response is a price
decrease by competitors,
Less likely is a benefits increase, as
these take time through re-engineering
the product
Show who is most affected.
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
•
•
•
•
Pricing high with respect to
competitors comparable price to
benefits offer
Price in the value disadvantaged
zone
Skim profits from early customers
with the expectation of lowering
prices later
Perceived as a Safe move from a
competitive response perspective,
however
– Can be a pricing error in terms of
forgone profits from missing
volume target
– Provides insufficient motivation
for the market to purchase the
product at the higher price point,
given the alternatives
•
Perceived Price
Skim Pricing
New Product
Priced to Skim
the Market
Perceived Benefits
Use only if offer taps into a metric
of benefits not foreseen by most
competitors
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Summary
• Prices should reflect value
• On any pricing move, you will take share primarily from
other products that are near the new pricing position
on the price to value map
• Price Neutral Positioning posses the fewest
competitive threats
• Value Advantaged Positioning imposes a threat on
competitors
• Value Disadvantaged Positioning challenges the need
to capture customers
• Customer may be uncertain regarding your price
position. Communicate Clearly.
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.