• 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

MKTG6214 Course Materials
Textbook:
• The Strategy and Tactics of Pricing , 5 th 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

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

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

SWOT Analysis
C ompany C ustomers C ompetitors C ollaborators C ontext
Market
S egmentation
Selection &
T argeting
Product/Service
Offering P ositioning
Create
Value
Communicate,
Capture &
Share Value
P roduct/Service
Offering
Pricing
Customer
Acquisition
P lace/
Channel
P romotion/
Communication
Customer
Retention
Revenue & Profits
C ustomer
R elationship
M anagement
Sustain
Value

Price
Level
Price setting
Pricing
Policy
Negotiation Tactics &
Criteria for Discounting
Price/Value Communication
Communication, Value Selling Tools
Communicate,
Capture, &
Share Value
Price Structure
Metrics, Fences, Controls
Value Creation
Economic Value, Offering Design, Segmentation
Create
Value
Price setting is just the “tip of the iceberg” of a profitable pricing strategy.

Value-Based Pricing
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

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.

Your unique value delivery
Positive
Differentiation
Value
Price of
Customer’s
Next Best
Alternative
Reference
Value
Negative
Differentiation
Value
Price to capture a share of this value
Costs unique to doing business with you
Total
Economic
Value

Example – Heavy equipment manufacturer
Higher residual value = $1200
Parts inventory program savings =
$1250
Invoice processing consistency savings
= $1500
Fuel economy savings = $2200
Add’l warranty cost = -$1050
Differentiation
Value = $7,450
Increased revenue from higher uptime = $2350
Total offering economic value
$79,950
How much of the
Differentiation
Value do you
Capture versus
Share with your
Customers
Competitive alternative for this customer
= $72,500
Reference
Reference price
= $72,500

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?

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?

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

Estimating Psychological Value
Impact of Warranty Length on Willingness to Pay
MKTG 6223 Understanding What Customers Value
Segment B — Innovators
$6
$5
Revenue
Contribution
$4
$
(M)
$3
$2
$4,041,864
(~ 10,100 units)
$1
$0
-$1
$0
$4
$626,904
$200 $100 $300 $400 $500
Price ($)
Segment E — Budget Shoppers
$600
$3
$
(M)
$2
$1
$0
$0
-$1
$2,020,788
(~ 5,800 units)
$100 $200 $300
Price ($)
$400
$261,496
$500 $600

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

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?

The price of the most basic of commodity products . . . .
Brand
Acqua Panna – Natural Spring
Product of Notes
Italy (Florence) 1 liter glass bottle
Arrowhead – Mountain Spring
Dasani – Purified Drinking Water
California
USA
Evian (Nomad) – Natural Spring France (Alps)
Menehune – Purified Drinking Water Aiea, HI
Perrier – Sparkling Natural Mineral France
Plastic 28-pack
Plastic
Plastic 6-pack
Plastic
Green Glass
Rosauer’s Finest – Spring Water
San Pellegrino – Sparkling Mineral
Talking Rain – Mountain Spring
Voss – Virgin aquifer
City of Dallas – Residential
Canada
Italy (S.P.)
Preston, WA
Norway
Price per
Ounce ($)
0.13162
0.02367
0.08876
0.12318
0.07813
0.08333
Plastic/Pop Top
Green Glass
0.02307
0.08844
Plastic/Flavored 0.06760
Clear glass cylinder 0.181746
Pipes/Lake Water 0.000012
Price per
Gallon ($)
16.85
3.03
11.36
15.77
10.01
10.67
2.95
11.32
8.65
23.26
0.00156
The relevant question is:
Why are consumers willing to pay relatively steep prices for a commodity product?

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
Create
Value
Communicate,
Capture &
Share Value
P roduct/Service
Offering
P ricing
Customer
Acquisition
P lace/
Channel
P romotion/
Communication
Customer
Retention
C ustomer
R elationship
M anagement
Sustain
Value
Revenue & Profits

A one-size fits all approach to pricing reduces profitability and intensifies customer pricing pressure
2
….leaves money on the table for these customers and communicates that value does not have to be paid for…
High
1 Setting price here
A B
Segment Size
3 ….and misses growth opportunities by pricing these customers out of the market
C D
Low

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

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

Benefits of Price Segmentation Can Change with
Ambiguous Reservation Prices
Percent of Market
A
5
B
15
C
35
D
25
E
20
Total
100
1000 Segment Size 50
Reservation Price ≈
30% buy next higher-priced option if target price not available
$20
150
$15
350
$10
250
$ 8
200
$ 6
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?

Mobile Customer Prices Paid per Minute (Virgin Ex 9b)
70
60
50
40
30
20
10
0
0 100 200 300 400 500
Contract Minutes
600 700 800
100
300
500
700

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

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

Value Based Market Segmentation – pp. 40-45
6 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

Three Mechanisms to Maintain Segmented
Structures

Pricing Menus Map Price Structure
Help Customers Trade Up or Trade Down
A “Fixed Price, Flexible Offer” Menu

Standard SRP $219.99
Professional SRP $299.99
All in Standard +
MS Access
Developer SRP $529.99
Development Tools to Build
Own Applications
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

Price Offer Configuration
Principles For Offer Creation
Toilet on the plane
First to Board
Premium Seats
Beverages
WiFi Access
On-Board Entertainment Bag Check

Price Metrics
Criteria For Evaluating Price Metrics - Exhibit 3.4
Potential Metrics
5
4
1 Tracks with Differences in Value Across Segments
3
2 Tracks with Differences in Cost-to-Serve
Easy to Measure and Enforce
Facilitates Favorable Positioning against Competition
Aligns with How Buyers Experience Value in Use
Optimal Metric

Market
Real Estate Want Ads
Aircraft Engines
Information service
Traditional Metrics Value-based Metrics
$ / column inch
$ / engine
$ / minute
$ / property value
$ / hour of use
$ / download

iTunes
Why did this new pricing model have such an impact on sales?

iTunes’ New Price Metric Re-Aligned Price and Value iTunes
Overpayment
Old
Metric
$ / CD
Value of
CD
Price of
CD
New
Metric
$ / Song
Value of
Song
Price of
Song
Value
Inducement

– 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)

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