Price to Value
Chapter 4-6
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?
• What are the common pricing practices while
launching a new product?
• When launching a new product, which
competitors are most likely to be threatened?
Price Variability in Autos
• Large variation of prices for a similar
good within the same category
– Tata Nano $2500
– Bentley Flying Spur $170,000
• What justifies the price difference:
Benefits
• Benefits based pricing is a direct
extension of the economics of
pricing
Price to Benefits Map
Conjoint Delivers Price to Value
Value Equivalence line
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.
Value Advantaged
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.
•
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
Customer perceptions
• 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.
Dispersion in Perceived Price
Dispersion in Perceived Benefits
• When different customers hold different
beliefs regarding the benefits of a
product.
– Most common error, to include to multiple
and disparate market segments as one in
making a Price to Benefits map
• Poor marketing communication
techniques
– Arises naturally when different segments
pay attention to promotional activity
differently.
– 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
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