COST AND PRICING
PRICE AND VALUE
COMMUNICATION
Strategies to Influence Willingness - To - Pay
Overview
Developing an effective
pricing strategy requires
understanding and quantifying
the value of your offer in order
to set profit-maximizing prices
across segments.
Overview
Yet even the most carefully constructed value-
based pricing strategy
will fail unless your offer’s value, and how it
differs from that of competitors’
OFFERS, IS ACTUALLY UNDERSTOOD
BY POTENTIAL CUSTOMERS.
Overview
Customers who fail to
recognize your differential value are
vulnerable to buying inferior offerings
at lower prices supported by loosely
defined performance claims.
Overview
The role of
value and price communications,
therefore, is to protect your value
proposition
from competitive encroachment, improve
willingness-to-pay, and increase
the likelihood of purchase as customers
move through their buying
PROCESS.
According to
business managers rated
“communicating
value and price” as the most important
research capability necessary to enable
their pricing strategies.
According to the ability to
communicate value is also one of the
research
weakest capabilities in most sales and
marketing organizations.
effective value and price communications
According to
require a deep understanding
of customer value (which most firms lack)
combined with a detailed
research
understanding of how and why customers buy
(another shortcoming) to formulate
messages that actually influence purchase
behaviors.
Amazon.com launched the
Kindle e-book reader in October
2007, sales grew rapidly even
though Amazon broke from
conventional wisdom
by not supporting the product
launch with a traditional
advertising campaign
although advertising on television and in
print media could reinforce awareness, it
would do little to motivate customers
who knew of the product but were
unwilling to invest in such a radical
departure from traditional books.
The challenge facing
Amazon management
was how to help customers
overcome the perceived risk
that the value of being
able to order and read
books electronically might
not justify the $400
price tag
Amazon had to communicate
the value of the new book
reader to customers
in a clear and compelling way
to overcome the perceived
risk—
something that advertising
alone could not accomplish.
SOLUTION
Amazon established a “Meet a
Kindle Owner” program in major
cities across the United States.
Under the program, customers
could meet current
Kindle owners and try out the
reader for themselves.
SOLUTION
The combination of
positive word of mouth from
Kindle enthusiasts and the
ability to experience
the product firsthand was
enough to overcome doubts
about the Kindle’s value
and has led to robust sales
growth that has surpassed
many analysts’ projections,
a clear demonstration of the
power of effective value
communications.
VALUE COMMUNICATION
Value communication can have a great effect on sales and price
realization when your product or service creates value that is not
otherwise obvious to potential buyers.
MF | F/W 2020
Adapting the Message for
Product Characteristics
The first step in developing a value message is determining which customer
perceptions to influence.
We start with an understanding of the value drivers
that are deemed most important to a customer segment.
MF | F/W 2020
Adapting the Message for
Product Characteristics
The goal is to help the
customer recognize the linkages between a product’s most important differentiated
features and the salient value drivers.
MF | F/W 2020
Adapting the Message for
Product Characteristics
Two product characteristics determine
how you should try to influence buyer perceptions of key value
drivers: the target customer’s relative cost of search for
information about the differentiating attributes of your offering
and the type of benefits sought—
monetary or psychological.
MF | F/W 2020
type of
Relative cost
benefits
of search
the financial and nonfinancial cost,
sought
relative to the expenditure monetary or psychological
in the category, that a customer
must incur
Several other factors determine the relative cost of search, including
search characteristics of the product and the customer’s expertise in
the category. The relative search cost is low when the customer can
easily determine
product differences before purchase.
Such products, called search goods, allow buyers to find information and choose
among them prior to purchase. Examples include commodity chemicals, desktop
computers, home equity loans, cosmetics, and digital cameras.
In contrast, experience goods have differentiating attributes that are more
difficult to evaluate across brands, requiring the customer to invest substantial
time and effort to evaluate the products before purchase. Examples include
most services such as management consulting, auto repair, and
investment advice, as well as some products such as pharmaceuticals and
home entertainment systems.
The relative cost of search declines significantly for expert
customers with
extensive knowledge about the product category. A
technophile can read the feature specifications for a personal
computer and quickly infer how it will perform various tasks.
Amore typical buyer, however, would have to try different
brands to make the same inferences.
Amore typical buyer, however, would have to try different brands
to make the same inferences. As a result, less sophisticated buyers
often develop strategies to lower search costs such as purchasing
a brand name or relying on
the advice of an expert. The endorsement of an expert can be very
powerful, even in business markets.
The relative cost of search diminishes as a
customer’s expenditure for
the product increases.
p. 78
FREE TRIAL/FREE TASTE
One of the most effective
ways to influence value
perceptions for experience
goods is to subsidize
trial.
For goods in which monetary
value drivers are most important
to the customer, value
quantification should be a
central part of the message
because the data calls attention
to any gaps between the
customer’s perceptions
of value and the actual
monetary value of the product.
When the important value
drivers for a purchase
decision are pyschological
rather than monetary, it is
best to avoid incorporating
quantified
value estimates into
market communications,
because value is
subjective and
will vary from individual to
individual.
There are two
ways to do this. One is to focus the
message on high-value benefits that
thecustomer might not have been
thinking about when considering the
differentiating
features of the product. The second is
to raise perceptions of the product’s
performance benefits that cannot be
easily judged prior to experiencing
them
In many cases, you may need
to communicate both
economic and psychological
benefits for the same product
to the same customers.
Adapting the Message to Purchase Context
Value-based communications must not only be adjusted for product
characteristics such as cost of search and benefit type, but also for the
customer’s purchase context.
MF | F/W 2020
Adapting the Message to Purchase Context
Netbooks are small computers with
limited computing power designed
to provide inexpensive access to the
Internet and basic home office
functions such as word processing.
MF | F/W 2020
Adapting the Message to Purchase Context
light weight and small size make them
highly portable for travelers or
students. They are exceedingly reliable
because of their simple design and the
fact that they run only mature operating
systems such as Microsoft’s Windows
XP.
MF | F/W 2020
Adapting the Message to Purchase Context
Suppose the target
customer
was a long-time laptop
buyer who was thinking
about replacing his
five-year-old Dell
computer.
MF | F/W 2020
Adapting the Message to Purchase Context
it is simply to make him aware
of the
benefits of netbooks that
could make them a preferable
option.
MF | F/W 2020
The Buying Process
Multiple Marketing
Participants in
the Buying Distribution
Process
Sales
PRICE
COMMUNICATION
four aspects of price perception and
their implications for price
communication:
proportional price evaluations,
reference prices, perceived fairness,
and
gain-loss framing
Proportional Price Evaluations
Buyers tend to evaluate price differences
proportionally rather than in absolute terms.
Reference Prices
buyers’ reference prices
can be raised by stating a manufacturer’s suggested price, a higher price
charged previously (“Was P999, Now P799!”), or a higher price charged by
competitors (“Their price P999, Our price P799!”)
promotional deals such as coupons, rebates, and special package
sizes can influence reference prices strategically.
Perceived Fairness
But what is fair? The concept of fairness appears to be totally
unrelated to issues of supply and demand
research shows that perceptions of fairness
are more subjective, and therefore, more manageable, than one might otherwise
think.8 Buyers apparently start by comparing what they think is the seller’s
likely margin now to what the seller earned in the past, or to what others earn in
similar purchase contexts
Perceived Fairness
perceptions of fairness seem to be related to whether the price is
paid to maintain a standard of living, or is paid to improve a standard of living.
People consider products that maintain a standard to be “necessities,” although
humanity has probably survived without them for most of its history. Charging
a high price for a necessity is generally considered unfair.
Gain–Loss Framing
A final consideration in price communication involves how the price is presented
to customers, who tend to evaluate prices in terms of gains or losses
from an expected price point.
The reason is that people place more psychological importance
on avoiding “losses” than on capturing equal size “gains.”
Gain–Loss Framing
• To make prices less objectionable, make them opportunity costs (gains forgone)
rather than out-of-pocket costs.
• When a product is priced differently to different customers and at different
times, set the list price at the highest level and give most people discounts.
This type of pricing is so common that we take it for granted.
• Unbundle gains and bundle losses.
END
Questions?
