PRICING STRATEGIES

• "leverage" means using something

Pricing - refers to the process of determining what a effectively to achieve a desired result
company will receive in exchange for its products or
services. • Leveraging profit into sustainable growth
means using a company's current profits to
Strategies - refers to a planof action designed to invest in initiatives or strategies that
achieve a long term or overall goals. promote long-term stability and expansion
Pricing
• is the process whereby a business sets the STRATEGIC PRICING
price at which it will sell its products and • The objective is to have a SUSTAINABLE
services Profit
• one of the most important decision in a • Translating the differentiated benefits the
business company can offer into customer
perceptions of a fair price premium for
What are your considerations in pricing a product? those benefits
• TR – TC
• Affordability Three Principles of Pricing Strategies
• Value • Value-based - differences in pricing across
• Competition customers or applications reflect
differences in the value to customers
The Importance of Pricing in Business • Proactive - companies anticipate disruptive
• Setting the right price is essential to a events and develop strategies in advance
business success to deal with them.
• Pricing contributes to how customers • Profit-driven - the company evaluates its
perceive a product or a service success at price management by what it
earns relative to alternative investments
Pricing Strategies rather than by its market share and growth
• is a method or approach that a business relative to its competitors
uses to set the price of its product or
services
FLAWED THINKING ABOUT PRICING
Goals of Pricing Strategies
• To have a competitive price in the market. FLAWED
• Maximize revenue • Not Adequate
• Attract/Retain customers • Defective
• Inconsistent

PRICING PRODUCT STRATEGICALLY Cost Plus Pricing

• is a pricing strategy where a company sets
Strategies - refers to a plan of action designed to the price of its product by adding a fixed
achieve a long term or overall goal percentage or amount (the mark up) to the
cost of producing it
Strategic pricers do not ask, • said to carry financial prudence

“What prices do we need to cover our costs Financial Prudence

and earn a profit?” Rather, they ask, “What costs can • refers to managing your money wisely and
we afford to incur, given the prices achievable in the responsively
market, and still earn a profit? • is achieved (according to cost plus pricing
strategy) by pricing every product or
“What price is this customer willing to pay?” but service to yield a fair return over all costs,
“What is our product worth to this customer and how fully and fairly allocated
can we better communicate that value, thus justifying
the price?” Cost Plus Pricing - In theory, it is a simple guide to
profitability; in practice, it is a blueprint for mediocre
“What prices do we need to meet our sales or market financial performance
share objectives?” Instead they ask, “What level of
sales or market share can we most profitably Why?
achieve?” Some other Factors are not considered

Leveraging Profit into Sustainable Growth Cost Plus Pricing

• Ignores customer value perception in the
• Learning to make sales more profitably is product
the key to achieving sustainable growth in • Competitor’s price is not considered
revenue, market share, and company value • Fails to optimized profit margins
over the long run.
 • Less motivation to innovate and improve ownership to which they will ascribe some economic
operations worth. consumer products often create more
• Fluctuations in demand, change in psychological than monetary value because they
preferences are not considered focus on creating satisfaction and pleasure.
• The buyer’s willingness to pay more based
on their perceived value is missed How to Estimate Economic Value

CUSTOMER DRIVEN PRICING 1. Collect and analyze Competitive Reference Prices

• Is a pricing strategy that sets the price of a 1.1 Identify Competitive Alternative
product or service based primarily on the
perceived value it provides to customers Example:
rather than on the cost of production or A manufacturer of uniforms, thought they had an 85
competitors’ prices percent market share. However, rudimentary market
• pricing at whatever buyers are willing to research quickly revealed that customers considered
pay, rather than at what the product is competitive offerings not just from other uniform
really worth undermines long term manufacturers, but anyone who sold clothing such
profitability as department stores and discounters.
Consequently, when viewed against this larger
But this Strategy UNDERMINES long term backdrop of potential uniform vendors, it was found
Profitability out that the l client only had a 35 percent share of the
WHY? market and they were shocked to learn that they
1. sophisticated buyers are rarely honest about how were missing many more sales opportunities than
much they are actually willing to pay for a product. they had originally thought.
2. Many companies underprice truly innovative
products because they ask potential customers, who 1.2 Establish the competitive reference price
lack prior experience from which to judge the • requires gathering accurate price data and
product’s value, what they would be willing to pay for ensuring that it is comparable to the pricing
it. for your product
• you must ensure that competitive prices are
ECONOMIC VALUE (The Guiding Force of Pricing measured in terms familiar to customers in
Strategy) the segment (for example, price per pound,
price per hour) and are stated in the same
Economic Value – The value that is key to units as your product
developing effective pricing strategy or exchange
value Example:
• many price comparison tools available today from
• value refers to the total savings or satisfaction that vendors like Google Shopping, Shoppee and Lazada
the customer receives from the product that allow users to quickly scan for competitive price
• economists refer to this as use value or the utility points competitive prices are more difficult to obtain
gained from the product. because of industry-wide practices of unpublished
prices or because prices are negotiated individually
Two Forms of Economic Value with customers
1. Monetary value represents the total cost savings
or income enhancements that a customer accrues as 2. Estimating Monetary Value
a result of purchasing a product it is the most • monetary value drivers are tied to the
important element for most business-to-business customer’s financial outcomes via tangible
purchases. cost reductions or revenue increases.

•Example: • In Quantifying Monetary Value you have to

When a manufacturer buys high-speed switching understand how the product category
equipment for its production line from ABB, a global affects the customer’s costs and revenues.
electrical equipment manufacturer, it gets products
with superior reliability that minimize power Example:
disruptions. For many of ABB’s customers, the Quantifying Monetary Value
benefit of fewer power disruptions has high monetary
value because it translates into tangible cost savings • Ahybrid car, for example, provides
associated with avoiding plant shutdowns. monetary benefits such as lower fuel and
maintenance costs. Typical of most end
2. Psychological value refers to the many ways that consumer monetary value drivers, fuel and
a product creates innate satisfaction for the customer maintenance costs can be quantified using
readily available data;
Example: • Toyota’s online calculator is a tool to help
A Rolex watch may not create any tangible monetary consumers estimate the financial benefits
benefits for most customers, but a certain segment of purchasing one of their cars.
of watch wearers derives deep psychological benefit
from the prestige and beauty associated with
3. Estimating Psychological Value Six-Step Process of Value-Based Market
• Psychological value drivers such as Segmentation
satisfaction and security, by virtue of their
subjective nature, do not lend themselves 1. Determine Basic Segmentation Criteria
to estimation via qualitative research • Choosing appropriate segmentation criteria
techniques like in-depth interviewing. starts with a descriptive profile of the total
• quantitative techniques is used to estimate market to identify obvious segments and
the worth of a product’s differentiated differences among them
features.
1. In consumer markets, basic demographics of age,
Conjoint Analysis a technique developed in the late gender, and income
1970s and early 1980s that can discern the hidden 2. Enterprise firmographics such as revenue,
values that customers place on product features. industry, and number of employees
The basic approach is to decompose a product into
groups of features and then provide customers with Segmentation Criteria
a series of choices among various feature sets to • Inputs for this basic analysis can include
understand which they prefer existing segmentation studies, industry
databases, government statistics, and
• makes it possible to estimate the value of other secondary sources.
different feature sets in driving willingness-
to-pay and, ultimately, the purchase • Outputs include buying patterns, customer
decision descriptions, a preliminary set of current
customer needs, and a provisional list of
Example unmet customer needs.
• A flat screen TV can be described in terms of
attributes such as size of screen, number of pixels, 2. Identify Discriminating Value Drivers
and brightness. In a conjoint study, each of these
attributes is divided into levels that can be tested. For Value Drivers- are purchase motivators that vary the
instance, screen size might be broken into 36 inches, most among segments but which have more or less
42 inches, and 52 inches, as a means to estimate the homogenous levels within segments
relative value placed on greater screen size.
• This allows you to focus your attention on
Example: what’s most important to each customer
• Similarly, conjoint is a common approach to segment.
estimating brand value because it enables • In-depth interviews probing how and why
brand to be treated as any other attribute. buyers choose among competitive
• Treating brand as another attribute in the suppliers provide the additional input
choice decision allows us to understand required in identifying discriminating value
how customers might value a 36-inch Sony drivers
TV relative to a 42-inch Samsung model.
3. Determine Your Operational Constraints
Regardless of the attributes tested, the value l and Advantages
estimates derived from a conjoint study can then be • examine where you have operational
used as an input to a variety of pricing decisions. advantages which value drivers can
you deliver more efficiently and at
Value Based Market Segmentation - facilitate pricing lower cost than others which value
commensurate with actual value perceived and drivers are constrained by your
delivered to customers resources and operations?
• Experience, capital spending plans,
personnel capabilities, and overall
Market Segmentation company strategy are among the
• one of the most important tasks in inputs to this step.
marketing • Use the discipline of activity-based
• the goal of any market segmentation is to costing to build a customer behavior
divide a market into subgroups whose spectrum mapping your true costs
members have common criteria that serving differentcustomers.
differentiate their buying behaviors. • examine competitive strengths and
• identifying and describing market weaknesses on key drivers as closely
subgroups in a way that guides marketing as you can.
and sales decision-making makes the
marketing and pricing process much more 4. Create Primary and Secondary Segments
efficient and effective.
• This step combines information about how
customer values differ and about your costs
and constraints in serving different
customers.
 • In theory, your primary segmentation is for customers are most rewarded with
based on the most important criterion higher margins and market value
differentiating your customers
• Your primary segmentation should account value communications - is about justifying the prices
for your company’s capabilities and charged in terms of the value of the benefits provide
constraints as well as customer needs
A. Role of Price & Value Communication
5. Create Detailed Segment Descriptions
to convey your value proposition in a
• segments should be described in everyday compelling manner to accomplish three goals:
business terms so that salespeople and 1. Enable customers to fully understand the benefits;
marketing communications planners know 2. Improve their willingness-to-pay;
what kinds of customers each segment 3. Increase the likelihood of purchase

Effective value and price communications require:

• a deep understanding of customer value
• combined with a detailed understanding of
how and why customers buy
• to formulate messages that actually
influence purchase behavior

a major goal for value communication is to provide

our customers the information
needed to justify paying a higher price

represents Changes of Markets

• Value of the is not communicated well
• B2B settings the agent is not incentivized to
6. Develop Segment Metrics and Fences figure out the relative value proposition of
• it’s important to recognize that the product
segmentation isn’t truly useful until you • Marketers assumed that market demand is
develop the metrics of value delivery to fixed , and market alone will determine the
market segments and devise fences that price of the product
encourage customers to accept price • Need to sell the product to those buyer who
policies for their segments know or understand the value of the
products
Metrics - are the basis for tracking the value
customers receive and how they pay for it. Example:
Mobile phones are often advertised to have “64GB
Example: memory” or “4G connectivity,” yet few sellers
car rental companies once used a distance-based translate these features into customer benefits such
value metric and charged customers for the mileage the ability to store a specific number of pictures or
traveled in addition to the time use relative improvements in reception quality

Fences - are those policies, rules, programs, and Value Communication

structures that customers must follow to qualify for
price discounts or rewards. B. ADAPTING THE MESSAGE FOR PRODUCT
CHARACTERISTICS
Example: minimum volume requirements, time-
based membership requirements, bundled purchase • the step in developing a value message is
requirements, prices paid determining which customer perceptions to
influence
Some fences can also force customers to pay higher • the goal is to help the customer recognize
prices regardless of the seller’s costs the linkages between a product’s most
important differentiated features and the
Choose metrics and fences that establish and salient value drivers
enforce premium prices for high- value segments,
and allow feature repackaging and unbundling to Which customer perceptions to influence?
appeal to low- value and low-cost-to-serve segments
Marketers have to:
PRICE VALUE AND COMMUNICATION • understand the value drivers that are
deemed most important to a customer
Price should reflect Value segment.
• applying the idea of value creation will • help the customer recognize the linkages
contribute to an economic system in which between a product’s most important
firms that are more adept at creating value
 differentiated features and the salient value Understand Key Benefits: Identify the key features
drivers and benefits of the product that drive value for the
customer. For instance, does it save time, reduce
Two Dimensions that Frame a Communications costs, improve efficiency, or enhance performance?
Strategy
Customer’s Priorities: Determine which of these
1. The type of value delivered/sought benefits matter most to the customer. Tailor the
• ECONOMIC value estimate to the customer’s specific needs and
• PSYCHOLOGICAL pain points.

2. The degree of buyer involvement 2. Estimate Reference Value

• level of involvement tends to increase when
the purchase is more expensive. Competitor Comparison: The reference value is the
price the customer would pay for the closest
competitive product. Start by identifying the
competing alternatives your customer could choose.

Cost of Competitor: Look at the price of the

competitor’s product or service that offers a similar
set of features. This becomes the baseline (or
reference value) for the EVE calculation.

3. Quantify Differentiation Value

Additional Benefits: If your product provides

additional benefits or unique features over the
competitor, quantify the monetary value of those
differences. This is the differentiation value.

Examples:
C. STRATEGIES FOR CONVEYING VALUE
Cost Savings: Calculate how much money your
product saves the customer compared to
C.1 Economic Value (monetary or psychological)
competitors (e.g., energy savings, lower
maintenance costs).
FORMULA:
Total Economic Value (EVE)= Reference Value +
Increased Productivity: Estimate the time saved or
Differentiation Value
increased efficiency that results from using your
product. Convert that time into monetary value.

Risk Reduction: If your product reduces the risk of

downtime, defects, or other problems, estimate the
financial impact of avoiding those risks.

Higher Revenue: If your product helps customers

generate more revenue (e.g., by improving sales or
customer satisfaction), calculate that additional
revenue

4. Calculate Total Economic Value

The total economic value of your product is the sum
of the reference value (from the competitor) and the
differentiation value (from the unique benefits your
product provides).
An Economic Value Estimate (EVE)
• is a framework used to calculate and Total Economic Value (EVE)= Reference Value +
communicate the economic value of a Differentiation Value
product or service to a customer
• quantifies the benefits of a product in Example:
monetary terms, helping to justify its price Reference Value: $1,000 (the price of the
by showing how it delivers more value than competitor's product)
competing alternatives Differentiation Value: $500 (extra savings in time,
cost, or added benefits)
STEPS in calculating EVE: Total Economic Value (EVE): $1,500

1. Identify the Product's Value Drivers