MARK 4900 Exam 2 Study Guide Chapter 8 Value Based Pricing and Pricing Strategies Price and Value If you win a customer on price you will lose that customer on price if you win a customer on value you will keep that customer on value Apple iPad o MAC users 41 would pay over 800 32 would pay under 600 o PC users 20 would pay over 800 64 would pay under 600 o Apple launched product with a wide range option of customer choices Apple s Pricing Strategy o Launch strategy was a great margin management price strategy because the margin was likely to be more for the higher priced iPads o If they only would have launched two high priced products they could have done traditional price skimming getting high margins but low volume o Apple s decision to offer different performance levels at several price points undoubtedly produced considerably more volume sales revenue and profit than a conventional price skim often used for new products o Multiple product price positioning strategy o iPod Used price skimming to generate high margins and eventually lowered the price to attract more people Single product price positioning strategy Cost Based Pricing Versus Market Based Pricing o Cost Based Pricing Most commonly used approach to pricing unfortunately because it has nothing to do with what customers will pay for a product 60 and 64 used this strategy The cost of making a product and the desired profit margin are the two primary determinants in setting a cost based price then price is marked up by channel intermediaries before arriving to the customer Customers and competitors are missing from this pricing approach Ignores customer performance needs and what they will pay for a desired level of product performance Overlooks both competitors offerings relative to customer needs and price sensitivity Goes from purchases labor and equipment through the channel to retail price for consumers o Value Based Pricing Market Pricing Starts with customer needs competitors product price positioning and company product price positioning Taking into account customer needs customers price sensitivity and competing products a company develops its price around a product s relative strengths to create greater value than competing products offer The value drivers that seem to come to the surface are product performance quality of customer service brand reputation and price Goes from customers competition and company backwards through the channel to determine cost to manufacturer and margin Cost Based Pricing Underpricing and Lowering Profits o Used a customer derived price purchase curve and found that for a digital camera the cost based pricing strategy would price at 250 to earn 50 margins and 187 5 mill gross profits However based on the chart if they charge 350 they would earn less sales but 225 in gross profits Serving fewer customers who value the product at the higher price of 350 is much more profitable with a gross profit margin of 64 3 percent than using the cost based price of 250 Cost Based Pricing Overpricing and Lower Profits o In this example unit cost is 250 so based on cost based pricing they would like to sell camera at 500 to achieve 50 margins but only 10 of population would buy the product at that price generating 62 5 mill in gross profits By using our market knowledge of how customers value this camera at different price levels we can see that a price of 400 with a margin of 37 5 yields significantly higher levels of sales and gross profit o In companies where the finance function sets price the customer derived pricepurchase curve is essential to winning the argument that a market based price would much more profitable than a company policy of pricing to achieve a 50 margin Value Pricing o Requires extensive customer and competitor intelligence Without high levels of both it is not possible to implement this kind of pricing o Starts with a good understanding of customer needs and the benefits a product offers relative to its competitors o 5 Types of Value Pricing Value in Use Pricing Price is set to provide customers with an attractive savings after considering the life cycle costs of acquiring owning using maintaining and disposing of a product Life Cycle Value Pricing Price is set with respect to the total cost of ownership over the life cycle of a product on the basis of the net present value of the difference between the company s and competitor s life cycle ownership costs Perceived Value Pricing Price is set on the basis of the value that customers realize when they compare the price and benefits of the company s product with those of a key competitor s product Performance Based Pricing Price is set on the basis of customer preferences for different levels of price and performance and taking into consideration how the company and competitors are positioned with respect to delivering both price and performance Customerization Value Pricing Price is set by unbundling a product s features or performance levels placing a price on each and then allowing customers to select the features and performance that they want at a price that they are willing to pay The price of the top performing product that has all features serves as the reference price Customers who buy the product with only the features and performance level they desire have an inferred savings value relative to reference price Understanding Total Cost of Ownership o Price is the most visible cost of any purchase all customers are price sensitive to some degree Some customers are willing to pay more for extra benefits these benefits include reduced costs in other areas of product ownership o The other costs of owning a product are much less obvious than the purchase price o Value in use pricing considers the annual cost of ownership for a competitor s product and the annual cost of ownership for the business s product in determining the business s customer value Using this method a business can offer an attractive savings economic value while maintaining a premium price Because of lower acquisition use and other costs the value in use of the business s product is higher than that of the competing product and the customer saves money The price is based on the attractive savings that customers realize over the life of the product not just on the costs of manufacturing and marketing the product The higher the savings the more attractive the product the more attractive the product the higher the purchase price can be regardless of