STRATEGIC PRICING #1

Economic Value
The Guiding Force of Pricing Strategy
Topic Outline

Economic Value, defined

•Two Forms of Economic Value

•How to Estimate Economic
Value
Topic Outline

Value Based Market

Segmentation

•Six Steps Process of Value

Based Market Segmentation
Economic Value
• The value that is key to developing effective pricing strategy or
exchange value
• value refers to the total savings or satisfaction that the customer
receives from the product
• economists refer to this as use value or the utility gained from the
product.
Two Forms of Economic Value
1. Monetary value represents the total cost savings or income
enhancements that a customer accrues as a result of purchasing a product
 it is the most important element for most business-to-business
purchases.
• Example:
When a manufacturer buys high-speed switching equipment for its
production line from ABB, a global electrical equipment manufacturer, it
gets products with superior reliability that minimize power disruptions.
For many of ABB’s customers, the benefit of fewer power disruptions has
high monetary value because it translates into tangible cost savings
associated with avoiding plant shutdowns.
Two Forms of Economic Value
2. Psychological value refers to the many ways that a product creates
innate satisfaction for the customer
Example:
A Rolex watch may not create any tangible monetary benefits for
most customers, but a certain segment of watch wearers derives deep
psychological benefit from the prestige and beauty associated with
ownership to which they will ascribe some economic worth.

consumer products often create more psychological than monetary value

because they focus on creating satisfaction and pleasure.
How to Estimate Economic Value
1. Collect and analyze Competitive Reference Prices
1.1 Identify Competitive Alternative
Example:
A manufacturer of uniforms, thought they had an 85 percent market share.
However, rudimentary market research quickly revealed that customers
considered competitive offerings not just from other uniform
manufacturers, but anyone who sold clothing such as department stores
and discounters. Consequently, when viewed against this larger backdrop
of potential uniform vendors, it was found out that the client only had a 35
percent share of the market and they were shocked to learn that they were
missing many more sales opportunities than they had originally thought.
How to Estimate Economic Value
1.2 Establish the competitive reference price
- requires gathering accurate price data and ensuring that it is
comparable to the pricing for your product
- you must ensure that competitive prices are measured in terms familiar
to customers in the segment (for example, price per pound, price per
hour) and are stated in the same units as your product
Example:
• many price comparison tools available today from vendors like Google Shopping,
Shoppee and Lazada that allow users to quickly scan for competitive price points
*competitive prices are more difficult to obtain because of industry-wide
practices of unpublished prices or because prices are negotiated individually
with customers
How to Estimate Economic Value
2. Estimating Monetary Value
 monetary value drivers are tied to the customer’s financial
outcomes via tangible cost reductions or revenue increases.

In Quantifying Monetary Value you have to understand how the

product category affects the customer’s costs and revenues.
Example:
Quantifying Monetary Value
A hybrid car, for example, provides monetary benefits such as
lower fuel and maintenance costs. Typical of most end consumer
monetary value drivers, fuel and maintenance costs can be quantified
using readily available data;
Toyota’s online calculator is a tool to help consumers estimate the
financial benefits of purchasing one of their cars.
How to Estimate Economic Value
3. Estimating Psychological Value
• Psychological value drivers such as satisfaction and security, by virtue of their
subjective nature, do not lend themselves to estimation via qualitative research
techniques like in-depth interviewing.
 quantitative techniques is used to estimate the worth of a product’s differentiated
features.

Conjoint Analysis—a technique developed in the late 1970s and early 1980s that can
discern the hidden values that customers place on product features. The basic approach
is to decompose a product into groups of features and then provide customers with a
series of choices among various feature sets to understand which they prefer
- makes it possible to estimate the value of different feature sets in
driving willingness-to-pay and, ultimately, the purchase decision.
Example:

• A flat screen TV can be described in terms of attributes such as size of

screen, number of pixels, and brightness. In a conjoint study, each of
these attributes is divided into levels that can be tested. For instance,
screen size might be broken into 36 inches, 42 inches, and 52 inches, as a
means to estimate the relative value placed on greater screen size.
Example:
• Similarly, conjoint is a common approach to estimating brand value
because it enables brand to be treated as any other attribute.
• Treating brand as another attribute in the choice decision allows us to
understand how customers might value a 36-inch Sony TV relative to a
42-inch Samsung model.
Regardless of the attributes tested, the value estimates derived from a
conjoint study can then be used as an input to a variety of pricing
decisions.
Value Based Market
Segmentation
facilitate pricing commensurate with actual value
perceived and delivered to customers
Market Segmentation

 one of the most important tasks in marketing

 The goal of any market segmentation is to divide a market into

subgroups whose members have common criteria that differentiate their
buying behaviors.

 identifying and describing market subgroups in a way that guides

marketing and sales decision-making makes the marketing and pricing
process much more efficient and effective.
Six-Step Process of Value-Based Market Segmentation

Determine Basic Segmentation

Criteria

1  Choosing appropriate segmentation criteria starts

with a descriptive profile of the total market to
identify obvious segments and differences among
them

1. In consumer markets, basic demographics of age,

gender, and income

2. Enterprise firmographics such as revenue,

industry, and number of employees
Segmentation
Criteria
Inputs for this basic analysis can include existing
segmentation studies, industry databases, government
statistics, and other secondary sources.
Outputs include buying patterns, customer
descriptions, a preliminary set of current customer
needs, and a provisional list of unmet customer needs.
Six-Step Process of Value-Based Segmentation
Identify Discriminating Value Drivers
Value Drivers- are purchase motivators that vary the most
among segments but which have more or less

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homogenous levels within segments

 This allows you to focus your attention on what’s most important to

each customer segment.

 In-depth interviews probing how and why buyers choose among

competitive suppliers provide the additional input required in
identifying discriminating value drivers
Six-Step Process of Value-Based Segmentation
Determine Your Operational
Constraints and Advantages

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 examine where you have operational advantages

 which value drivers can you deliver more efficiently and at lower cost than
others

 which value drivers are constrained by your resources and operations?

 Experience, capital spending plans, personnel capabilities, and overall

company strategy are among the inputs to this step.

 Use the discipline of activity-based costing to build a customer behavior

spectrum mapping your true costs serving different customers.

 examine competitive strengths and weaknesses on key drivers as closely

as you can.
Six-Step Process of Value-Based Segmentation
Create Primary and Secondary
Segments

4  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 based on the most important

criterion differentiating your customers

 Your primary segmentation should account for your company’s

capabilities and constraints as well as customer needs
Six-Step Process of Value-Based Segmentation
Create Detailed Segment Descriptions

 segments should be described in everyday business

5 terms so that salespeople and marketing

communications planners know what kinds of
customers each segment represents
Example:
Characteristics of Three Printer Customer Segments
Six-Step Process of Value-Based Segmentation
Develop Segment Metrics and Fences
 it’s important to recognize that segmentation isn’t truly useful until you

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develop the metrics of value delivery to market segments and devise
fences that encourage customers to accept price policies for their segments

 Metrics - are the basis for tracking the value customers receive and
how they pay for it.

Example:

car rental companies once used a distance-based

value metric and charged customers for the mileage traveled in addition to
the time used
 Fences - are those policies, rules, programs, and structures that customers must
follow to qualify for price discounts or rewards.

Example: minimum volume requirements, time-based membership

requirements, bundled purchase requirements, prices paid

 Some fences can also force customers to pay higher prices regardless of the seller’s
costs

 Choose metrics and fences that establish and enforce premium prices for high-
value segments, and allow feature repackaging and unbundling to appeal to low-
value and low-cost-to-serve segments