Value Creation

The Source of Pricing Advantage

The role of value in pricing
 Value (or use value): the overall
satisfaction that a customer receives
from using a product or service
offering.
 Consumer Surplus = Value – Price
Economic Value
 The value at the heart of pricing
strategy is not use value, but is what
economists call economic value or
exchange value.
 Economic Value = Reference
Value + Differentiation Value
 Economic value is the measurement
of the benefit derived from a good or
service to an individual or a company.
 Economic value: depends on the
alternatives customers have
available to satisfy the same need
Economic Value
Differentiation Value
 Differentiation value is the net benefits that
your product or service delivers to
customers over and above those provided
by the competitive reference product.
 Economic value comes in two forms:
monetary and psychological.
 Monetary value: the total cost savings or
income enhancements that a customer
accrues as a result of purchasing a product.
 Psychological value: a product creates
innate satisfaction for the customer.
 Consumer products focus more on
psychological value than monetary value
because they provide satisfaction and
pleasure.
 Differentiation value can be positive or negative
Estimate Economic Value
 Competitive reference prices
 Estimate monetary value
 Estimate psychological value
Competitive Reference Prices
 Some products may not have a
single competing product that
customers would consider a
suitable alternative.
 Gathering accurate competitive price
data and ensuring that it is comparable
to the pricing for your product.
 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.
Untreated Reference Price
Data
Adjusted Reference Prices
Estimate Monetary Value
1. Understand how the product category
affects the customer’s costs and
revenues
2. Collect specific data to develop
quantified estimates. In-depth customer
interviews are the best source of
information.
3. Sum the reference value and the
differentiation value to determine the
total monetary value.
Case: Dyna-Test
 Dyna-Test synthesizes a
complementary DNA strand from an
existing DNA sample, significantly
reducing DNA molecule degradation
and enhancing the precision of a DNA
analysis.
 Primary competitor: EnSyn
 Applications: criminal investigators,
hospitals and medical professionals,
and pharmaceutical manufacturers.
 In all applications, test failures can be
costly.
Monetary Value Estimation for
Dyna-Test Industrial Buyers
Monetary Value Estimation for Dyna-
Test Academic and Government
buyers
Monetary Value Profile for
Dyna-Test
Several Guidelines for
Estimating Monetary Value
 Consider only the value of the
difference between your product and
the next best competitive alternative
(NBCA) product.
 The value of any benefits that are the
same as those delivered by the NBCA is
already determined by competition and
incorporated into the reference value.
 Company can charge no more for than the
price of the NBCA product, regardless of
its use value to the customer.
Several Guidelines for
Estimating Monetary Value
 Measure the differentiation value either
as costs saved to achieve a particular
level of benefit or as extra benefits
achieved for an identical cost.
 Don’t add both; that’s double counting.
Estimate 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.
 Instead, pricing researchers must rely on
a variety of quantitative techniques to
estimate the worth of a product’s
differentiated features.
 The most widely used of these techniques is
conjoint analysis.
 Conjoint analysis extrapolates the
respondent's preference for a qualitative
measurement.
Case: Big Drive
 Big Drive is a revolutionary golf club,
and it has led to significant increases
in distance and accuracy for both
beginning and advanced players.
 Four segments: 1) Innovators; 2)
Value Seekers; 3) Lost Players; 4)
Budget Shoppers.
 Four attributes: 1) Distance; 2)
Straightness;
3) Consistency; 4) Warranty.
Impact of Warranty Length on
Willingness to Pay
Customer Value Modeling
 Assumption: customers seek to
purchase the products that give them
the greatest perceived benefit – which
might be quantified in monetary terms,
but need not be – per unit price.
 Total economic value and
psychological terms have a single
linear relationship to price
Customer Value Modeling
 Linear relationship between price and
perceived quality: if a differentiated
product is “x” percent more effective
than the competition, then the product
will be worth only “x” percent more in
price.
 The fact is, however, that CVM
underestimates the value of the
more differentiated products in a
market and overestimates the
Customer Value Modeling
value of the less differentiated
products.
Value Based Market segmentation

 Identifying and describing market

subgroups makes the marketing
and pricing process much more
efficient and effective
 Charging the entire market the same
price has the risk of undercharging
some segments and overcharging other
segments which in both cases causes
forgone profits.
Six-step process to conduct
a
1. Determine Basic Segmentation Criteria
 Choosing appropriate segmentation
criteria starts with a descriptive
profile of the total market to identify
obvious segments and differences
among them
 Behavioral (rate of use, benefits),
demographic (age, income),
geographic (cities), psychographic
(lifestyle, opinion)
Six-step process to conduct
a
2. Identify Discriminating value drivers-
purchase motivator
 Identify those value drivers

 In depth interviews probing how and

why buyers choose among competitive
suppliers provide the additional input
required. Industry expert distributors
and sales people can provide
information for double checking value
perceptions
Six-step process to conduct
a
 The outputs include a list of value
Six-step process to conduct
a
3. Determine you operational constrains
and advantages
 Which value drivers you can deliver
more efficiently and at lower cost
than others?
 Develop a customer behavior
spectrum mapping your true costs
serving different customers.
 Examine competitive strengths and
weaknesses on key drivers  which
Six-step process to conduct
a
customers can you better serve than can
competitors
Six-step process to conduct
a
4. Create Primary and Secondary segments
 Primary segmentation account for your
company’s capabilities and constraints
as well as customer needs what is
likely to be the most important
differentiator
 Your secondary segmentation
divides primary segments into
distinct subgroups according to
your second most important
Six-step process to conduct
a
criterion.
Six-step process to conduct
a
5.Create detailed Segment Descriptions
 Segments should be described in
everyday business terms so that
salespeople and marketing
communication planners know what
kinds of customers each segment
represents.
Six-step process to conduct
value-based segmentation: a
6. Develop Segment Metrics and Fences
 Metrics is the basis for tracking the
value customers receive and how they
pay for it. (what customer gets and
how they pay for it)
 Fences are those policies, rules,
programs and structures that
customers must follow to qualify for
price discounts or rewards. (minimum
volume requirement, bundle
purchase)