Chapter 4

Price to Value

Exploring the Strategic Framework

Relating the Three Dominant
Approaches to Price Setting

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 Agenda
• What should we expect to find when we identify products on
the price versus value plane?
• What does it mean to be priced to value? Value advantaged?
Value disadvantaged?
• Are penetration pricing and skim pricing the only pricing
strategies for launching a new product?
• When launching a new product, which competitors are most
likely to be threatened?
• Stretch Question: When considering the use of price versus
value to capture market share, which approach is more
defensible?
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 Price Variability in Autos
• Large variation of prices for a similar good within the
same category
– Tata Nano $2500
– Chevrolet Malibu $28,000
– Bentley Flying Spur $170,000
– a factor of 68 between the lowest price production car
and the highest price product auto
• What justifies the price difference: Benefits
• Benefits based pricing is a direct extension of the
economics of pricing
 Price to Benefits Map
• Price Boundary Theory
– Identify relevant competing
alternatives
Bentley Flying
– Define the value differential Spur

Perceived Price
– Pricing accordingly BMW 7
Series
• The price to benefits map plots
Lexus LS
the position of products in
terms of perceived products Chevrolet
Malibu
and perceived benefits…. Tata
Nano
– Visual representation of how
customers perceive the value Perceived Benefits
trade off.

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EVM Model Delivers Price to Value

Stent Exchange Value Model Results

4000

3500

3000
Evaluated Value

2500

2000

1500

1000

500

0
Standard Stent Druge Eluting Stent
Strent
Conjoint Delivers Price to Value

Mango Juice Conjoint Analysis Results

$6.00

$5.50
Perceived Value

$5.00

$4.50

$4.00

$3.50

$3.00
Mango Fruit Mango Fruit Pure Mango, Pure Mango,
Blend, Blend, Premium National
Premium National Niche Brand Brand
Niche Brand Brand
Product Features
The Market Expects Price to Value

Exhaust Fan Prices (Grainger)

$1,600

$1,500

$1,400

$1,300
Price

$1,200

$1,100

$1,000

$900

$800
0 1000 2000 3000 4000 5000 6000 7000
Capacity (CFM)
 Pricing Areas
• Value Equivalence Line
– Where price increases Value
proportional to benefits Equivalence
Line
increases
• Value Advantaged

Perceived Price
Value
Disadvantaged
– Excess benefits beyond what is
captured in price Zone of
Indifference
• Value Disadvantaged
– Priced higher than what would Value
Advantaged
be justified based on the
measure of benefits alone
Perceived Benefits

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 Zone of Indifference
• Around the value equivalence line is a zone of indifference
– Small variations in price or benefits around the value equivalence line have
non measureable effect on sales volume
• Not all products will fall along the value equivalence line
– Outside of this zone of indifference, lies the value advantaged zone and the
value disadvantaged zone.
– Products lying in the value advantaged or disadvantaged zones are either
priced significantly lower or higher than the corresponding levels of benefits,
as perceived by customers
• Elasticity is a key ingredient for determining the width of this zone.
• There is a range of pricing moves that will not impact purchasing behavior
at all
– Range of demand inelasticity, as the next nearest competitor is out of the
comparison metric
– Can be a source of a painless price increase, thus improving profitability
 Variance in Price Elasticity
• Big Number syndrome • Variance with time
– large changes in price have non-linear – customer needs change over time, product
effect on elasticity of demand lifecycle and expectation of growing benefits
– Zone of credibility for same dollar
• Below expectation price the offering has no • Variance by price communication method
credible value. – daily, monthly, or annual payment schemes
• Above expectation price and customers do can affect price sensitivity
not believe it is possible to deliver that
many benefits • Variance by discounting method
• Benefit Bracketed – off invoice discounts vs. on receipt discounts
have different effects on perceived price
– Benefit Floor: Required minimal level of
benefits • Creating demand vs. shifting shares
– Benefit Ceiling : Exceeding a maximum – market growth by lowering price of item or
level, maximum WTP for benefits … more is it just steeling a fixed share
horsepower in a car becomes unnecessary • Cross-product elasticity.
• Price Capped – Switching between categories: cars vs.
– Budget constraints bicycles
– As aluminum became cheaper, it displaced
– Price category spending constraints
steel in beverage cans, later displaced itself
• Variance by segment by plastic
– different customer segments have – Paper or plastic bags
different price sensitivities
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 Value Advantaged
• At times, companies will choose to price • Hypercompetition
aggressively, thus providing more benefits than – Certain product categories, technology driven
expected at a given price sectors in particular, enjoy sequential
improvements in product quality over time
• Autos and gas mileage
• Unharvested Value • DRAM decreases in costs per kb each time a new
– Some authors refer to products priced in the photolithography standard becomes available
value advantaged zone as suffering from • LCD TV’s, computer processors, etc likewise enjoy
“unharvested value” because the company has such costs reductions over time
the opportunity with products that are “value – Aggressively pricing new technology that offers
advantaged” to raise the prices. significant costs advantages over legacy
– Consider it a pricing error technology is a common trait in certain markets.
Forms the basis for the concept of
– Ex: selling front row seats at the same price as Hypercompetion,
lawn seats in a large amphitheatre – See D’Aveni

• Market Share Taking

– Customers perceive that more benefits are
delivered at a given price through the value
advantaged product, and rationally choose to
select that product.
– Warning: deliberately pricing products in the
value advantaged zone is likely to instigate a
competitive reaction, such as a potential price
war, harming overall industry health

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 Value Disadvantaged
• At the other end of the spectrum, • Can be stable if the product does offer
companies will at times price a product superior benefits along a dimension not
high in comparison to the perceived measured
benefits of that offering. – Can be used effectively to capture profits
from a segment that seeks value and
derives benefits from a source of features
• Missed Opportunities or placement that is along another
– Some authors refer to this as missed dimension than that measured.
opportunities, as the firm could have sold – Ex: Bentley Silver Spur @ $170,000 vs.
a higher volume if their prices were more Porsche 911 GT2 @ $194,000
inline with expectation levels – Both priced relatively high, but for a sedan
– Consider it too a pricing error seeking buyer, the Porsche is priced too
– Ex: Unsold advertising space within a high as it fails to provide luxurious seating.
poplar magazine Meanwhile, for the performance seeking
• Usually results in a loss of market share buyer, the Bentley Silver Spur is priced to
high for the level of performance sought.
• In this case, it is suggested that the market
be segmented, and generate specific Price
to Benefits maps for the independent
market segments.
– i.e. luxury sedans as one segment and
luxury sports cars as another segment

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 Constructing Price to Benefits Maps
• Executive Approach
– Identify competing products and their features , benefits, and prices. Position them on
the price to value map according to management impressions of the valuation of
competing benefits
• Delphi Approach
– Use a defined or identified market transaction prices and independent expert
evaluations of “benefits”
• Consumer Research Approach
– Measure the level of perceived benefits and perceived price for a number of
products, as well as the variation in prices in which customers are indifferent
to changes.
– Plot the products according to the mean perceived price and mean perceive
benefits. Use the variation in prices to define ellipses of uncertainty about the
mean price and benefits for the products.
 Dispersion in Perceived Price
• Within the market, a single product
may be sold at a number of different
prices, and the perceived price may at
times vary away from the actual
transaction price
– Varies between customers
• Hidden price vs. explicit price
statements
– Phone tariff structures of incumbent
vs. new entrant
• Usage rates and flat fees… price per

Perceived Price
unit can vary
– Distribution Channel and Locations –
each gives variation in price. Large
– Promotional discounts Dispersion in
• Couponing and price promotions Perceived
• Can create challenges in cross channel Price
cannibalization.
• Perception mismatch
– Customer may place an expected price
on a product based upon the last time Perceived Benefits
they purchased that product, however
due to changes in economic situations,
the price will change over time.
Especially true during inflationary
times.

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 Dispersion in Perceived Benefits
• Perception of benefits gained from utilizing a product varies among customers – orientation
of segmentation
– Most common error, to include to multiple and disparate market segments as one in making a Price
to Benefits map
• Poor marketing communication techniques
– Can be due to miscommunication of the benefits where some MarComm focuses on one set of
benefits while other MarComm focuses on another set of benefits, leaving the recipients of the
message confused as to the exact set of benefits or their value – Can be an area to “fix” within the
company
– Arises naturally when different segments pay attention to promotional activity differently. Some
segments are more responsive to marketing communication than others, driving a dispersion in
perceived benefits (McDonalds Healthy Choices)
• Common also in experience and credence goods,
– the benefits of the product can only be poorly perceived prior to purchase, if they are ever observed
(credence goods)
– customers with direct and recent exposure to the product are likely to have a more accurate reading
of the benefits than those with less exposure to the product
• Dispersion in risk tolerance affects benefits perception
– Risk aversion and aversion to change may cause many customers to discount the perceived benefits,
while other customers seek the benefits precisely because they bring about change
– Also seen in business markets, where executive management seeks change and improvement while
mid-level management seeks stability and steady career improvement
Dispersion in Perceived Benefits

Perceived Price

Large
Dispersion in
Perceived
Benefits

Perceived Benefits

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 Benefit Sources
• Functional benefits
– physical nature or performance characteristics of the product
– Examples: Cars, jewel clarity and size, square footage &
neighborhood,
• Process benefits
– lowering transactional costs
– quicker, safer, easier, reduced search costs, etc
• Relationship benefits
– accrue to the customer from a mutually beneficial relationship with
the seller
– emotional connection to the brand or sales representative, loyalty
rewards, information provisions, - lower search costs or design costs.
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 Market Confusion
Simultaneous Dispersion in Perceived Price and Benefits

Perceived Price

Large Dispersion in Perceived

Benefits and Price

Leading to poor purchases, and

ultimately brand betrayal or lost
opportunities
Perceived Benefits

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 New Product Positioning or Repositioning
• Key Pricing issue in Product Launch/Repositioning is where on
the Price to Benefits map should the product fit?
– Where is the customer addressable horizon?
• Customers from a higher price / higher benefit region?
• Customers from a lower price / lower benefits region?
– Where are the adjacencies from which the new product will take
market share or grow the market?
– What is the likely response of the nearest competitor?
– Is the new position defensible?
• Choices:
• Value Equivalence
• Value Advantaged
• Value Disadvantaged
– For Each, why would you take one stance vs. another?
 Price Neutral
• Pricing along the Zone of
indifference
• Occurs when there is a opening in
the Price to Benefits map that is
currently un-served

Perceived Price
– From whom will you see a
response, those closest to you in
the Price to Benefits map. New
• Somewhat unlikely to have a Product
strong competitive response
• Will capture profits in proportion
to benefits Perceived Benefits
• Safest from a pricing perspective.
Puts pressure on other marketing
levers, distribution and promotion,
in driving volume

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 Penetration Pricing
• Pricing at a low level compared to level
of benefits offered
• Using price as a means to gain market
share Likely
• Competitive

Perceived Price
Can come from increasing the level of
Response is a
benefits of a product, but leaving the Price
price unchanged, thus driving the Decrease
product into the value advantaged zone
• Easy from a promotion perspective, but
can be deleterious for the firm New Product
– Substantial loss of potential profit Priced to
Penetrate the
– Can incur a negative competitive Market
response
• Potential competitive response Perceived Benefits
– Most likely direct response is a price
decrease by competitors,
– Less likely is a benefits increase, as
these take time through re-engineering
the product
– Show who is most affected.

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 Skim Pricing
• Pricing high with respect to
competitors comparable price to
benefits offer
• Price in the value disadvantaged
zone New Product
• Skim profits from early customers Priced to Skim

Perceived Price
the Market
with the expectation of lowering
prices later
• Perceived as a Safe move from a
competitive response perspective,
however
– Can be a pricing error in terms of
forgone profits from missing
volume target
– Provides insufficient motivation for
the market to purchase the Perceived Benefits
product at the higher price point,
given the alternatives
• Use only if offer taps into a metric
of benefits not foreseen by most
competitors

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 Summary
• Prices should reflect value
• On any pricing move, you will take share primarily from other
products that are near the new pricing position on the price to
value map
• Price Neutral Positioning posses the fewest competitive
threats
• Value Advantaged Positioning imposes a threat on competitors
• Value Disadvantaged Positioning challenges the need to
capture customers
• Customer may be uncertain regarding your price position.
Communicate Clearly.