Chapters 8-9

1. Chapters 8-9 Customer Value Analyses

2. Value versus Price Perceived Acquisition Value = Perceived benefit or Quality ÷ Perceived total sacrifice Perceived benefit or value: physical attributes + service attributes + technical support + other quality indicators. Total sacrifice: purchase price + start up cost (acquisition, transportation, installation, order handling, etc.) +post purchase cost (repairs and maintenance, risk of failure or poor performance)

3. Perceived Acquisition Value • Sacrifice – sum of all costs and sacrifices that customers incur to acquire and use the product/service. • Equity – perceived value of the brand, company or store where the product is sold. • Aesthetics – value placed by customers on the properties and attractiveness of the product. • Relative use – the way a product is used in comparison to competitive product. • Perceived transaction value – perceived benefits or gains from taking advantage of the offer.

4. Five Steps of Value-Oriented Pricing • Conceptualize Customer Value • Understanding the Key Value Drivers for Customers • Calculate Customer Value - Activity based costing and Profitability analysis; Value analysis and Value Engineering; Value in use analysis (consumer surplus = value-in-use – value-in-exchange; reference product, life-cycle cost, improvement value); Value mapping; • Communicate Value to Customers • Develop Ways to Capture Customer Value

5. Determining maximum Acceptable Price to Consumers Improvement value Relative Economic Value = $800 Purchase price Post-purchase cost (discounted) Start – up cost Product Y New ($1200) Product X Old ($1000)

6. Price Setting for a New Product (y) – From a Consumers Perspective Pmaxy = LCCx + IVy – (PPCy + SUCy) LCCx = Px + PPCx + SUCx Pmaxy = Maximum acceptable price of product Y LCCx = Life-cycle costs of the reference product X IVy = Improvement value for the new product Y PPCy = Discounted post-purchase costs for the new products Y SUCy = Star-up costs for the new product Y

7. Price Setting for a New Product (y) – From a Consumers Perspective Pmaxy = $1000 + $200 – ($200 + $200) = $800 LCCx = $400 + $300 + $300 = $1000

8. Determining Sellers Price Customer’s Inducement (Buyer’s Surplus) Seller’s Pricing Discretion Relative Economic Value = $800 Contribution Direct Variable cost Product Y New ($1200) Product Y ($800)

9. Determining Seller’s Price SDP = Pmax – DVC SDP = Seller’s pricing discretion Pmax = Customer’s maximum acceptable price DVC = Direct variable costs of producing and selling the product SDP = $800 - $400 = $400

10. Value Mapping Customers in a value segment tradeoff perceived benefit against perceived price. Value Disadvantage Area Value Equivalence Line Perceived Price Brand C Brand B Brand A Value Advantage Area Perceived benefits

11. Communicating Value to Consumers • Keep price structure understandable, flexible, and easy to administer. • Consistently and clearly communicate price structure (e.g., discounts, allowance, rebates, and rewards for loyalty). • Provide complete and accurate information about each offer. • Provide appropriate reference price and actual selling price. • Avoid vague phrasing. • Minimize the amount of work and effort required for customers to take advantage of an offer. • Refrain from using phrases such as ‘suggested list price’. These are distrustful and deceptive. • Communicate the total saving in an offer; minimize the need for buyers to make calculations. • Place a reference value on any ‘free’ accept an offer. • For temporary price reduction, provide specific ending dates and price after that date. • For price increase, provide the beginning date of the new price.

12. Contingency Value Pricing When it is difficult to access the value of delivery before the delivery. Examples of contingency pricing: • Money-back guarantee. • Real estate agent’s commission on sale price. • Lawyer’s or agents fee based on % of damage or contract. • Let customer decide the value-equivalent price.

13. Chapters 9 Research Methods for Pricing Decisions

14. Basic Pricing Research Issues • Will price sensitivity be tested for a single product/brand by itself or in the context of competing products. • Will customer’s response to price be tested directly (willingness to buy) or indirectly (change in attitude). • Will each respondent be asked to respond to one price or to several prices?

15. Examples of some research questions • Extent of association between price and quality. • What is the maximum price consumers are willing to pay. • Acceptable price for consumers. • Different consumer groups with different price sensitivity. • Price awareness for a product category. • Competitor’s response to the price change. • Importance given to various benefits and price associated with these benefits.

16. Research Methods • Surveys • Experiment • Statistical methods and models • Panels

17. Specific Research Techniques • Estimating price-level sensitivity (absolute threshold) – direct question (upper and lower levels), price sensitivity meter (at what price would you buy this product), price categorizations (acceptable-unacceptable), magnitude scaling, etc. • Estimating sensitivity to price thresholds – sequential preference, tradeoff analysis, conjoint analysis,