Pricing Strategies

Session 2
(Economic Value Creation)
The Strategic Pricing Pyramid
Price level
(Price Setting)

Pricing Policy
(Negotiation tactics and Session 2 & 3
criteria for discounting)

Price and Value Communication

(Communication, Value Selling tools)

Price Structure
(Metrics, Fences and Controls)

Value Creation
(Economic value, Offering Design, Segmentation)
Recap: The Total Product

• Delivery
Installation
Support Services Warranty
After sales service

• Brand
Product Design
Country of Origin
Attributes Price
Packaging

Core • Features/Functions/benefits

Product/Benefits Value to Customer

 Components of Offering

Brand
Suppliers creatively combine
components of the total offering
that contribute to value for a
specific customers.
Product Service

Components will vary depending Packaging

on specific customer needs and the
Cost
customer’s cost structure

Value

Customer perceives price as a cost

in its offering
Availability
Reflect
• There is a lot of data to support the idea that a firm which has the
largest market share also is the most successful in a particular
industry. And what is the most effective way to gain the largest
market share?
Reflect
• Certainly to lower prices below competition.
• If this is true, wouldn’t a smart marketing manager always lower his
prices below the firms competitors to get the biggest market share
possible?
• What could possibly prevent him from taking this action?
Profit Objectives
Profit • Include pricing to realize a target return
on investment or to maximize profits
Oriented
Sales • Aim to increase sales either in currency
or unit terms or to penetrate markets
Oriented and increase share

• Includes meeting competition or

Status Quo choosing to compete on a non-price
basis
 Customer
Firm -Value in use
-Corporate Objectives -Perceptions of
-Costs product, company
-Marketing Program -Ability to pay
-Product assortment

Pricing Competitors
-offerings
Environment Strategy -pricing
-Govt Regulations -costs
-Inflation
-Currency Value and
stability
-Economy
Distribution
Channels
-Costs
-Capabilities
-Grey Market
Possibilities
Pricing

• Determine the cost to produce and then

Cost plus add the profit (markup) to set the price

Customer • Value+ Profit

Driven
• Sales objective to get maximum market
Share Driven share
The Strategic Pricing Pyramid
Price level
Session 7,8,9,10
(Price Setting)

Pricing Policy
(Negotiation tactics and
criteria for discounting) Session 6

Price and Value Communication

(Communication, Value Selling tools)
Session 5

Session 4 Price Structure

(Metrics, Fences and Controls)

Value Creation
Session
2&3 (Economic value, Offering Design, Segmentation)
Just 574 To’ak chocolate bars were
produced in 2014 using hand sorted,
heirloom cacao beans harvested from
rare Ecuadorian trees. Each bar is
engraved with an individual number,
packaged in a Spanish elm wooden box
and comes with a specially designed
tasting tool (touching the chocolate with
your fingers can alter the flavour). A
single 50gram bar will set you back
$260.

Who decides what a chocolate bar is worth and on what evidence do they base that decision?
How do we know when to pay more or less?
Value is in the heart of the beholder.
More often than not value is perceived, not calculated.

It’s irrational, intangible, unpredictable and messy.

The customer is not paying for the rare beans or even the
tasting experience— she’s paying for the joy that believing
the story brings her.

Value creation is the responsibility of the marketer. It’s our

job to give people stories to believe in, not just advantages to
measure.
 2 3
1
Pricing should reflect value
Value Creation Game
• Rank your preference on seat position in the class room
1. Middle or on side of class room (Horizontally)
2. Front, Middle or back (Vertically)
3. Sit next to a friend
4. Have room to spread out
What is “Value”?
Commonly refers to the overall satisfaction that a customer receives from using a
product or service offering.
Which airline “seat” do you
prefer?
 Economic or Exchange Value
• Economic value depends on the alternatives customers have available
to satisfy the same need.

How many of you will be willing

to pay for the premium seats?

Economic Value is created through

Differentiation
Economic or Exchange Value
Monetary
value
Differential
value

Psychological
value
Value Creation

Product Cost Price Value Customers

Customer Values Prices Costs Product

Caterpillar Example
• Is the equipment’s s price if it is only equivalent to the
$90,000 competitors tractor

$7,000 • Is the price premium for Caterpillars superior durability

$6,000 • Is the price premium for caterpillar’s superior reliability

$5,000 • Is the premium for Caterpillars superior service

$2,000 • Is the premium for Caterpillars longer warranty on parts

$110,000 • Is the normal price to cover Caterpillars' superior value

-$10,000 • Discount

$100,000 • Final Price

Economic Value
Negative Differentiation Differentiation Value:
Positive Value The Value to the customer (both positive
Differentiation and negative) of any differences between
Value the offering and the reference product

Total Economic
Value
Reference Value:
Reference The price (adjusted for differences in
value units) of the customer’s best alternative
Case of Atlantic Computer: Value Creation
Information
Atlantic Computer Price per Server Cost per server
Tronn (basic)- New Product $2000 $1538
Raida (High Performance) $11000 $7586
Ontario (Competitor)
Zink (Basic) $1700 $1214

Proposal is to sell a performance enhancement tool (PESA s/w) along with Tronn Basic to propose
value
PESA Software development cost = $2000000
R&D claims for performance is 2Tronn+ PESA = 4 Zink Servers
Customer expense for servers
1. Cost of electricity- $250/year/server
2. Cost of other s/w licenses- $750/year/server Forecast Quantity to be sold is
3. Cost of server administrator- $80,000/year 10590- in three years
 Price to benefits Map
• Plot the following cars in the perceived
map
• Tata Nano

Perceived Price
• Maruti alto
• Maruti Baleno
• Hyundai i20
• Hyundai Verna
• Honda City
• Audi A7 Perceived Benefits
• BMW 7 Series
• Bentley Flying Spur
Value Equivalence Line
Value
Value Equivalence
disadvantaged line
Perceived Price

Value Advantaged
Zone of
indifference

Perceived Benefits
Dispersion in Perceived price
When customers hold contrasting
Small Dispersion beliefs regarding the price of a
in Perceived product, there is a dispersion in
Price perceived price
Perceived Price

When Actual prices are above

Large
expected prices, customers may
Dispersion in
delay purchases due to sticker shock,
Perceived Price
resulting in fewer sales.

Perceived Benefits
What happens when actual price
is lower than the expected
price?
Dispersion in Perceived Benefit
Benefits may be:
Small Dispersion
• Functional
in Perceived
Benefits • Process
• Relationship
Perceived Price

Large
Dispersion in
Perceived
Benefits
Perceived Benefits
Dispersion in Perceived Benefit: Search Goods
• Search Goods
• Items that allow functional comparison between competing products during
shopping experience itself
Dispersion in Perceived Benefit: Experience Goods
• Experience Goods
• Items in which the full knowledge of the benefits can be gained only from
past experience with the product.
Dispersion in Perceived Benefit: Credence Goods
• Credence Goods
• These are items where the benefits are unknown and probably will never be
known
How to interpret Dispersion in
both price and benefit?
Dispersion Means:
• Overlapping of perceptions- between segments
• Market is confused
• Misalignment means lost opportunity
Garinger: Dayton 220 V hazardous location
exhaust fan
• Position the products on a price to benefit plot using cubic feet per
minute as the metric of benefit

Item CFM Blades Price

Dayton 3GPA3 1217 Cast Aluminum $999
Dayton 3GPA5 3247 Hardened steel $1,127
Dayton 3GPA6 4438 Hardened steel $1,368
Dayton 3GPA8 6267 Hardened steel $1558
 How would you explain the variations
$1,800
$1,600
$1,400
$1,200
Price $1,000
$800
$600
$400
$200
$0
0 1000 2000 3000 4000 5000 6000 7000

Benefit
 iPad
Will iPad steal Sony or
Amazon’s market share?
Perceived Price

Sony Amazon
eReader Kindle

What should be the strategy

of Amazon or Sony?

Perceived benefits
Feedback and Questions to:
Mridula.Mishra@nmims.edu