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    Pricing

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    Versha Kaushik
    The value-pricing approach considers three key inputs when setting prices: the true economic value of the product to the customer, the customer's perceived value of the product, and the organization's cost of goods sold. Value pricing aims to set the price between the perceived value and cost of goods sold to maximize both customer and organizational value. It requires understanding how customers assess value differently and tailoring marketing and pricing strategies accordingly. Setting the right combination of price and marketing is important to either push perceived value higher to allow for a higher price, or keep costs low with minimal marketing to capture value through a lower price.

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    Pricing

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    Versha Kaushik
    61 views10 pages
    The value-pricing approach considers three key inputs when setting prices: the true economic value of the product to the customer, the customer's perceived value of the product, and the organization's cost of goods sold. Value pricing aims to set the price between the perceived value and cost of goods sold to maximize both customer and organizational value. It requires understanding how customers assess value differently and tailoring marketing and pricing strategies accordingly. Setting the right combination of price and marketing is important to either push perceived value higher to allow for a higher price, or keep costs low with minimal marketing to capture value through a lower price.

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    The value-pricing approach considers three key inputs when setting prices: the true economic value of the product to the customer, the customer's perceived value of the product, and the organization's cost of goods sold. Value pricing aims to set the price between the perceived value and cost of goods sold to maximize both customer and organizational value. It requires understanding how customers assess value differently and tailoring marketing and pricing strategies accordingly. Setting the right combination of price and marketing is important to either push perceived value higher to allow for a higher price, or keep costs low with minimal marketing to capture value through a lower price.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    61 views10 pages

    Pricing

    Uploaded by

    Versha Kaushik
    The value-pricing approach considers three key inputs when setting prices: the true economic value of the product to the customer, the customer's perceived value of the product, and the organization's cost of goods sold. Value pricing aims to set the price between the perceived value and cost of goods sold to maximize both customer and organizational value. It requires understanding how customers assess value differently and tailoring marketing and pricing strategies accordingly. Setting the right combination of price and marketing is important to either push perceived value higher to allow for a higher price, or keep costs low with minimal marketing to capture value through a lower price.

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    © All Rights Reserved
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    Download as pptx, pdf, or txt
    of 10

    THE VALUE-PRICING APPROACH

    By Group 1-
    Aashi Tayal
    Ajit Pillai
    Archit Abhishek
    Arijita Das
    Hafis Javed
    Sonal Jain
    Versha Kaushik
    Introduction
    • Pricing can be effective and fastest way to realize
    Value
    maximum profit
    • Value pricing is preferred by researchers
    • Two elements of value pricing
    • Value orientation : economic value for customers Customer Organization
    • Processes :value captured by firm
    • Requires commitment and a lot of effort
    • Despite higher profits cost based pricing is preferred
    because
    1. Relatively easier
    2. Easy to justify to stakeholders Value
    3. Simplifies a complex process Pricing
    • Disadvantages: may not capture maximum revenue
    • This reading talks about:
    • Value pricing Value
    Processes
    • Price customization Orientation
    • Customer view point
    • Organization view point- breakeven analysis
    • Marginal math
    The Value-Pricing Approach
    Three Inputs to Value-Pricing Decision:

    • True Economic Value (TEV) of the product to the customer


    • Value that a fully informed buyer would or should ascribe to the product
    • Different customers obtain different TEVs

    • Perceived Value (PV) of the product to that same customer


    • Firm has potential to influence PV via marketing efforts
    • Lower than TEV due to various reasons

    • Organization's Cost of Goods Sold (COGS)


    • Lower bound on the price an organization is willing to set
    • Generally, firms do not sell below cost on a sustained basis
    Customer’s Incentive to
    purchase
    Cost of Goods Perceived
    Sold (CGOS) Value (PV)

    Product True Economic


    Price Value (TEV)
    Firm’s Incentive to sell Marketing Efforts
    True Economic Value Air-Filtration Alternatives for Toy-
    Factory

    • TEV is based on customer’s underlying economics, New Product Next-Best


    the performance of competitor’s products and the Alternative
    relative advantage or disadvantage offered by the
    main product. Probability of 1% over one 20% over
    System Crash year one year
    • TEV = price of next-best alternative + expected system
    crash savings – added operating costs
    Cost of $100,000 $100,000
    = $75,000 + ((20%.$100,000)-(1%.$100,000))
    System Crash
    -((2,500 hrs * $15/hr )-(2,500hrs * $10/hr))
    =$75,000 + $19,000 -$12,500
    =$81,500 Hours of 2,500 2,500
    Operation
    • TEV represents what a fully informed, rational customer
    should be willing to pay for a product. Operating $15 $10
    system cost
    per hour
    Price To be $75,000
    Determined
    Assessed Perceived Value Air-Filtration Alternatives for Toy-Factory

    New Product Next-Best


    • Customer’s willingness to pay is governed by the
    Alternative
    value he/she perceives in the new product.

    • Potential buyer may not be fully aware of the relative Probability of 5% over one 20% over
    benefits of the new product. System year one year
    Crash
    • PV = price of next-best alternative + expected system Cost of $100,000 $100,000
    crash savings – added operating costs System
    = $75,000 + ((20%.$100,000)-(5%.$100,000)) Crash
    -((2,500 hrs * $15/hr)-(2,500hrs * $10/hr))
    =$75,000 + $15,000 -$12,500 Hours of 2,500 2,500
    =$77,500 Operation

    • PV approaching TEV can be influenced by the level Operating $15 $10


    and quality of marketing efforts directed to the system cost
    customer. per hour
    Price To be $75,000
    Determined
    COGS (Cost of Goods Sold)

    • Can often be derived directly from the firm’s


    income statement
    • Represents the fully loaded variable cost of
    producing the product being sold
    • No profit is made if the product is sold at a price less than
    or equal to COGS.
    • Profits are only made if product is sold above COGS.
    • If the company can sell enough units at a price high
    enough above the COGS, it may have a thriving
    business.
    Putting the pieces together
    • At the upper end firms are firm is bound the PV of the product
    • At the lower end being the COGS
    • PV of the product is influenced by TEV of the product for particular
    customer and firm’s marketing effort marketing in communicating
    that TEV.
    • For example (continuing the previous example):
    • TEV = $81,500; PV=$77,500; COGS= $50,000. Therefore range is :
    $50,000 to $77,500.

    • Three important concepts to note are :


    1. Value Creation : Within this range, the price that ultimately is set
    will determine both the firm’s and the potential buyer’s relative
    incentives to make the sale happen.
    If price = $75,000 then,
    Seller’s incentive to enter the transaction = (75,000 - 50,000 = 25,000)
    Buyer’s incentive to enter the transaction= ( 77,500 – 75,000 = 2,500)
    Therefor, firm has set the price close to PV and has claimed all the
    value created.
    Whereas by setting price close to 65,000 it creates value for both
    seller and buyer.
    2. Value varies from customer to customer: The perceived value of a
    product varies with different customers when they consider
    differential value impacting the business operation.

    For Example: In the same example consider an oil rig owner


    purchasing the air filtration system. The relative impact of his choice
    may be quite different from that faced by the toymaker. The
    calculated PV for the rig owner is $105,500.

    This pricing difference create opportunity and a potential problem. If


    the pricing is favourable to one party it won’t be favourable to the
    other or the firm.
    • Therefore, goal of an optimal pricing strategy should be to
    separate these two buyers, whenever possible, and price
    differentially to each
    • Since here in this case both are in different industry, how we price
    to one may not restrict how we price to the other
    3. Firm’s price and marketing activities must work together :

    • The favourable combination of pricing and marketing


    effort are low low or high high
    • In the former scenario it makes it feasible and low-
    marketing-expenditure strategy makes product’s value to
    speak for itself, and such a soft voice may not push PV
    near TEV hence lower price
    • In the latter, firm can invest in marketing to boost PV, price
    high to capture the perceived value thereby created,
    and attain the margins necessary to fund the high
    marketing. As the strategy used by Glaxo on pricing
    Zantac
    • Other two combination are not feasible because of
    undesirable results in the top and bottom-line of the firm
    Thanks!

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