Pricing Exam 1

Why is pricing policy necessary for strategic pricing?

A customer's willingness-to-pay an offered price is not determined solely by whether that price is fair or reasonable when compared to economic value. If customers come to expect that some change in their purchasing behavior will enable them to get the same product or service at an even better price, then the regular price becomes no longer acceptable.

What is the reasoning for segmented pricing?

A one-size-fits-all approach to pricing reduces profitability and intensifies customer pricing pressure. It leaves money on the table for upper customers and communicates that value does not have to be paid for. It misses growth opportunities by pricing lower customers out of the market.

What are the 4 types of price fences?

Buyer identification fences, purchase location fences, time of purchase fences, purchase quantity fences

Explain the psychological factor: competitive reference

Buyers framed on a low reference price (e.g. competitors price, production cost, etc.) will be more price-sensitive

Explain the psychological factor: extremeness aversion

Buyers like to buy the middle option—not too cheap, not too expensive; however, the definition of "middle" can be influenced by addition of a high-priced or low-priced offering

Explain the psychological factor: expenditure

Buyers tend to be more price-sensitive when the expenditure is higher, either in dollar terms or as a percentage of available budget

Explain the psychological factor: shared cost

Buyers that do not pay the full cost of the product from their budget will be less price-sensitive

Explain the psychological factor: switching cost

Buyers that have made investments in dealing with you or another supplier will be less price-sensitive (e.g. plant is optimized to your machines)

Explain the psychological factor: end benefit

Buyers that receive significant benefits in addition to economic value delivered by the product will be less price-sensitive (e.g. professional advancement)

What is the problem with not using value-based segmentation to determine prices?

Charging the entire market a single price risks undercharging some segments, causing foregone profit to you, and overcharging others, costing you additional foregone profit since those customers buy from other suppliers.

What are the differences between cost-plus pricing and value-based pricing?

Cost-plus pricing asks what is the best product we can offer customers, value-based pricing asks what is the best value we can offer customers

What is the problem with customer driven pricing?

Customers aren't always honest with what amount they are willing to pay

Explain the psychological factor: price--quality

Price acts as important signal of quality when it's difficult to objectively evaluate product quality (e.g. services). In these situations, higher prices may actually reduce price sensitivity

What are the benefits of policy driven pricing?

Provides greater consistency across customer base, Mitigates cost associated with ad-hoc discounting, Forces trade-offs and value recognition, Increases perceptions of price integrity, Creates more efficient selling process

Describe the differences in orientation of purchasing agents versus sales reps

Purchaser: goals are to cut costs and increase long term competitive cost advantage, negotiation is full time job, collect market info and purchase history to leverage in negotiation, rewarded for reducing overall costs Seller: goals are to achieve sales term goals without regard to long term consequences, full time job is customer service, poor knowledge of competitor prices and lack history of account, rewarded for sales volume not profitability

What is the point of the value cascade?

Strategic pricing requires effective management of both value and price

Explain the psychological factor: fairness

The degree to which product's current price compares poorly with expectations of fairness will increase price sensitivity significantly

Describe price--offer configurations

When differences in value of an offer across segments is caused by differences in features/services customers need or value, a seller can segment the market by configuring different offers consisting of different bundles of features/services for different segments. People are less sensitive to the cost of value-added features and services when bundled as a single expenditure.

Explain the psychological factor: difficult comparison

When it's difficult to directly compare alternatives, buyers rely on other signals of quality such as brand, prior experience, endorsements; price plays less important role

Describe price fences

a means to charge different customer different prices; fixed criteria that customers must meet in order to qualify for lower prices (ex. children and senior discounts)

What is the problem with competition driven pricing?

a price cut can be easily matched so it offers only a short-term market advantage at the expense of permanently lower margins

What are the policies for leading an industry-wide price increase?

before you announce the increase, let it be known publicly why increase is necessary for industry as a whole, announce size and effective date of increase, state which product lines are increasing by how much. Explain the cause and effect relationship. don't back off the increase for anyone without doing so for everyone who is a customer in the same industry, give transition guarantee (delay increase)

Describe discounting for volume

buyers suggest small percentage discounts if they purchase more volume, but if the percentage is taken off the total order (instead of just the increased volume) it makes them large discounts

What are the 4 tactics used by purchasers to disconnect price from value?

commoditizing the offer, double discounting of price increases, discounting for volume, discounting to compensate for past failure

What are the 9 psychological factors to consider for price communication?

competitive reference, extremeness aversion, switching cost, difficult comparison, end benefit, price--quality, expenditure, shared cost, fairness

What is a power buyer?

control so much volume that they have the power to deliver or deny huge amounts of market share; they expect to get better prices

5 steps in value-based pricing

customer, value, price, cost, product

Describe buyer identification fences

customers have obvious characteristics that sellers can use to identify them (ex. a barber charges different prices for long vs. short hair)

Describe time of purchase fences

customers in different market segments purchase at different times, useful when demand varies based on the time (ex. movie theater cheaper during day than at night); priority pricing (ex. iPhone is expensive when it comes out but is market down overtime)

Describe commoditizing the offer

customers refuse to discuss what differentiates the offers of various competitors. Instead, they distribute specifications of exactly what they require. They then solicit bids to meet or exceed that specification

What are the 6 steps in value-based segmentation?

determine basic segmentation criteria, identify discriminating value drivers, determine your operational constraints and advantages, create primary and secondary segments, create detailed segment descriptions, develop segment metrics and fences

Describe brand-driven buyers

differentiation is valuable, but cost to evaluate all suppliers to determine best possible deal is just too high. will buy a brand that is well known for delivering good product with good service without considering cheaper but riskier alternatives. may have had positive past experience with current supplier and cost to evaluate another supplier versus any potential savings is too high

Describe convenience-driven buyers

don't compare prices; just buy from easiest source. value, loyal, or price buyers in categories where they spend more or buy more frequently, but will pay price much more than economic value. expect to pay premium for convenience, price objections are rare.

What is the policy prescription for discounting for volume?

focus discount on incremental volume (instead of entire volume) AND/OR give it as a rebate

Describe value-driven buyers

have sophisticated purchasing departments that consolidate and buy large volumes, can afford cost to search and evaluate many alternatives before making a purchase. They are trying to manage both the benefits in the purchase to get all the features and services that are important to them, as well as to push down the price as low as possible.

What is the problem with cost-plus pricing?

it is impossible to determine a product's unit cost before determining its price Because unit costs change with volume

What are the 5 criteria for determining the most profitable price metrics?

it tracks with differences in value across segments, tracks with differences in cost to serve, is easy to measure and enforce, facilitates favorable positioning versus competition, aligns with how buyers experience value in use

Describe double discounting of price increases

large buyers already receiving volume discounts reject, or ask for a lesser version, of price increases

What is the policy prescription for commoditizing the offer

look at the specifics carefully and think about how you could reduce your costs by cutting quality and service levels to meet but not exceed the specifics. OR Make a policy either to refuse to participate in sham reverse auctions or to bid your list prices.

What are the 5 policies for dealing with power buyers?

make power buyers compete, quantify the value to the power buyer, eliminate unnecessary costs, segment the product offering, resist 'divide and conquer' tactics

What are the two types of economic value?

monetary and psychological

What is the policy prescription for discounting to compensate for past failure?

negotiate fair compensation for cost of failure, but pay as a lump-sum payment, rather than letting it reduce established price OR add as a credit to their invoice

What is the policy prescription for double discounting of price increases

no exceptions to price increases OR delay the price increase for big buyers--perhaps incramentally

Describe price-driven buyers

polar opposite of brand buyers. genuinely aren't looking for feature/service that exceeds some level that they specify. "reverse auction" purchasing process. buyer commits to specifications of acceptable offer and is unwilling to hear about value of offer that exceeds specifications. wants proposal that simply communicates your capability to achieve the specifics and your price.

Which levels of the value cascade are under value management?

potential value, actual value, perceived value, target prices

In order, what are the 7 levels in the value cascade?

potential value, actual value, perceived value, target prices, willingness to pay, actual prices, sustainable profit

What are the policies for transitioning from flexible to policy-based pricing?

price banding that estimates how much of price variation is illegitimate, both on an aggregate and per account basis; policies should focus on managing outliers who enjoy lowest prices and highest prices for unjustified reasons. authorize a period of transition to legitimate pricing level in steps. If customer doesn't accept new policies/prices walk away.

What are the 3 mechanisms to maintain segmented structures?

price--offer configuration, price metrics, price fences

What is the main idea of cost-plus pricing?

pricing every product/service to yield a fair return over all costs, fairly and fully allocated

What is the main idea with competition driven (share-driven) pricing?

pricing is a tool to achieve gains in market share

What is pricing policy?

pricing policy is a rule or habit, consistently applied, that defines the criteria under which a company will change a price for an individual customer, for a limited period of time or for particular transactions.

5 steps in cost-plus pricing

product, cost, price, value, customer

Describe discounting to compensate for past failure

seller fails to meet commitments and buyers demand discount as compensation

What are the 4 steps in the cycle of proactive policy-based price negotiation?

seller offers discounts by policy, customers must make price-value trade offs, customers seek and share information to best find value, seller creates new win-win policy options

Define psychological value

the many ways that a product creates innate satisfaction for the customer

Define total economic value

the maximum price that a smart shopper, fully informed about the market and seeking the best value, would pay.

Define reference value

the price (adjusted for units and terms) of the customer's next best alternative supplier

How do we calculate total economic value? (EVE model)

the price of the customer's best alternative (the reference value) plus the worth of whatever differentiates the offering from the alternative (the differentiation value)

Define monetary value

the total cost savings or income enhancements that a customer accrues as a result of purchasing a product

Define value

the total savings or satisfaction that the customer receives from the product; utility

Describe price metrics

the units to which the price is applied; They define the terms of exchange—what exactly the buyer will receive per unit of price paid. There are often a range of possible options. Common categories of price metrics: Per unit, per use, per time spent consuming, per person who consumes, per amount of benefit received.

Define differential value

the value to the customer (both positive and negative) of any differences between your offering and the reference product

What is the purpose of customer-driven pricing?

to price more profitably by capturing more value, not necessarily by making more sales

Cost-driven pricing model

total cost over volume plus unit cost equals target price

What are the 3 steps in estimating monetary value?

understand how the product category affects the customer's costs and revenues, collect specific data to develop quantified estimates, sum the reference value and the differentiation value to determine the total monetary value

Describe the process of developing value-based messages?

understand the type of value sought (economic or psychological), understand the degree of buyer involvement (low vs. High)

In order, what are the 6 gaps in the value cascade?

value creation gap, value communication gap, price structure gap, price policy gap, price setting gap, price completion gap

Describe purchase location fences

when different locations of a product attract different segments who perceive different values, they may be charged different prices (ex. dentist office downtown versus closer to suburbs)

Which levels of the value cascade are under price management?

willingness to pay, actual prices, sustainable profit

What are the challenges to segmented pricing?

-customers have incentive to undermine higher prices -Channel intermediaries can undermine pricing structures by buying product intended for lower price segment and then reselling to customers targeted to receive higher price (gray-market sales). Particularly problematic in international sales. -Flexible pricing can work in markets where customers buy a complex product very infrequently. -In markets where direct sales are common it's easier to charge different prices to different customers. -Customers making infrequent purchases are usually uninformed about differences in price and features among competitors and about the value those differences might create for them. -Flexible pricing disastrous with whom the seller has existing relationship, or hopes to establish one.

What are the 4 challenges of value communication?

1) Communicating value and price is one of most important capabilities for a marketer but is also the one most are weakest at performing. 2) Buyers aren't incentivized to determine the relative value proposition. If value is not obvious, buyer will likely choose cheapest alternative as it's most justifiable. 3) Marketers often assume market demand is fixed and the market alone will determine price a buyer is willing to pay. BUT There are always ways to differentiate an offering. 4) In order to sell on value, marketers need to sell to the person that recognizes the value

describe purchase quantity fences

4 types: Volume discounts, order discounts, step discounts, and two-part prices. Customers who buy in large volume are more price sensitive. They have larger financial incentive to learn about alternatives and negotiate best possible deal. The attractiveness of selling to them increases competition for their business. Large buyers are less costly to serve.