Download Economic Value

Value Creation
The Source of Pricing Advantage
Value
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Value (or use value): the overall satisfaction
that a customer receives from using a
product or service offering.
Consumer Surplus = Value – Price
Economic Value
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The value at the heart of pricing strategy is
not use value, but is what economists call
economic value or exchange value.
Economic Value = Reference Value +
Differentiation Value
Economic Value
Differentiation Value
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Differentiation value is the net benefits that your
product or service delivers to customers over
and above those provided by the competitive
reference product.
Differentiation value comes in two forms:
monetary and psychological.
Monetary value: the total cost savings or income
enhancements that a customer accrues as a
result of purchasing a product.
Psychological value: a product creates innate
satisfaction for the customer.
Estimate Economic Value
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Competitive reference prices
Estimate monetary value
Estimate psychological value
Competitive Reference Prices
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Some products may not have a single competing
product that customers would consider a
suitable alternative. Ex. 中華電信 vs. 威達.
Another challenge to is gathering accurate price
data and ensuring that it is comparable to the
pricing for your product. You must ensure that
competitive prices are measured in terms
familiar to customers in the segment (for
example, price per pound, price per hour) and
are stated in the same units as your product.
Untreated Reference Price
Data
Adjusted Reference Prices
Estimate Monetary Value
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2.
3.
Understand how the product category
affects the customer’s costs and revenues,
e.g. Distributor Co..
Collect specific data to develop quantified
estimates. In-depth customer interviews are
the best source of information.
Sum the reference value and the
differentiation value to determine the total
monetary value.
Case: Distributor Co.
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Distributor Co. buys technology products
such as servers, software and network
components and re-sells them downstream to
value-added resellers.
The management team believed that all
customers valued its technical service and
support highly – a belief supported by high
service usage across all segments.
Two segments: systems integrator vs. boxpusher.
Examples of Value Driver Algorithms
for Equipment Manufacturer
Caterpillar’s Perceived-Value
Pricing
$90,000
is the tractor’s price if it is only equivalent to the
competitors tractor
$7000
is the price premium for Caterpillar’s superior durability
$6000
is the price premium for Caterpillar’s superior reliability
$5000
is the price premium for Caterpillar’s superior service
$2000
is the price premium for Caterpillar’s longer warranty
on parts
$110000
is the normal price to cover Caterpillar’s superior value
$10000
discount
$100,000
final price
Case: Dyna-Test
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Dyna-Test synthesizes a complementary
DNA strand from an existing DNA sample,
significantly reducing DNA molecule
degradation and enhancing the precision of a
DNA analysis.
Primary competitor: EnSyn
Applications: criminal investigators, hospitals
and medical professionals, and
pharmaceutical manufacturers.
In all applications, test failures can be costly.
Monetary Value Estimation for
Dyna-Test Industrial Buyers
Monetary Value Profile for
Dyna-Test
Several Guidelines for
Estimating Monetary Value
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Consider only the value of the difference
between your product and the next best
competitive alternative (NBCA) product.
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The value of any benefits that are the same as
those delivered by the NBCA is already
determined by competition and incorporated into
the reference value. You can charge no more for
it than the price of the NBCA product, regardless
of its use value to the customer.
Several Guidelines for
Estimating Monetary Value
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Measure the differentiation value either as
costs saved to achieve a particular level of
benefit or as extra benefits achieved for an
identical cost. Don’t add both; that’s double
counting.
Several Guidelines for
Estimating Monetary Value
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Do not assume that the percentage increase
in value is simply proportional to the
percentage increase in the effectiveness of
your product.
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Although your part might last twice as long as a
competitor, it does not follow that your value is
only twice as large.
Estimate Psychological Value
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Psychological value drivers such as satisfaction
and security, by virtue of their subjective nature,
do not lend themselves to estimation via
qualitative research techniques like in-depth
interviewing.
Instead, pricing researchers must rely on a
variety of quantitative techniques to estimate the
worth of a product’s differentiated features.
The most widely used of these techniques is
conjoint analysis.
Case: Big Drive
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Big Drive is a revolutionary golf club, and it
has led to significant increases in distance
and accuracy for both beginning and
advanced players.
Four segments: 1) Innovators; 2) Value
Seekers; 3) Lost Players; 4) Budget
Shoppers.
Four attributes: 1) Distance; 2) Straightness;
3) Consistency; 4) Warranty.
Impact of Warranty Length on
Willingness to Pay
Optimal Price – Innovators
Optimal Price – Budget
Shoppers
Limitation of Conjoint Analysis
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Where conjoint and other similar survey
research techniques can fall short is when
the differentiating benefits are innovative.
Most people, even those deeply familiar with
the technology, are not good at inferring the
benefits of innovation.
There is no reason anyone would ever want a
computer in their home. (Ken Olsen, 1977)
Customer Value Modeling (CVM)
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Assumption: customers seek to purchase the
products that give them the greatest
perceived benefit – which might be quantified
in monetary terms, but need not be – per unit
price.
Related terminology: “fair-value line,” “value
equivalence line,” or “indifference line.”
Customer Value Modeling (CVM)
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Linear relationship between price and
perceived quality: if a differentiated product is
“x” percent more effective than the
competition, then the product will be worth
only “x” percent more in price.
The fact is, however, that CVM
underestimates the value of the more
differentiated products in a market and
overestimates the value of the less
differentiated products.
Customer Value Modeling (CVM)
Price Metrics (價格計量單位)
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Price metrics are the units to which the price
is applied. They define the terms of exchange
– what exactly will the buyer receive per unit
of price paid.
Common categories of price metrics: per unit,
per use, per time spent consuming, per
person who consumes, per amount of benefit
received.
Price Metrics (價格計量單位)
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The problem with most price metrics is that
they are adopted by default or tradition.
Is it reasonable to pay more for longer
hospital stay?
Kaiser Permanente and Mayo Clinic
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“Capitation” price that covers all services required
by a patient during a year.
Price per illness or procedure that covers all
services required to treat a condition to a
satisfactory outcome.
Criteria for Evaluating Price
Metrics