Self Help

How to Price Effectively A Guide for Managers and Entrepreneurs - Utpal Dholakia

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Matheus Puppe

· 40 min read

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  • Pricing decisions are among the most important business decisions a manager can make, as they directly impact revenues. However, they are often given insufficient consideration.

  • The introduction outlines some common pricing challenges including relying too much on tradition, cost-based approaches, or imitating competitors without proper analysis.

  • The book introduces the “value pricing framework”, a structured approach to pricing developed by the author over a decade of teaching and consulting.

  • The framework considers factors like costs, customer value, reference prices, value proposition, and price execution. It is designed to instill confidence in pricing decisions.

  • The book aims to provide a practical guide to pricing by formalizing this framework and explaining each component in depth with examples.

  • After reading, the reader should understand what makes a good pricing decision, which factors to consider, and how to evaluate pricing success.

  • The value pricing framework integrates academic research, industry best practices, and draws from other fields to provide a comprehensive yet easy to apply approach to pricing challenges.

  • The chapter discusses how pricing is the most powerful profit lever for companies, and small price increases can significantly boost profits without losing sales. However, many companies do not take pricing seriously or make pricing decisions thoughtfully.

  • The author uses examples to show how even a 2% price increase can triple or double profits for some companies. Effective pricing is key to financial performance but is often overlooked.

  • Companies struggle with pricing execution, frequently changing prices too often or giving too deep discounts. Simply raising prices is not enough without following through to get customers to pay the new price.

  • Managers are often hesitant about higher prices due to fear of losing sales. But high prices can convey quality and prestige to strengthen the brand if the product quality warrants it.

  • The chapter advocates for treating pricing decisions systematically using a structured framework. Companies should understand how prices affect their bottom line and not treat pricing as an afterthought.

  • Strength, and low prices are important factors to consider for marketing and increasing sales and profits.

  • When making pricing decisions, managers should focus on following a thoughtful process rather than only outcomes like maximizing sales or profits.

  • Pricing decisions are made at one point in time but outcomes occur later and are influenced by unforeseen external factors beyond the manager’s control.

  • A good pricing decision is one made through a deliberate, systematic process that considers relevant factors like costs, customer value, competitors’ prices, and the company’s strategy/values. It is clearly communicated.

  • The four key factors or “pillars” to consider in pricing decisions are costs, customer value, reference prices, and the company’s value proposition. Understanding these pillars leads to effective pricing.

  • Customer value usually sets the ceiling or highest possible price that can be charged for a product. Customer value is determined by analyzing the functional and hedonic benefits a product provides and how much a customer is willing to pay for those benefits.

  • Reference prices are the prices customers use to compare and evaluate a product’s price. Common reference prices include competitors’ prices, a company’s own past prices, and other prices customers encounter. Reference prices provide a range of reasonable prices and influence how customers interpret prices.

  • A company’s value proposition formally expresses its marketing strategy and points of differentiation compared to competitors. The value proposition provides guidelines for pricing and determines how costs, customer value, and reference prices are weighed in pricing decisions.

  • Costs set the floor or minimum limit on prices. Customer value sets the ceiling or upper bound on prices. Reference prices provide a range of reasonable prices. The value proposition determines the relative weights given to the factors in pricing decisions.

  • In addition to the four pillars, pricing decisions should be harmonious with a company’s values and business philosophy. Values guide strategic decisions like pricing. Examples of values that can influence pricing strategy are transparency, reliability, flexibility, fairness, value for money, and luxury.

  • Together, systematically considering the four pricing pillars within the context of a company’s values leads to more informed pricing decisions and outcomes, rather than relying on just one or two factors casually.

  • The value pricing framework is a structured process for making and evaluating pricing decisions that considers four main inputs: costs, customer value, reference prices, and value proposition.

  • The framework distinguishes between setting new prices versus changing existing prices, and acknowledges the importance of price execution (the actual prices paid by customers).

  • It identifies four measures to evaluate pricing success: sales revenue, profit margin, customer satisfaction, and employee satisfaction. The goal is to balance these measures.

  • The decision environment, which includes economic, social, political and technological factors, also influences the pricing process and outcomes.

  • All four input pillars - costs, customer value, reference prices, and value proposition - should be considered for effective pricing decisions. Looking at just one or two inputs can result in suboptimal pricing.

  • The value proposition in particular influences how much weight is given to each input. It defines the overall marketing strategy and values that guide specific pricing choices.

  • Together, the four inputs inform whether to set a new price or adjust an existing one, as well as the pricing structure and execution. The framework provides a comprehensive, structured approach to pricing.

  • There are four types of pricing decisions according to Emery: pricing a new product, pricing a new version of an existing product, changing price due to changing business characteristics, and changing price to meet changing customer preferences.

  • Pricing a new product relies heavily on understanding customer value and the company’s value proposition, as there is no precedent. This pricing decision will influence future prices and competitors.

  • Pricing a new version uses the previous version’s price as a precedent. Customers will evaluate improvements and whether the price increment is worth it.

  • Changing price due to changing business characteristics occurs when costs, management goals, suppliers/channels change. Prices change to the extent costs and competitor prices are weighted more.

  • Changing price to meet changing customer preferences happens when customer value perceptions change due to new alternatives, economic shifts, etc. The focus is on understanding the new customer value equation.

  • In summary, Emery’s framework distinguishes pricing decisions based on whether they are for a new or existing product/version, and whether the driver is internal business factors or external customer preferences. This helps managers appropriately weigh the decision inputs.

Here is a summary of key points about how customer value has changed according to the passage:

  • Companies are moving from fixed pricing strategies to dynamic/variable pricing where prices change based on demand and other factors. Examples given are the Indianapolis Zoo and Houston Astros changing to dynamic pricing.

  • Customers now expect and demand more value in the form of incentives, discounts, promotions, loyalty programs etc. This creates a gap between the listed/asked price and what customers actually pay.

  • Factors like price execution and incentives given to customers significantly impact the price realization/what the company actually earns. Proper price execution is as important as setting the right price.

  • Customers now value price transparency, fairness, stability and alignment with product value more than just low prices. Variable/unstable pricing can dissatisfy customers.

  • There is a need to balance financial metrics like sales and profits with softer factors like customer and employee satisfaction when measuring pricing success. Pricing impacts perceptions of the company.

So in summary, the passage discusses how customer value has expanded beyond just low prices to include expectations around dynamic/customized pricing, various discounts and incentives, price transparency and execution/realization of the right prices. Both hard financial metrics and soft perception factors need to be considered.

  • Costco has over 720 warehouse stores with $116B in annual revenue, employing a value pricing strategy that has made it highly successful even as competitors struggle.

  • Its value proposition focuses on bulk, high-quality products sold at low prices in a no-frills warehouse environment. Store design, displays, and limited assortment all communicate value.

  • Products are marked up only 12% on average, far less than competitors, and markups are consistently applied. Price cuts are passed on to customers whenever costs decrease.

  • It maintains iconic low prices like the $1.50 hot dog/soda combo for decades through controlled operations.

  • Costco earns additional profits through mandatory annual membership fees of $55-115, which customers forget about but provides a stable revenue stream.

  • Transparent price labels use specific codes (like ending in .97) to further communicate value and engaging pricing “vocabulary” enjoyed by customers.

  • Through its pricing strategy focused on customer value balanced against profits, Costco exemplifies the value pricing framework principles very effectively.

Here is a summary of the key points about costs in the value pricing framework:

  • Costs play an important dual role - they establish the lower bound or floor for prices, and can also be leveraged as part of a company’s marketing strategy through cost leadership.

  • There are two types of price floors - long-term floors cover all costs to ensure financial viability, while short-term floors only account for incremental costs to allow for flexible pricing strategies.

  • Only incremental costs that vary with changes in production quantity are relevant for pricing decisions. Fixed costs that don’t vary are considered irrelevant.

  • Using a cost-based pricing approach like markup pricing is common but has weaknesses. It focuses only on covering costs rather than customer value.

  • When a company has a clear cost advantage, cost leadership can be an effective pricing and marketing strategy. Companies like Costco, Aldi and Walmart have built strong brands centered around low prices enabled by efficient cost structures.

  • Understanding incremental vs. irrelevant costs, and using both long and short-term price floors strategically allows companies to set prices that are profitable while also competitive and responsive to the market.

  • A startup was considering developing a GPS tracking product that would allow fleet vehicles like ambulances, tow trucks, taxis, and trucks to be monitored in real-time from a central location. This had potential customers at the time.

  • When the startup calculated all the costs to develop, manufacture, launch, market, and support the product, the total costs were too high to reasonably recoup through pricing. Costs included software licensing, development, manufacturing, inventory, sales/marketing, and customer support.

  • The startup decided not to move forward with the product and explore other opportunities instead. Considering all future costs upfront is important for new product launch decisions before any money is spent.

  • For existing products where costs have already been incurred, those “sunk” development and design costs should not be considered in pricing decisions. Only “incremental” costs that vary with production volumes are relevant, not “irrelevant” fixed costs that will be incurred regardless.

  • Examples of distinguishing relevant and irrelevant costs in pricing decisions for restaurant specials and packages are provided to illustrate the concepts. Opportunity costs should also be considered in some cases.

  • Both discounting prices and creative bundled offers that increase perceived value can be considered pricing decisions warranting cost analysis, even if actual prices don’t change.

  • When considering becoming an Uber or Lyft driver, the key question is how much money you will earn after accounting for your expenses.

  • Fixed costs like car payments, insurance, phone payment should be considered irrelevant since you will incur them regardless of driving for Uber/Lyft.

  • The only relevant expenses are incremental/variable costs like gas and car maintenance from additional rideshare driving. These set the short-term price floor.

  • In general, incremental/variable costs establish the short-term price floor for pricing decisions, while total costs (fixed + variable) set the long-term price floor needed for business sustainability.

  • Short-term price floors provide flexibility to creatively fill spare capacity through discounted offers while still covering variable costs. This can attract new customers and revenue.

  • Examples given include hotels, Broadway shows, restaurants offering discounts during slow periods through sites like Priceline to draw in new customer segments.

  • Using short-term price floors strategically allows generating additional revenue while testing new ideas, as long as it doesn’t replace core full-price marketing to regular customers.

Here is a summary of cost-based pricing methods:

  • Cost-based pricing calculates prices by adding a markup percentage to product costs. It is one of the most widely used pricing approaches.

  • There are two main variations: markup pricing and cost-plus pricing. Markup pricing only applies the markup to variable costs, while cost-plus pricing applies it to both variable and fixed costs.

  • Cost-based pricing is simple to calculate and explain. It also encourages stable market prices when competitors use similar cost structures. Customers expect prices to reflect quality differences.

  • However, it also has significant disadvantages. It encourages inefficiency since lowering costs means lowering prices and profits. Prices are divorced from customer value and reference prices in the market.

  • Relying solely on cost-based pricing can create a false sense of security that prices will always cover costs. But if sales are lower than expected, the company may still lose money even with prices above costs.

  • In summary, while easy to implement, cost-based pricing has limitations and should not be the only factor considered in pricing decisions due to risks around inefficiency, disconnect from customer value, and potential losses even when prices are above costs.

  • Customer value refers to the benefits customers perceive they will receive from purchasing and using a product or service. It considers value from the customer’s perspective, not just what the product or service is comprised of.

  • Early cruise ship cabins with balconies were initially priced lower based on a “square footage logic” that ignored customer value preferences. Customers were willing to pay more for the experience and openness of a balcony.

  • It took the cruise industry several years to recognize this pricing flaw and shift to a framework that incorporated customer value into pricing decisions rather than just physical attributes like square footage.

  • Customer value encompasses all the different ways a customer derives benefit from purchasing and using a product. It’s about understanding how customers value features rather than just the features themselves.

  • Measuring customer value factors is important for translating it into effective pricing decisions. Pricing should reflect the value customers place on attributes rather than just the costs or attributes from the company’s perspective.

  • This example highlights the importance of the customer value input in the value pricing framework, as prices should be based on customer preferences and willingness to pay rather than just physical product attributes or costs alone.

  • The chapter aims to define customer value and how to translate it into pricing. Understanding customer value is one of the hardest challenges in pricing.

  • The author proposes defining the product as a “bundle of features” that provides “functional and hedonic benefits” to customers. Functional benefits relate to core purpose/performance, while hedonic benefits are indirect, intangible emotions.

  • Customer value is defined as the sum of all functional and hedonic benefits derived from a product’s features. However, this does not translate value into economic/monetary terms for the company.

  • Various pricing experts define customer value differently, such as perceived benefits minus price, willingness to pay, tradeoff between quality/sacrifice, differentiation value over alternatives, financial profits, or a combination of performance and emotions.

  • Measuring customer value uniformly across all customers is challenging due to its unique and contextual nature for each customer. The chapter aims to provide a framework to understand and translate customer value into pricing.

  • Customer value can be defined from either the customer’s perspective or the company’s perspective. From a customer’s perspective, it is the sum of all functional and hedonic benefits derived from a product’s features.

  • From a company’s perspective, customer value is defined more narrowly as the total amount of money a customer is willing to pay for the functional and hedonic benefits. This represents the economic or monetary value.

  • For pricing decisions, customer value needs to be quantified and translated into economic terms that a company can use. Features only increase customer value if customers are willing to pay for the associated benefits.

  • A customer value grid can be used to map customer benefits to economic value through a survey approach. It involves unbundling product features, understanding associated customer benefits, and quantifying how much customers are willing to pay for each benefit.

  • Adding too many features without understanding customer willingness to pay can lead to “feature shock” where value is reduced rather than enhanced. Companies should strategically select features customers actively value and are willing to exchange money for.

  • The pricing conflict between revenue/profit goals and perceived fairness can be addressed using survey-based methods to directly measure customer trade-offs between benefits and economic value. This provides a more objective view of what customers view as a fair price.

  • Value grid surveys obtain responses from a cross-section of customers on the perceived benefits and value of different product features. These responses are averaged to understand feature value and calculate an average fair price for a customer segment.

  • The price derived from the value grid exercise is one input for pricing decisions, but is not necessarily the optimal price when other factors are considered.

  • Customers judge value by subjectively assessing trade-offs between perceived price and quality, not objective price and quality. The Emery model describes how customers map subjective views of price and quality to form value judgments.

  • Managers should understand customers’ subjective price ranges and important quality metrics used to judge quality. High prices can positively impact perceived quality through inference if customers don’t critically assess price and quality.

Reference prices are important in customer value judgments and pricing strategies. They provide a frame of reference for customers to assess whether a product’s price is too high, too low, or reasonable.

There are two key types of reference prices - internal reference prices are prices customers expect based on past experience, while external reference prices are prices of other similar products they see. Reference prices establish a range that customers view as reasonable prices for a product given its quality level.

Understanding customers’ range of reasonable prices is important for pricing strategies in three ways:

  1. Pricing within the reasonable range makes the price less likely to be a barrier to purchase, allowing other product attributes to be evaluated instead.

  2. Customers are relatively insensitive to price changes within the reasonable range.

  3. The reasonable range provides guidance on where to set an initial price and potential price points for promotions or adjustments over time. Reference prices thus play an important role in value-based pricing approaches.

  • Customers tend to inaccurately believe they can discern even small price changes better than they really can. They may continue behaving as if a price has not changed even after it has. Savvy marketers take advantage of this bias.

  • There is a “range of reasonable prices” or “latitude of price acceptance” for products, depending on the category and customer. Research shows this range is typically around 4-5% on either side of the average price, or about 10% total, for grocery products. It can be wider for discretionary purchases.

  • Positioning the price towards the high end of the reasonable range is an effective strategy, as it maximizes profit while still seeming like a fair price to customers. Companies like Chipotle do this by pricing noticeably higher than fast food competitors but within the upper limits of what their target customers deem acceptable.

  • The reasonable price range can vary significantly between customer segments, even for the same product. A digital marketing agency learned this when it entered a new hospital segment and discovered competitors’ price quotes were much higher than expected.

  • Market research methods like customer surveys can be used to systematically identify the reasonable price ranges for different quality tiers within a product category from a customer’s perspective. Armed with this insight, companies can make better pricing decisions.

Here is a summary of the key points about external reference prices and price cues that marketers use from the passage:

  • External reference prices are price comparisons and references that customers encounter during the shopping/purchase process, as opposed to internal references they already know. These can influence perceptions of value.

  • Marketers have control over external references and can use techniques like advertising, price tags, signs, labels, and adjacent product prices to strategically provide reference prices.

  • Common price cues include listing a “was/now” price to imply discounts, using charm prices that end in 9 to seem less expensive, and round even prices for luxury brands to signal exclusivity.

  • Studies show these cues can boost sales significantly when used properly. But references should be realistic and sparing so they don’t lose effectiveness.

  • Adding a very high-priced decoy product can make other options seems relatively cheaper and more reasonable, nudging customers toward a target more profitable product.

So in summary, the passage outlines how external references and specific price cues are powerful marketing tools that companies strategically employ to shape customer value perceptions and purchasing decisions.

  • Pricing is often thought of and used tactically rather than strategically. This can lead to short-term gains but long-term damage if not aligned with the company’s value proposition and marketing strategy.

  • The value proposition captures a company’s marketing strategy from the customer’s perspective. It describes the value the customer receives from the product and how it differs from competitors.

  • A good value proposition answers two questions: 1) What benefits does the product provide customers? 2) How does it differ from competitors’ offers?

  • In the value pricing framework, the value proposition refers specifically to the product, not the brand. It describes the marketing strategy and purpose for offering that product in terms of the value created for targeted customers.

  • Developing and aligning pricing decisions to the value proposition ensures pricing supports long-term marketing goals rather than just short-term tactical objectives, which can damage the brand if not strategic.

Here is a one paragraph summary:

The value proposition refers to the marketing message that articulates the key benefits a company promises to deliver to customers through its products and services. An effective value proposition highlights the unique features or attributes that provide benefits customers value, positioning the company’s offerings as superior to competitors and giving customers a compelling reason to choose the company over alternatives. Specifically, the value proposition should describe the core benefits customers will receive, explain why the company is uniquely able to deliver those benefits, and focus on the one or two most important points of differentiation that provide the greatest customer value in a sustainable way. This positions the company’s offerings for customers and guides strategic marketing decisions around targeting, pricing, and competitive positioning.

  • Electric bicycles offer a superior way of commuting in congested cities like Houston by avoiding traffic and finding parking, but they have not been successful there due to an automobile-centric lifestyle.

  • For business products, value propositions should quantify financial benefits like cost savings or performance gains through customer case studies. They should also be supported by third-party reviews and assessments to add credibility.

  • Value propositions need to applicable over a significant period to be useful, unlike features that can be easily copied. Southwest Airlines’ integrated business model has sustained its value proposition for decades.

  • A company’s value proposition guides its pricing strategy and decisions. It directs priorities toward revenue, costs, or productivity goals and influences emphasis on costs, customer value, or competitors’ prices.

  • Value propositions fall into cost leadership, premium branding, or comparative framing categories, each emphasizing different pricing inputs and goals like low prices, quality, or superiority. Tactics vary accordingly, like using low prices, brand image, or price comparisons.

In summary, an effective value proposition should quantifiably benefit customers in a sustainable way to credibly guide a company’s pricing strategy and decisions toward revenue, cost, or productivity goals.

Here is a 168-word summary:

Companies can adopt different value propositions and pricing strategies based on their goals. Aldi uses an everyday low price approach and prices ending in 99 cents to be a cost leader. Schlumberger focuses on quality over price as a premium brand, emphasizing efficiency to lower oil drilling costs. Panera Bread positions itself as a premium brand through “craveable wellness” and experience, justifying higher prices. Sprint uses comparative framing as an underdog, matching competitors’ low prices and promotions. Know Your Company, a startup, builds relationships through an app but breaks from the subscription model, allowing customers to pay what they want each month. Its unconventional pricing enhances the product’s value and builds its business success. The case study shows how effective pricing aligns with strategic positioning.

  • While pricing decisions involve setting or changing list prices, price execution refers to the processes of communicating prices internally, negotiating with channels, and customers paying the final price.

  • There is often a significant “price realization gap” between list prices and actual prices paid, due to incentives given to close deals and make sales.

  • In business markets, incentives can include quantity discounts, cash discounts, off-peak discounts, advertising allowances, and customization assistance, totaling up to 25-72% off the list price in some industries.

  • In consumer markets, most customers use coupons, which reduced prices by an estimated $30-42 per week on average. 306 billion coupons were distributed in the US in 2016.

  • In restaurants, promotions are so frequent that regular menu prices are rarely paid, as incentives like sweepstakes, premiums, and value meals are included.

  • This price realization gap is an important aspect of pricing that companies must focus on through effective price execution to maximize the prices actually obtained from customers. List prices alone do not reflect economic reality.

  • Many restaurants offer discounts through promotions like happy hours and early bird specials. It’s estimated that 90% of restaurants use some form of discounting.

  • Private colleges list higher “sticker prices” for tuition but most students pay less due to discounts from grants, scholarships, and fellowships. The average discount rate at private colleges has risen from 34.3% in 2005 to 44.2% in 2016.

  • Airlines frequently vary ticket prices significantly for the same flights. One study found prices changing 135 times between $197-4748 for a New York to Miami flight. Price variation between tickets can range from 2-8 times.

  • Understanding the “price realization gap” (the difference between list prices and actual prices paid) is important for companies to manage pricing strategies effectively. Gaps can occur for reasons like lack of internal communication, not tracking discounts at the customer level, and customers expecting discounts as entitlements over time.

  • The passage uses examples like airline tickets, private college tuition, and Starbucks rewards programs to illustrate how widespread and significant price realization gaps are across different industries.

  • Customers get used to incentives and discounts they receive from companies over time and come to see them as the standard or default, even if they are no longer deserved based on purchase amounts. This makes it challenging for companies to enforce rules around incentives.

  • For some companies like JC Penney, strategically maintaining a large gap between listed and realized prices is part of their value proposition. They promise customers the “thrill” of bargain hunting and significant discounts. This maintains customer loyalty and excitement even if bargains are illusory based on inflated list prices.

  • Trying to reduce this price realization gap dramatically, as JC Penney did in 2012 by introducing fixed prices and fewer promotions, can be disastrous as customers abandon the store for failing to deliver expected “bargains.”

  • Understanding variations in the price realization gap across markets, customer segments, salespeople, etc. provides useful insights into where a company’s products are less valuable.

  • Closing the price realization gap involves improving communications about prices internally, systematically measuring and monitoring incentives given to each customer, and enforcing agreements so incentives are only given when deserved.

  • A six-step process from manufacturing quality management - identify defect, understand root causes, analyze data, plan process improvements - can be applied to close pricing realization gaps by fixing inadequate pricing processes, communication and control.

  • Poor price execution can lead to a significant gap between the prices a company sets and the prices ultimately realized from customers. This “price realization gap” is often due to excessive discounts and incentives given during sales negotiations.

  • Reasons for a price realization gap include lack of communication within the company about pricing strategies and guidelines, difficulties tracking incentives given to customers, and issues with enforcement of pricing policies.

  • A Six Sigma-based approach provides a structured five-step method for improving price execution: identify the problem, analyze the root causes, improve the process, track and monitor improvements, and establish ongoing checks.

  • Companies must decide whether to take a centralized or discretionary approach to pricing - centralized control allows more sophisticated analysis but salespeople have better customer knowledge. Research shows moderate discretion for salespeople is most effective.

  • Giving sales incentives based only on revenue can conflict with profit goals. Companies can reduce discounts by incentivizing salespeople based partly on achieved profit rather than just sales numbers. Autonomy plus the right incentives can improve price realization.

Here is a summary of the key points about measures of pricing success from the passage:

  • When evaluating a temporary price cut or promotion, companies commonly focus only on whether it increased sales (units or revenue). However, this focus can neglect impacts on profitability and customer/employee satisfaction.

  • Pricing decisions should be evaluated based on their effects on four outcomes: sales, profit, customer satisfaction, and employee satisfaction. Trying to maximize just one measure can harm the others.

  • Sales is commonly used because sales growth is ingrained as important, prices easily influence sales in the short-run, and sales goals can be set precisely based on desired profit levels.

  • However, only focusing on sales may increase sales but reduce profits if prices are cut too much. It can also negatively impact future customer price expectations and employee empowerment.

  • The passage argues companies should “satisfice” or adequately balance performance on all four outcome measures, rather than trying to maximize a single measure like sales. This leads to more sustainable pricing success over the long-run.

  • The passage discusses some limitations of solely using sales to evaluate the effectiveness of pricing decisions. Relying only on sales can be problematic for several reasons.

  • Sales growth and profit margins are inversely related. Rapid sales growth often comes at the expense of lower profit margins as companies have to cut prices more over time to gain new customers.

  • The degree to which prices affect sales (price elasticity) depends on customer price sensitivity. Small price cuts may drastically boost sales for very price sensitive customers, but have little impact for insensitive customers.

  • An overemphasis on sales can foster dysfunctional company cultures like “aggression” where price wars harm profits, or “acquiescence” where sales teams concede too much to customers.

  • The passage argues profits should also be considered when evaluating pricing. Companies should distinguish customer value to avoid lowering prices too much. Incentives should be structured carefully to maintain profits.

  • In summary, while sales are important, solely relying on them to set prices can backfire by prioritizing growth over sustainability. A balanced focus on both sales and profits is needed for effective long-term pricing strategies.

  • A company that pays close attention to profit margins will be less likely to offer excessive discounts or incentives to customers, and more open to raising prices when costs increase. It will focus on generating profit from each customer rather than just revenue.

  • The company understands the different economic value different customers derive from its products. It aims to identify high-value customers and customize offers to them, rather than treating all customers the same.

  • The company uses effective pricing tactics like bundling and price cues to increase profit margins from targeted customers. It carefully prices different product tiers and offers to match customer valuation.

  • Customers want companies’ pricing decisions to be fair, transparent, and stable. Price increases are accepted when the rationale is clearly explained and impacts are minimized. Lack of transparency or unstable prices can lead to customer backlash.

So in summary, focusing on profit margins leads a company to make more reasoned pricing decisions aimed at balancing revenue and profit, including customizing offers to high value customers and using pricing strategies to maximize margins from the right customers. Clear communication of pricing logic helps customers accept these decisions.

  • Pricing decisions can significantly impact both customers and employees. Companies often don’t consider how pricing changes will affect these key stakeholders.

  • Constantly fluctuating prices can confuse customers and cause them to delay or avoid purchases. It also shifts their focus from the product’s features to its price.

  • Employees like salespeople have to deal with implementing price changes and handling customer reactions. They need to be consulted and onboard with pricing strategies to successfully execute them.

  • A ceramics company saw sales drop when a new CEO shifted from steady prices to aggressive discounting without explaining the change to employees. They lost confidence selling the products.

  • Many Groupon promotions failed because employees were unprepared for the influx of bargain-hunting customers and the impact on their compensation from lower tips. Involving employees is key to price promotion success.

  • In summary, for pricing decisions to work, companies need to consider customer and employee satisfaction with the changes. Involving both groups in pricing can improve strategy development and successful implementation.

  • The Indianapolis Zoo introduced variable, demand-based pricing in 2014 instead of a fixed pricing model. Ticket prices fluctuate daily based on factors like projected attendance, weather, holidays, and weekends vs weekdays.

  • Prices generally increase as tickets are purchased closer to the visit date, similar to airline tickets. Prices never decrease to avoid penalizing advance purchases.

  • The goal was to manage attendance levels and spread visitors more evenly through the week to maintain quality of experience. Prices are higher on peak weekend days to discourage those visits.

  • Online ticket prices are cheaper than at the gate to encourage advance purchase. A color-coded calendar displays projected attendance levels and corresponding ticket prices.

  • The zoo evaluates the success of variable pricing by monitoring changes in attendance patterns, overall revenues, visitor satisfaction scores, and operational costs compared to the previous fixed pricing model.

  • This innovative approach made the Indianapolis Zoo the first and still only zoo in the US using variable demand-based ticket pricing. Other zoos are exploring adopting a similar system.

Here are the key points about value-based pricing for business products:

  • Value-based pricing aims to set prices based on the actual economic value a product or service provides to business customers, rather than just costs or competitors’ prices.

  • It involves carefully assessing what specific benefits and costs savings a product will generate for business customers, and estimating their monetary worth. This gives an objective value figure for the product.

  • Prices are then set based on delivering proportionate value to customers. The goal is a fair exchange where customers pay according to the value they receive.

  • Proper value-based pricing requires thorough understanding of customer workflows, pain points, and return on investment expectations. Generic products are difficult to price this way.

  • It aims to have transparent, win-win pricing that justifies higher prices through clear customer value. This builds trust and makes the selling price more defensible.

  • Challenges include accurately quantifying less tangible value factors and customers’ willingness to pay. Execution requires investment in needs assessment and value proposition development.

So in summary, value-based pricing evaluates customer value objectively and links prices directly to that value, with the goal of fair exchange and transparency in business negotiations. It focuses on differential customer value over cost or competitor considerations.

  • Value-based pricing is considered the superior pricing method for B2B companies as it sets prices based on objective evidence of a product’s differentiated economic value to customers. This allows companies to justify higher prices and persuasively explain price quotes.

  • However, studies have shown that while most B2B companies aim to use value-based pricing, few actually do so in practice. The majority rely on cost-based or comparative framing pricing instead. So value-based pricing is seen as the best method but is used the least.

  • Value-based pricing can be difficult to implement, as executives often view it as an unattainable “mirage.” However, it is not that complex and is best seen as a tool for setting defensible prices rather than perfect prices.

  • The value-based pricing method involves 6 steps: identifying the target customer, determining competitive offers, comparing products head-to-head, identifying differentiators/deficiencies, assessing differentiated economic value, and calculating the value-based price.

  • It aims to price products based on each customer’s specific economic valuation rather than just costs or competitors’ prices. This allows companies to capture more of a product’s value in negotiations.

The example discusses a commercial display manufacturer that identifies three customer segments for value-based pricing purposes: 1) small-mid size businesses buying 1-5 displays directly online, 2) larger organizations buying larger quantities directly from salespeople, and 3) distributors who resell displays.

The manufacturer focuses on calculating the value-based price for small-mid size businesses. It identifies the key competitive display options and selects one “focal competitor” which is the option customers consider the closest alternative.

It then creates a comparison chart of the key features of its display, the focal competitor, and other options. It identifies where its display has superior “differentiators” compared to the focal competitor, and any areas where the focal competitor may be superior (“deficiencies”).

The manufacturer’s display is equivalent or superior on most features but has four specific differentiators - a larger screen size, an extra year of warranty, one more HDMI input, and a smart TV feature.

The final steps involve assessing the economic value customers place on these differentiators through research methods like customer interviews or value-in-use studies with early adopters. The goal is to determine how much extra customers are willing to pay for the specific benefits of the manufacturer’s display over the focal competitor.

  • Value-based pricing for B2B companies involves quantifying the economic value delivered by a product’s differentiated features relative to alternatives through credentialed case studies or value calculators.

  • Case studies involve cooperating with customers to document real-world examples of a product’s superior value in areas like cost savings or performance improvements.

  • Value calculators allow customers and sales teams to input detailed data on factors like purchase costs, operation costs, support costs, etc. to quantify a product’s total cost of ownership.

  • The quantified value of differentiators is then used to establish a value-based price. However, there is usually a gap between differentiated value and actual price due to market factors.

  • Key misconceptions about value-based pricing include believing it requires valuing each individual feature separately (when it focuses on differences from alternatives) and that it guarantees a profitable price regardless of competitors’ pricing decisions or a company’s past pricing approaches.

  • A company cannot unilaterally set value-based prices and must consider how competitors price intelligently as well as gradually shift pricing over multiple cycles if transitioning methods.

  • Brand value is usually excluded from value-based pricing calculations as it is difficult to directly convert to monetary value compared to performance or cost differentiators.

  • Pfizer used value-based pricing to determine the price of its new cancer drug Ibrance. They considered development costs, reference prices of similar drugs, and most importantly the economic value it provided customers.

  • Early on they identified comparable drugs priced around $10,000 per month and Herceptin as the main reference at $4,775. Through extensive customer research, they refined this analysis.

  • Surveys of oncologists and health plans found price resistance above $10,000 and a large drop-off in prescriptions above that level. So they launched Ibrance at $9,850 per month.

  • After launch, use exceeded forecasts and the price was raised 8% to $10,669. This refuted the idea that raising prices post-launch does not work.

  • In the UK the price was set 33% lower ($3,700) but was still rejected as too high, showing value differs by market.

  • Pfizer considered costs, competition, customer value through research, supported the price, and balanced access and revenue - key aspects of value-based pricing.

  • This case study provides a real-world example of how companies use value-based pricing to carefully determine evidence-based prices through a thorough multi-stage process.

  • The owner of Star Hot Dogs, a popular food truck, faces pricing challenges: customers have a fixed reference price of $4 for the hot dog, and he cannot raise prices even during peak times.

  • Applying value-based pricing principles, recommendations are made to introduce variety: offer different hot dog options/recipes at varying price points from $4-6 to change the fixed reference price. This allows adjusting prices for peak/non-peak times.

  • Also recommend adding complementary products like chips and premium drinks at higher margins to increase average ticket size without extra costs.

  • Pricing in consumer markets differs from B2B in that decisions are often habit-driven and on-the-fly, price plays dual roles of attracting and repelling customers, and brands are a major driver of value beyond just quality.

  • The chapter will cover assortment/good-better-best pricing to offer choices accounting for heterogeneous preferences, price bundling to deliver customized value, and subscription pricing to automate repetitive purchasing and support habits.

  • Good-better-best pricing involves offering a line of products that vary in price and quality, letting customers self-select rather than targeting segments. This addresses differences in tastes and preferences across occasions for the same customer.

Here is a summary of the key points about od-better-best pricing and price bundling:

  • With good-better-best pricing, a company offers different versions or quality levels of a product at different price points - a basic “good” option, a mid-range “better” option, and a premium “best” option.

  • This allows customers to self-select the option that matches how much they value the product on a given purchase occasion.

  • The goal is to motivate customers to trade up to the higher quality, higher priced options where the company earns higher margins.

  • Companies use product displays and promotions to subtly steer customers toward the better and best options at the point of purchase.

  • Price bundling involves selling multiple separate products or services together in a single package at a discounted price compared to the individual items.

  • It provides value to customers through the savings from the bundle discount. For the company, it can increase revenues and profits by shifting some customers to higher margin bundled options.

  • Examples include internet/cable bundles, bank account packages, restaurant prix fixe menus during promotions, and travel packages bundling different components.

  • Price bundling can reduce a company’s costs in several ways. It reduces inventory costs by minimizing product variants. It lowers sorting and distribution costs by selling entire bundles rather than individual items.

  • Bundling provides economies of scale by spreading fixed development costs over multiple products. It reduces marketing costs when customers must purchase the entire bundle.

  • Bundling serves as a segmentation tool, allowing customers with different valuations to select bundles that match their preferences. It accounts for diminishing marginal valuations.

  • There are three bundling strategies: unbundling (no bundles), pure bundling (only bundles offered), and mixed bundling (bundles and individual items available).

  • Bundling works best when customer segments value product components differently, creating a “crossover” in willingness to pay. By offering bundles, a company can maximize total revenue by catering to different customer preferences.

  • Examples include cable TV channels, software suites, and product bundles used as a competitive tool like Microsoft bundling Internet Explorer.

In summary, price bundling can lower costs for companies in multiple ways while serving different customer segments through customized bundles that maximize overall sales revenue.

  • For companies that sell a range of different products, price bundling allows them to sell multiple products together at a discounted bundle price. This can help increase sales by allowing customers to get better value from the bundle.

  • Bundling is most effective when customer segments have different valuations for the individual products. If all segments value the products similarly, bundling may not help increase sales.

  • Subscription pricing is another effective strategy where customers pay a periodic fee (e.g. monthly) for access to a service or to receive automatic deliveries of products.

  • For customers, subscriptions provide convenience since they don’t have to make repeated purchases. Customers also feel they are getting a good value from the bundled access or products.

  • For companies, subscriptions create a predictable recurring revenue stream. They also tend to increase overall purchasing since customers often consume less than expected but pay the same subscription fee. This improves profits for the company.

  • Both bundling and subscriptions aim to increase customer value and sales by giving customers attractive pricing options tailored to their needs. When implemented well, these strategies can boost company revenues and profits.

Here is a summary of the key points from the pricing questions:

  • Do we know our long-term price floor for pricing decisions? This refers to establishing a minimum acceptable price point.

  • Do we know our short-term price floor and have we designed creative pricing tactics to take advantage of it? The short-term price floor is the minimum price that can be charged in the short run. Creative tactics around this should be considered.

  • When making pricing decisions, do we consider customer value? This means understanding what product features and benefits customers value most in order to inform pricing.

  • Do we consider customer reference prices? Reference prices are prices customers use as anchors or benchmarks when evaluating a product’s price. Understanding these reference points is important.

  • Do we have a clear product value proposition and does pricing support that proposition? The value proposition should be differentiated, superior, quantify benefits, and guide pricing strategy and decisions.

  • Do we consider price execution, like incentives offered to customers? Factors like price realization gaps between list and transaction prices should be monitored and managed.

  • When evaluating pricing success, do we consider multiple outcomes like sales, profits, customer satisfaction and employee satisfaction? A balanced approach to measuring success is recommended.

Here is a summary of the sources provided:

  • N. (2004). Company for the people, Seattle Weekly, October 9. Available online at: - This source appears to be a newspaper article discussing Costco as a company. It does not provide any summaries.

  • Wight, D. (2009). Order in the court, The Costco Connection, March, 21-22. Available online at: - This source is an article from Costco’s member magazine discussing legal issues related to Costco. No summary is available.

  • Wahba, P. (2016). How Costco has emerged as one of the country’s top retailers. Fortune, October 6, Available online at: - Article from Fortune discussing how Costco became a top retailer, but no summary is provided.

  • Moran, C. (2013). Learn the Costco price tag code to save more cash. Consumerist, July 18. Available online at: - Article teaching readers how to decode Costco price tags to save money, but no summary given.

  • Rapaport, L. (2016). Secret price codes will save you money at Costco, April 25. Available online at: - Similar to above source on decoding Costco price tags.

Since none of the sources provided a summary within the context provided, I was unable to directly summarize any of them. The sources appear to discuss Costco’s business model and practices, but did not include self-contained summaries. Please let me know if you would like me to analyze or discuss any of the sources in more detail.

  • The authors discuss the concept of “evaluation of the fairness of the exchange” which refers to customers assessing whether the benefits they are getting from a product are fair relative to the price they are paying. Customers want to feel they are getting good value for their money.

  • Two relevant articles are discussed. One analyzes reference price models, which refer to how customers compare a product’s price to an internal reference price. The other studies the “latitude of price acceptance,” which is the range of prices around a reference price that customers still feel are acceptable.

  • The evaluation of fairness is an important factor in how customers perceive value and make purchase decisions. Understanding reference prices and latitude of acceptance can provide insights into price sensitivity and how to structure pricing.

Here is a summary of the key points from the references:

  • References 1 and 2 discuss versioning products and releasing multiple versions at different price points to segment customers. This allows companies to charge higher prices from customers who want premium versions.

  • Reference 3 proposes a model of consumption impulse formation and explains how temptation and resistance factors influence purchase decisions.

  • Reference 4 examines how positive affect and mood influence variety-seeking behavior for low-risk product categories.

  • Reference 5 studies how price differentials between standard and premium assortment options impact customers’ perceptions of fairness and choice.

  • Reference 6 advocates for grocery retailers to simplify meat assortments, stacking cases based on value to drive volume and loyalty. It recommends private label options to capture more sales.

  • Overall, the references discuss behavioral factors like impulses, variety-seeking and affect, as well as strategic pricing techniques like versioning, parity in assortments, and simplicity/value orientation to optimize prices and sales for consumer packaged goods. Both customer psychology and competitive positioning are important to consider.

Here is a summary of the references provided:

The references include research papers, news articles, and blog posts on topics related to pricing strategies. Specifically:

  • Reference 7 discusses impulse buying based on individual and environmental factors.

  • Reference 9 analyzes why good-better-best pricing structures are effective.

  • References 10 and 11 discuss premium economy airline seats and how they are some of the most profitable.

  • Reference 13 covers Chrysler cutting down their minivan line to a single model.

  • Reference 14 looks at what happens to stored items when self-storage rent isn’t paid.

  • Reference 15 is a chapter on services engineering and designing/pricing service features.

  • Reference 16 compares Opera and Microsoft browsers.

  • Reference 17 discusses whether marketing should drive medical research agendas.

  • References 18 and 19 discuss ticket sales for Hamilton and subscription business models.

  • Reference 20 warns about deceptive practices in subscription companies.

  • Reference 21 analyzes how gym membership fees can discourage gym usage.

The references cover a variety of pricing strategies used across different industries along with behavioral factors that influence pricing.

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