McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. Chapter 8 Customer Value Analysis

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. Customer Value Analysis A cynic is a man who knows the price of everything, and the value of nothing. -Oscar Wilde What we obtain too cheaply we esteem too lightly; it is dearness only that gives everything its value. -John Jakes, The Rebel The quality is remembered long after the price is forgotten. -James E. Brill, ABA Journal (September 1992), 85

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. Value Analysis Management  Customer value management is understanding all the experiences that customers have with the products and services the firm provides them  The firm’s pricing is driven by measurable value provided to customers and not by customer’s expressed willingness to pay

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. Perceived Acquisition Value Perceived = perceived benefits or quality acquisition value perceived total sacrifice Perceived total sacrifice to the buyer is equal to purchase price + start-up costs + post-purchase costs Perceived benefits or quality is equal to some combination of physical attributes, service attributes, and technical support available, as well as the purchase price and other indicators of quality

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. Components of Perceived Acquisition Value  1. Sacrifice  2. Equity  3. Aesthetics  4. Relative use  5. Perceived transaction value

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. The Concept of Benefits To provide benefits a product or service must be able to: –1. Perform certain tasks or functions –2. Solve identified problems –3. Provide specific pleasures

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. The Concept of Benefits It is necessary to: –Identify the benefits that customers will perceive the product or service to offer –Determine the relative importance of those benefits that customers place on the product of service

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. The Five Cs Of Value-oriented Pricing 1. Conceptualize customer value1. Conceptualize customer value –Translate features and attributes into perceived benefits –Consider relative benefits delivered by the product itself –Consider the relative benefits provided by the supplier of product –Consider the relative risks and costs of switching from the current practice to implementing the new alternative

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. The Five Cs of Value-oriented Pricing 2. Understand The Key Value Drivers for Customers2. Understand The Key Value Drivers for Customers 3. Calculate customer value3. Calculate customer value –Determine sources of differentiation value –Determine customer value segments –Perform customer value assessments –Estimate economic value to customer value segments

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. The Five Cs of Value-oriented Pricing It is important to identify and quantify how a customer can: –Reduce costs –Avoid costs What costs are a function of customers’ requirements? What costs does a customer actually incur? How do we affect those costs? How do our competitors affect those costs?

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. The Five Cs of Value-oriented Pricing Examples of cost-based sources of value –Salary and compensation savings –Productivity increases –Training/learning savings –Maintenance/set up savings –Hiring/turnover savings –Improved material handling

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. The Five Cs of Value-oriented Pricing Identify and quantify how a customer can increase income or improve cash flows Examples of revenue-based sources of value –Reduced time to market. –Cost competitive advantage. –Customer gains. –Change in customer mix. –Increased sales volume/market share. –Enhanced product performance.

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. The Five Cs of Value-oriented Pricing Other components of value –Value added by the sum of costs required to produce the product –Exchange (brand equity) - the ability to obtain a certain price –Aesthetic - the value placed on the properties or attractiveness of the product –Relative use - increased durability of product (life span) or reduction in cost of supplies –Scarcity –The value placed on uniqueness

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. The Five Cs of Value-oriented Pricing Value analysis and value engineering- an organized effort to analyze the products or services to perform desired functions, satisfy needs, or provide satisfaction in the most profitable manner Value-in-use analysis- the maximum price that can be set is that at which the customer disregards the difference between the product and the next best economic alternative

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. The Five Cs of Value-oriented Pricing Value mapping- illustrates the way customers in a value segment trade off perceived benefits against perceived sacrifice

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. The Five Cs of Value-oriented Pricing 4. Communicate Value to Customers4. Communicate Value to Customers –Frame price relative to economic value (not to competitive prices) –[Framing - language or context used to present alternatives] –Suggest “reference price” and “end-benefits” frames –[Anchoring - using a reference point to evaluate or compare alternatives]

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved The Five Cs of Value-oriented Pricing Communicating value.Communicating value. –Keep price structures understandable, flexible, and relatively easy to administer. –Consistently and clearly communicate price structure. Discounts, allowances, rebates, rewards for loyalty should be above-board and clearly defined. –Provide complete and concrete information about the offer. –Provide appropriate reference price and actual selling price.

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. The Five Cs of Value-oriented Pricing Communicating value.Communicating value. (e.g., “Save up to 50%”). –Avoid vague phrasing (e.g., “Save up to 50%”). –Minimize the amount of work and effort for buyers to take advantage of the offer. –Refrain from using “suggested list price” or similar phrases. These phrases are distrusted by buyers; may be deceptive. –Communicate the total savings in an offer; minimize the need for buyers to make calculations to determine savings.

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. The Five Cs of Value-oriented Pricing Communicating value.Communicating value. –Place a reference value on any “free” aspect of the offer. –For temporary price reductions, provide the specific ending date of the offer and the price in effect after the ending date. –For price increases, provide the beginning date of the new higher prices.

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. The Five Cs of Value-oriented Pricing 5. Develop Ways to Capture Customer Value5. Develop Ways to Capture Customer Value –The seller becomes externally-focused when managing prices –Establish pricing rules or structure that force customers to acknowledge value received

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. Contingency Value Pricing Occurs when the value of the service cannot be calculated before its delivery Forms of contingency pricing include –Money-back guarantees –Real estate agents’ commissions based on a percentage of the selling price –Lawyers’ or professional sports agents’ fees based on a percentage of the damage award or contract negotiated

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. Key Point Of Value-oriented Pricing A fundamental component of being “customer-focused” involves not just satisfying customers, but creating value for customers by framing the context of customer judgments and preference formation.

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. Key Point of Value-oriented Pricing Profitable pricing depends not only on careful measurement of customer perceptions, but also on developing effective strategies and tactics to manage those perceptions toward the true value of your products and services.