CUSTOMERS (Chapter 4)

Exhibit 4.1 Economic Value Analysis

Negative Differentiation Value is the
Differentiation value to the customer (both
Value positive and negative) of any
Positive
differences between your
Differentiation
Value
offering and the reference
product.
Total
Economic
Value Reference Value is the cost
Reference
Value (adjusted for differences in
units) of the competing
product that the customer
views as the best alternative
for this one.

If all customers were economic men and women, that is, fully informed consumers
who completely and rationally analyze all purchase decisions, the economic value
would then be the maximum price they would pay for any purchase.
 Economic Value Analysis (EVA)

Important to assess economic value (to buyers) of

product

Is product overpriced? or underpromoted?

Important for new, differentiated products --

where no going rate is available from
competition

EV = Ref. Value + Differentiation Value

Important for communicating with your market

& for your (non-price) marketing mix strategy
Price Involves determining how important
Sensitivity price is to buyers -- or
How sensitive are buyers to price?

Factors 1. Perceived substitutes

Affecting 2. Unique value
Price 3. Switching cost
Sensitivity 4. Difficult comparison
5. Price-quality
6. Expenditure
7. End-benefit
8. Shared-cost
9. Fairness
10. Inventory
1. Perceived substitutes effect
What alternatives are buyers (or segments of buyers) typically aware of when making a
purchase?
To what extent are buyers aware of the prices of those substitutes?
To what extent can buyers price expectations be influenced by the positioning of one brand
relative to particular alternatives, or by the alternatives offered them?
2. Unique value effect
Does the product have any unique (tangible or intangible) attributes that differentiate it from
competing products?
What attributes do customers believe are important when choosing a supplier?
How much do buyers value unique, differentiating attributes? How can one increase the
perceived importance of differentiating attributes and/or reduce the importance of those offered
by the competition?
3. Switching cost effect
To what extent have buyers already made investments (both monetary and psychological) in
dealing with one supplier that they would need to incur again if they switched suppliers?
For how long are buyers locked in by those expenditures?

4. Difficult comparison effect

How difficult is it for buyers to compare the offers of different suppliers?
Can the attributes of a product be determined by observation, or must the product be
purchased and consumed to learn what it offers?
What portion of the market has positive past experience with your products? With the brands
of the competition?
Is the product highly complex, requiring costly specialists to evaluate its differentiating
attributes?
Are the prices of different suppliers easily comparable, or are they stated for different sizes and
combinations that make comparisons difficult?
5. Price-quality effect
Is a prestige image an important attribute of the product?
Is the product enhanced in value when its price excludes some consumers?
Is the product of unknown quaity and are there few reliable cues for ascertaining quality before
purchase?
6. Expenditure effect
How significant are buyers expenditures for the product in absolute dollar terms (for business
buyers) and as a portion of income (for end consumers)?
7. End-benefit effect
What end-benefits do buyers seek from the product?
How price sensitive are buyers to the cost of the end-benefit?
What portion of the end-benefit does the price of the product account for?
To what extent can the product be repositioned in customers minds as related to an end-
benefit for which the buyer is less cost sensitive or which has a larger total cost?

8. Shared-cost effect
Does the buyer pay the full cost of the product?
If not, what portion of the cost does the buyer pay?

9. Fairness effect
How does the products current price compare with prices people have paid in the past for
products in this category?
What do buyers expect to pay for similar products in similar purchase contexts?
Is the product seen as necessary to maintain a previously enjoyed standard of living, or is it
purchased to gain something more out of life?
10. Inventory effect
Do buyers hold inventories of the product?
Do they expect the current price to be temporary?
 Managerial Analysis of Price Sensitivity
--- Buyer segments differ in their price sensitivities

--- Need for identifying suitable price ranges

--- Serves as a prelude to the measurement of price

sensitivity

--- Important to estimate aggregate effect of the ten

factors

Once completed, combine the results of the managerial

analysis with those of the financial analysis of costs,
undertaken earlier.
 Price Sensitivity is Operationalized in Terms
of Price Elasticity (E)

E = Percentage change in unit sales

Percent change in price

SOME PROPERTIES OF PRICE ELASTICITY (E)

--- Usually a negative #

--- Relevant only over the range of calculation

--- Short run and long run price elasticities may not be the same

--- Few, if any, generalizations can be made about price elasticities

(Exception: Brands with Lower E.

High Mkt. Share

with
Low Mkt. Share Higher E.)