Value Creation

Week 3 Time Table: (February 15- February 20, 2021)

For this week, the following shall be your guide for the different lessons and tasks that you need
to accomplish. Be patient, read them carefully before proceeding to the tasks expected of you.
HAVE A FRUITFUL LEARNING EXPERIENCE 😊

Date Topics Activities or Tasks

February 15-18  Value Creation Read Lessons
Accomplish the worksheet in the
February 22 Submission of learning tasks
Activities Portion of this module
Synchronous Quiz (for LMS) Prepare for a Quiz ( Synchronous-for
February 19 the Online Mode) Actual Quiz for the
modular

Introduction:

PERCEIVED VALUE

Value
Based
MARKUP
Cost-Plus
COST

Value-based price (also value optimized pricing) is a pricing strategy that sets prices

primarily, but not exclusively, according to the perceived or estimated value of a product or
service to the customer rather than according to the cost of the product or historical prices.
Where it is successfully used, it will improve profitability through generating higher prices
without impacting greatly on sales volumes.
The approach is most successful when products are sold based on emotions (fashion), in niche
markets, in shortages (e.g. drinks at an open-air festival on a hot summer day), or
for complementary products (e.g. printer cartridges, headsets for cell phones). Goods that are
very intensely traded (e.g. oil and other commodities) are often sold using cost-plus pricing.
Goods which are sold to highly sophisticated customers in large markets (e.g. automotive
industry) have also in the past been sold using cost-plus pricing, but thanks to modern pricing
software and pricing systems and the ability to capture and analyze market data, more and
more markets are migrating towards market- or value-based pricing.
Value-based pricing in its literal sense implies basing pricing on the product benefits perceived
by the customer instead of on the exact cost of developing the product. For example,
a painting may be priced as much more than the price of canvas and paints: the price in fact
depends a lot on who the painter is. Painting prices also reflect factors such as age, cultural
significance, and, most importantly, how much benefit the buyer is deriving. Owning an
original Dalí or Picasso painting elevates the self-esteem of the buyer and hence elevates the
perceived benefits of ownership.

Value-Based Pricing
1 2 3 4
Evaluate Set target Determine Deliver a
customer price to costs and product
needs and reflect competitive that meets
value customer differentiation and
value exceeds
value

Value-based versus cost-based pricing

Cost-based pricing
Product Cost Price Value Customers
Value-based pricing
Customer Value Price Cost Product
s

Price should be controlled within the value of the benefits that one business provides for its
customer, while at the same time considering the price that their competitors' charge. Thus,
prices are to be set according to the value that the business provides for its customer. To
maximize the profitability of the products sold by the business, the business has to measure the
benefit of the product that they provide to their customers, survey the criteria for the
customers' buying decision (speed of delivery, convenience or reliability, etc.) and also identify
the value of the benefits provided to the customer.
Cost-plus pricing
Cost-plus pricing is an approach that takes the total cost of producing the product or service and
adding some amount to allow the business to make a profit.[1] For example, in a retail store, if a
merchant buys something for 5,andtheysellitfor10 to a customer, this is called cost-based
pricing. However, the willingness for the customer to pay is limited by the benefits they can
receive: "Benefits are net benefits, where any cost that the customer firm incurs in obtaining the
sought benefits, apart from the purchase price, are included" (Anderson and Wynstra, 2010,31).
[4] Thus, the customer-perceived value is the difference between the net benefit they received
and the price the customer paid, the supplier will not make any profit if the products are sold
below the cost.
Value-based pricing

Value-based pricing
Customer Value Price Cost Product
s
Value-based pricing is defined based on the value that a product or service can deliver to a
predefined segment of customers which are the main factor for setting prices (Hinterhuber,
2008, 42), as value-based pricing depends on the strength of benefits that a company can prove
and offer to their customers. Thus, value is the most important driving force in every business
decision as value focuses on the price the potential customers are willing to pay based on the
benefit offered by the business.
A benefit is typically meant in regards to achieving specific business goals. If the offered product
or service helps to achieve these goals, it is typically valued higher. The foundation of value-
based pricing is therefore to understand the customers' goals and the values used to achieve
these goals.
For example, the cost for fixing a pipe at a customer's home for a plumber
is 17.50withthecostoftravel,materialcost,andanhour
′slabor.However,theplumbermaydecidetochargeatotalof50 to benefit from this business.[1]
[6] Thus, the customer might not be happy about the overcharged price given by the plumber, at
the same time there is a possibility that the plumber will lose their customer, so it is important to
measure the value of a product before setting the price too high. On the other hand, if the
company has a clear-defined benefit that gives you an advantage over the competitor, the
company is able to charge according to the value that is offered to the customers. Thus, this is a
very profitable approach as it can break off potential customers who are driven only by price and
also attract new customers from competitors. For example, Starbucks raised prices to maximize
profits from price-insensitive customers who depend on their gourmet coffee while losing
customers who wanted cheaper prices to McDonald's.
Comparison with cost-based pricing
Several factors affect customer willingness to pay certain prices; for example, the difference of
needs between countries, individual customers' needs and wants, and the usual customer
facing different occasions (actual and present needs) - hence a plan to suit all time value-based
pricing is impossible. An extreme focus on value might leave the customer feeling exploited,
leading to negative affect towards the company. In the long term, prices based on value-based
pricing are always higher or equal to the prices taken from cost-based pricing - if the prices were
any lower, the customer might perceive the actual value to be lower than the cost of producing
the good plus a profit margin. Companies will not be interested in producing and selling the
product at that price in the long term. Despite being difficult in implementation of both pricing
techniques on companies, there should be consideration of values on products and market
positioning brought out to the customers in the early stage of product development.
Implementation
Resolving competing objectives
The conceptualization of sales strategy (Panagopoulos and Avlonitis, 2010) is essential for
companies to sell in a more strategic way rather than operationally selling their products.
However, the focus of B2B (business-to-business) pricing method has transformed into the
concept of appreciating and raising the value of a product in a market, such as value creation
and value capture (Aspara and Tikkanen, 2013). One of the reasons for some companies not
applying value-based pricing is that they do not know their own advantages and capabilities.
Next, the objectives of the company are not aligned. It is a typical conflict of objectives in
companies is market share versus profitability, because in a business tradition, the higher your
market share, the more profitable the company is. Hence, to implement value-based pricing into
a company, the company has to understand its objective and the advantages that stand out
among the competitors in the same field. Thus, this will provide a benefit of dominating the
targeted market for the company, hence, sustaining the segmented customers that the company
is targeting.
Understanding customer segmentation
1. Conduct customer surveys
2. Choose the type of segmentation
3. Identify lucrative customer segment
4. Device the right marketing approach
5. Test and iterate
There are many ways of approaching value-based pricing. However, segmentation between
companies decides and affects which market segment the company is attracting or aiming for.
Generally driving segments, there are customers who just go for the lowest priced product or
value buyers who are willing to pay more to purchase products that are worth the price. Thus,
value-based pricing companies are aiming for types of segmentation like value buyers. In
reality, each and every product in the market is sold at different prices, for more or less similar
products. However, selling the same product at different prices is often illegal, because it is
regarded as price discrimination or treated as unfair. For example, if customer A and customer
B purchased the same item but charged at different prices, this is perceived as unfair. Hence,
two of the strategies to go around the market and still to charge more from one segment than
another are price fencing and versioning. Price fences are criteria that customers must meet if
they are to qualify for a lower price e.g. fencing price buyers from convenience buyers by
offering a lower price to shoppers who use coupons found in local newspapers. A convenience
buyer only goes to a store and purchase the product they want to get at full price. However, the
price buyer wants a low price, so they would clip out the coupon they got from the newspaper
and redeem the coupon in the department store for a discount. Thus, fencing and versioning are
just the ways of how we can address different segments with the willingness to pay at different
price points. By capturing the willingness to pay from price buyers with a low-end offering, and
at the same also segmenting convenience buyers. Thus, companies are able to charge a much
higher price in the convenience buyer segment, so profit increases by serving different
segments at different price points.
Using pricing as pain management
However, coupons cannot be given out blindly before understanding which customers are
willing to pay more when buying in large quantities. Periodically, some marketers have
eliminated their competitors by driving down costs or developing upsetting technologies
(Paranikas, Whiteford, Tevelson, and Belz, 2015). Thus, the market has been segmented out to
set up different levels of discounts. Although the market has a list price no one ever pays the full
list price, in fact, price negotiation turns into discount negotiation. For instance, the biggest
challenge faced by the market nowadays is giving too many discounts without getting anything
in return. This proven that pricing is often pain management, where when customers ask for a
discount or to purchase a product at a lower price, customers have to give something back in
return to get lower prices or discounts. Hence, every discount should have a pain associated
with it, because if customers do not suffer from the pain of asking to get a discount, they will just
ask for more discounts.
Understanding price negotiation and fear
WHY NEGOTIATION SUCH A CHALLENGE?
1. People are oblivious to how the come across during a negotiation, with around 57%
failing to accurately guess how assertive they have been.
2. People enter a negotiation unprepared and without a clear idea of what they want.
3. Negotiators only remember about 50% of what their counterpart has said.
Price management and price psychology are related to each other. Companies often
transform from a sole entrepreneur into a large company with multibillion-dollar contracts at
stake, subject to both price anxiety and on the other hand price confidence. For example, when
the buyer knows that the seller will win a deal at any cost, the seller will get it at any cost,
meaning that the price will go down. Thus, in another way, the moment when the seller fears a
price negotiation and on the other side there is an experienced buyer, the price will go down. It
is often said that fear is the most expensive feeling in a company. Additionally, it is often seen
that companies, salespersons, entrepreneurs, or freelancers are anxious to lose a deal when
the customer just takes the price down. Pricing confidence is an essential organizational
characteristic that allows teams to sell the product confidently and believe in the price-worthy
value of the product (Liozu et al., 2011). Therefore, it is important that companies build up
pricing confidence in a team, showing the team a better insight, creating more value from the
product. Furthermore, this leads to price confidence that leads from the confidence a seller has
in the product they are selling. However, when the seller is not confident about the price or
product they are selling, help from others to access your product that has the value for the price
is possible as well, and this leads to commoditization. Commoditization happens when the
product a seller offer is as good or as bad as the competitor is offering. In these scenarios, the
seller will find it difficult to sell the product at a higher price. Customers often use
commoditization to drive down the price of a product during a negotiation. Thus, it is valuable to
the seller to convince the buyer that the product is not a commodity when you understand the
value and that the price of the product is justified.
Addressing the mindset change
Value-based pricing is as much about a change in mindset, as it is about the underlying
mechanics of establishing a price and the sales skills needed to achieve the price in the market.
The most important first step in Value-based pricing is to address the mindset change, so that
the entire commercial organization starts to think about selling value instead of just selling a
product.
Companies with most successful VBP initiatives invest the time upfront to build a unified view
across their commercial functions on some fundamental questions like ‘What is Value?’ and
‘How do we quantify Value?’ Answers to such questions are very specific and unique to each
B2B company depending on what it sells, where it sells, who it sells to and how does it sell. A
proven approach is for companies to conduct a cross-functional workshop that involves not just
the Product and the Marketing teams but also the Sales and Customer Service teams to build a
company specific view on Value-based Pricing. Once this common definition is established,
companies can then go about quantifying value and establishing the value-based price
*End of Lesson