WEEK 6

As we noted in an earlier module , a successful value-based pricing strategy involves five

components. Those effective strategies incorporate customer value with the value
management elements of value creation and value communication. So what exactly are these
elements?

Value creation involves including only those elements in a product or service that a fully-
informed customer should be willing to pay for — which is what we call “value”. The term
“should be” is used because what customers will actually pay depends upon how the product is
marketed and is usually somewhat short of the full value. A great new product that promises
huge benefits is only a promise. For example, willingness-to-pay will fall short of value, but will
move much closer to value if the product comes with a money-back performance guarantee.
Aligning what you offer with what customers’ value requires modeling the impact of the various
benefits on a customer’s economics. For B2B customers, the process is conceptually easy
using the Economic Value Estimation® (introduced in the renowned pricing book – The Strategy
and Tactics of Pricing) or “economic value to the customer” method. It is not a measure of the
price you can charge, but a measure of the relative price potential that a feature or service
enhancement could represent for different segments of customers.
Companies that lack a way to interject a measure of value into their product development
process have a tendency to create products that represent “the best that money can buy”, rather
than products that represent the “best value” that customers will buy.
 VALUE COMMUNICATION involves communicating credibly, in monetary terms, the
differentiating benefits of your product. The goal, particularly for a higher-priced product, is to
establish for the customer the “value” identified during the value creation stage. Without that,
you run the risk that the purchasing department does not know the value of your
differentiating benefits to their company, or that they will not acknowledge the value, even if
they do know what it is. Once you have established the economic value, or at least have
opened a discussion about what it is, you no longer need to justify your price premium
relative to the competition. Instead, you can sell or promote your discount relative to the
added value that you deliver. Or, to describe value communication in the negative, you can
show that your lower-priced competitors are none-the-less overpriced because the savings
from buying their products is insufficient to compensate for the value lost by not buying your
product!
In order to implement and execute a successful value-based strategy, it is critical that you
address value management—not just price management—systemically. Failure to include an
understanding of value in offer development and customer communication activities will result
in a disconnect between what product teams are building, what marketing is communicating,
and what sales is selling, leading to fewer profitable sales and poorer financial performance.

Understanding the value your products create for customers and translating that understanding
into a valuebased price structure can still result in poor sales unless customers recognize the
value they are obtaining. A successful pricing strategy must justify the prices charged in terms
of the value of the benefits provided. Developing price and value communications is one of the
most challenging tasks for marketers because of the wide variety of product types and
communication vehicles. In some instances, marketers might employ traditional PRICING
STRATEGY| 4 advertising media to convey their differential value, as was the case with the now
famous “I am a Mac” ads created by Apple. The ads, featuring the actors Justin Long posing as
a Mac and John Hodgman as a PC, highlighted common problems for PC owners not faced by
Mac owners and are credited with making a major contribution to Apple's success in the late
2000s. In other instances, value messages will be communicated directly during the sales
process with the aid of illustrations of value experienced by customers within a market segment
or with the aid of a spreadsheet model to quantify the value of an offering to a particular
customer.

The content of value messages will vary depending on the type of product and the context of the
purchase. The messaging approach for frequently purchased search goods such as laundry
detergent or personal care items will tend to focus on very specific points of differentiation to
help customers make comparisons between alternatives. In contrast, messaging for more
complex experience goods such as services or vacations will deemphasize specific points of
differentiation in favor of creating assurances that the offering will deliver on its value proposition
if purchased. Similarly, the content of value messages must account for whether the benefits
are psychological or monetary in nature. As we explain in, marketers should be explicit about
the quantified worth of the benefits for monetary value and implicit about the quantified worth of
psychological benefits. Price and value messages must also be adapted for the customer's
purchase context. When Samsung, a global leader in cellular phone sets, develops its
messaging for its new 4G (fourth generation) phones, it must adapt the message depending on
whether the customer is a new cell phone user or is a technophile who enjoys keeping up with
the latest technology. Samsung must also adapt its messages depending on where the
customer is in their buying process. When customers are at the information search stage of the
process, the value communication goal is to make the most differentiated (and value creating)
features salient for the customer so that he or she weighs these features heavily in the purchase
decision. For Samsung, this means focusing on its phones' big screens and high data-transfer
speeds. As the customer moves through the purchase process to the fulfillment stage, the
nature of messaging shifts from value to price as marketers try to frame their prices in the most
favorable way possible. It is not an accident when a cellular provider describes its price in terms
of pennies a day rather than one flat fee. Research has shown that reframing prices in smaller
units comparable to the flow of benefits can have a significant positive effect on customer price
sensitivity. As these examples illustrate, there are many factors to consider when creating price
and value communications. Ultimately, the marketer's goal is to get the right message, to the
right person, at the right point in the buying process.
*End of Lesson