Module 5 Price and Value Communication

• Developing an effective pricing strategy requires understanding and quantifying the value of your offer in order to set profit-maximizing prices across segments
• Even the most carefully constructed value-based pricing strategy will fail unless your offer's value, and how it differs from that of competitors' offers, is actually understood by potential customers
• Customers who fail to recognize your differential value are vulnerable to buying inferior offerings at lower prices supported by loosely defined performance claims
• The role of value and price communications is to protect your value proposition from competitive encroachment, improve willingness-to-pay, and increase the likelihood of purchase as customers move through their buying process
• Business managers rated "communicating value and price" as the most important capability necessary to enable their pricing strategies
• The ability to communicate value is also one of the weakest capabilities in most sales and marketing organizations
• Effective value and price communications require a deep understanding of customer value (which most firms lack) combined with a detailed understanding of how and why customers buy (another shortcoming) to formulate messages that actually influence purchase behaviors

  
• Amazon's solution to communicate the value of the Kindle e-book reader

  Established a "Meet a Kindle Owner" program in major cities across the United States where customers could meet current Kindle owners and try out the reader for themselves
• The combination of positive word of mouth from Kindle enthusiasts and the ability to experience the product firsthand was enough to overcome doubts about the Kindle's value and has led to robust sales growth that has surpassed many analysts' projections
• Effective price and value communications can have a significant impact on purchase intent and willingness-to-pay
• The challenge for marketing and sales managers is how to develop effective value messages for different types of products and differences in the buying process that customers employ
• It would be absurd to use the same communication approach for breakfast cereal as for computer data servers
• The approach must vary depending on whether the customer is a first-time buyer in the category or an experienced user, or whether the buyer is an individual, a family, or large corporation
• McDonald's targets many of its messages toward children because they are key influencers in the final choice for a family meal
• Top salespeople in business markets also understand the need to adapt messages to different people inside a customer's organization because of the variety of roles that managers have in the buying process
• The purpose of this chapter is to explain how to develop value-based messages to reflect key product characteristics such as the nature of the benefits (psychological versus monetary) and the type of good (search versus experience)
• The purpose is also to discuss how to adapt the message for important purchase characteristics such as the stage of the buying process or the number of individuals involved in the purchase decision

  
• The purpose is also to show how to communicate prices in a way that can have a positive influence on a customer's willingness-to-pay
• Value communication


  Can have a great effect on sales and price realization when your product or service creates value that is not otherwise obvious to potential buyers
• Relative cost of search


  The financial and nonfinancial cost, relative to the expenditure in the category, that a customer must incur to determine differences in features and benefits across alternatives

  
• Search goods


  Products where the customer can easily determine product differences before purchase
• Experience goods


  Products where the differentiating attributes are more difficult to evaluate across brands, requiring the customer to invest substantial time and effort to evaluate the products before purchase
• The relative cost of search diminishes as a customer's expenditure for the product increases
• For high cost-of-search products, sellers design value messages to reduce the uncertainty associated with their product's benefits, such as relying on expert endorsements, using a high price to signal high value, providing money-back guarantees, or leveraging a known brand image
• One of the most effective ways to influence value perceptions for experience goods is to subsidize trial, such as offering free trial memberships or free samples
• Monetary benefits


  Benefits such as profit, cost savings, or productivity that can be directly quantified
• Psychological benefits


  Benefits such as comfort, appearance, pleasure, status, health, or personal fulfillment
• For goods where monetary value drivers are most important, value quantification should be a central part of the message to call attention to any gaps between the customer's perceptions of value and the actual monetary value of the product
• Value


  The amount of value (monetary or psychological) that a product creates for the customer
• Value communication


  • Justifying a price premium by demonstrating the value the product creates for the customer
  • Focusing the message on high-value benefits the customer might not have been thinking about
  • Raising perceptions of the product's performance benefits that cannot be easily judged prior to experiencing them
• When the important value drivers for a purchase decision are psychological rather than monetary, it is best to avoid incorporating quantified value estimates into market communications, because value is subjective and will vary from individual to individual
• Subjective values, such as those that a customer might reveal in a conjoint research study, can be influenced by communication
• Ways to influence subjective values

  1. Focus the message on high-value benefits the customer might not have been thinking about

  2. Raise perceptions of the product's performance benefits that cannot be easily judged prior to experiencing them
• Duracell ad


  • Clearly specifies the linkage between the Duracell battery's key differentiating feature of longer life with the benefits that might bring to a variety of customers
  • Does not mention price or estimates of monetary value, its goal is to establish Duracell's differentiation

  
• In many cases, you may need to communicate both economic and psychological benefits for the same product to the same customers
• Hybrid car buyers


  • Want to feel good about protecting the environment (psychological benefit)
  • Also depend on how much money they expect to save from improved gas mileage (economic benefit)
• Johnson & Johnson drug-coated coronary stent


  • Priced at $3,500, 250% higher than traditional uncoated stents
  • Explained the economic benefits to medical professionals (reduced likelihood of reclogging)
  • Also emphasized the psychological value to patients in avoiding the risk and discomfort of a repeat procedure
• Value-based communications


  Must be adjusted for product characteristics such as cost of search and benefit type, as well as for the customer's purchase context
• Netbook computers


  • Light weight and small size make them highly portable
  • Exceedingly reliable because of simple design and mature operating systems
• Adapting value message for netbook computers based on purchase context

  1. Awareness stage: Make customer aware of benefits of netbooks

  2. Consideration stage: Create assurances that Lenovo's product is differentiated

  3. Evaluation stage: Detail superior performance vs other netbooks and laptops

  4. Purchase stage: Justify price-value tradeoffs