Customer Value in Pricing Strategy

Start Date: 08/25/2019

Course Type: Common Course

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Course Syllabus

Welcome to Week 1! We kick off the week with an overview of the course so that you'll know what to expect with an optional review of the specialization and three pricing lenses (watch these if you want a refresher). Then we'll dive into the content! This week, you'll learn about customer value--what it is and its relevance to pricing. You'll see how consumers make decisions--and why knowing consumers' willingness to pay is so important when setting a product's price. Next, we'll take a look at customer value in developing economies and how and why companies succeed (or not!) with value-based pricing in these markets. You'll finish the week with a solid understanding of "customer value" and how that impacts pricing strategy.

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Course Introduction

The traditional approach to pricing based on costs works to pay the bills, but it leaves revenue on

Course Tag

Customer Willingness to Pay Pricing Strategies Customer Value-based Pricing Measuring Customer Preferences Customer Psychology

Related Wiki Topic

Article Example
Value-based pricing Value-based price (also value optimized pricing) is a pricing strategy which 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.
Customer value model A customer value model (CVM) is a data-driven representation of the worth, in monetary terms, of what a company is doing or could do for its customers. Customer value models are tools used primarily in B2B markets where the choice of a given product, service, or offering is based primarily upon the amount customer value created. Customer value is defined as Value = Benefits - Price. Thus, customer benefits are quantified in a CVM - product features and capabilities are translated into dollars. Customer value models are different from customer lifetime value models, which seek to quantify the value of a customer to its suppliers.
Customer value proposition Customer Value Management was started by Ray Kordupleski in the 1980s and discussed in his book, Mastering Customer Value Management.
Value-based pricing A few factors that affects the willingness of the customer to pay a 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. However, by focusing at an extreme way might leave customer with a feeling of exploited, leaving negative results towards the company. However, in long term, prices based on value-based pricing are always higher or equal to the prices taken from cost-based pricing, but in another words, if the prices are lower, customer might think that the actual value perceived by the customer is lower than the cost of producing the good plus a profit margin, companies will not be interested to produce and sell the product at that price in 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 on early stage of product development.
Cost-plus pricing Cost-plus pricing is a pricing strategy in which the selling price is determined by adding a specific dollar amount markup to a product's unit cost. An alternative pricing method is value-based pricing.
Customer lifetime value Customer lifetime value can also be defined as the dollar value of a customer relationship, based on the present value of the projected future cash flows from the customer relationship. Customer lifetime value is an important concept in that it encourages firms to shift their focus from quarterly profits to the long-term health of their customer relationships. Customer lifetime value is an important number because it represents an upper limit on spending to acquire new customers. For this reason it is an important element in calculating payback of advertising spent in marketing mix modeling.
Pricing strategies This pricing strategy is frequently used where the value to the customer is many times the cost of producing the item or service. For instance, the cost of producing a software CD is about the same independent of the software on it, but the prices vary with the perceived value the customers are expected to have. The perceived value will depend on the alternatives open to the customer. In business these alternatives are using competitors software, using a manual work around, or not doing an activity. In order to employ value-based pricing, a one must know its customers' business, one's business costs, and one's perceived alternatives. It is also known as perceived-value pricing.
Customer Cost Value-based pricing strategy is founded on a differentiation strategy, and uses buyer’s perceptions of value, which are based on experience. It is customer-driven, and is expressed in terms of setting the highest price possible to the greatest extent that the market will bear. Since sustainable products are expected to be more expensive than the conventional ones, this strategy is particularly suitable for them. Indeed, suppliers increase the price because a price increase adds value to the product by adding sustainability benefits, regardless of the underlying cost structure. The application of premium pricing for sustainable products and the amount that the customer would be willing to pay for that product are just two of the questions that need to be answered by marketers, and taking into account:
Pricing Marketers develop an overall pricing strategy that is consistent with the organisation's mission and values. This pricing strategy typically becomes part of the company's overall long -term strategic plan. The strategy is designed to provide broad guidance to price-setters and ensures that the pricing strategy is consistent with other elements of the marketing plan. While the actual price of goods or services may vary in response to different conditions, the broad approach to pricing (i.e., the pricing strategy) remains a constant for the planning outlook period which is typically 3–5 years, but in some industries may be a longer period of 7–10 years.
RFM (customer value) Customer segments containing weighted RFM scores and demographic data in the same clusters conclude stronger and more accurate association rules to understand the customer behavior and customer value.
Pricing When decision-makers have determined the broad approach to pricing (i.e., the pricing strategy), they turn their attention to pricing tactics. Tactical pricing decisions are shorter term prices, designed to accomplish specific short-term goals. The tactical approach to pricing may vary from time to time, depending on a range of internal considerations (e.g. such as the need to clear surplus inventory) or external factors (e.g. a response to competitive pricing tactics). Accordingly, a number of different pricing tactics may be employed in the course of a single planning period or across a single year. Typically line managers are given the latitude necessary to vary individual prices providing that they operate within the broad strategic approach. For example, some premium brands never offer discounts because the use of low prices may tarnish the brand image. Instead of discounting, premium brands are more likely to offer customer value through price-bundling or give-aways.
Pricing "Demand-based pricing", also known as dynamic pricing, is a pricing method that uses consumer demand - based on perceived value - as the central element. These include price skimming, price discrimination and yield management, price points, psychological pricing, bundle pricing, penetration pricing, price lining, value-based pricing, geo and premium pricing.
Customer lifetime value One of the first accounts of the term Customer Lifetime Value is in the 1988 book "Database Marketing", which includes detailed worked examples. Early adopters of Customer Lifetime Value models in the 1990s include Edge Consulting and BrandScience.
Customer retention Successful customer retention involves more than giving the customer what they expect. Generating loyal advocates of the brand might mean exceeding customer expectations. Creating customer loyalty puts ‘customer value rather than maximizing profits and shareholder value at the center of business strategy’. The key differentiation in a competitive environment is often the delivery of a consistently high standard of customer service. Furthermore, in the emerging world of Customer Success Retention is a major objective.
Customer value proposition In marketing, a customer value proposition (CVP) consists of the sum total of benefits which a vendor promises a customer will receive in return for the customer's associated payment (or other value-transfer).
Value-based pricing Cost-plus pricing is an approach which uses the total cost of producing the product or service and adding some amount to allow the business needs to make a profit. For example, in a retail store, a person buys something for $5, and he/she sells it for $10 to 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 purchase price, are included" (Anderson and Wynstra, 2010,31). Thus, the customer-perceived value is different 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.
Pricing strategies Pricing a product based on the value the product has for the customer and not on its costs of production or any other factor.
Service parts pricing Value based pricing is an approach that suggests pricing after the consumers' perception of value. This approach completely reverses the process of pricing in contrast to the cost based pricing approach, and is in fact gaining acceptance as a superior method of pricing. Estimating a product's economic value to the customer could be a difficult, but an essential, task for a pricing analyst or a marketer. Economic Value Estimation or EVE is a method that is used to do the same, and requires setting a reference value equal to the cost of the next best alternative to the customer and then adding a differentiation value to get the final price. The differentiation value can be calculated by taking into account what economical benefits the product or service provides over the next best alternative – for example lowering customer's labor cost, providing higher quality product, providing higher product support etc.
Customer lifetime value In marketing, customer lifetime value (CLV or often CLTV), lifetime customer value (LCV), or life-time value (LTV) is a prediction of the net profit attributed to the entire future relationship with a customer. The prediction model can have varying levels of sophistication and accuracy, ranging from a crude heuristic to the use of complex predictive analytics techniques.
Pricing "Premium pricing" (also called prestige pricing) is the strategy of consistently pricing at, or near, the high end of the possible price range to help attract status-conscious consumers. The high pricing of a premium product is used to enhance and reinforce a product's luxury image. Examples of companies which partake in premium pricing in the marketplace include Rolex and Bentley. As well as brand, product attributes such as eco-labelling and provenance (e.g. 'certified organic' and 'product of Australia') may add value for consumers and attract premium pricing. A component of such premiums may reflect the increased cost of production. People will buy a premium priced product because: