The authors' research suggests that companies that adopt a value-based pricing strategy and build the organizational capabilities to implement it earn 24 percent higher profits than their peers.
Strategic Pricing
All extraordinary evaluating systems depend on three standards - they are value- based, proactive and benefit driven.
Stage 1: Basic Segmentation Criteria
The inputs here are basically any and all research about your market that already exists. It could include industry databases, government statistics, or any other research your company has already done. The outputs in this step are a preliminary set of customer needs, and a provisional set of unmet customer needs.
Stage 2: Discriminating Value Drivers
The inputs of this step include in-depth interviews with customers about how and why they choose the products in your market. The outputs of this step include the list of value drivers in your market ranked by their ability to discriminate among customers, an explanation of why each driver adds value, and whether or not customers in each segment recognize that value.
Stage 3: Operational Constraints and Advantages
Sort out where you can convey esteem drivers more proficiently and at a lower cost than your rivals. The goal is to have a sustainable competitive advantage in order to serve your customers well.
Stage 4: Primary and Secondary Segments
Your primary segmentation should be an obvious outcome of the previous steps, and focus on your most important differentiator. Your secondary segmentation takes your primary segment and puts them into distinct subgroups according to your second most important differentiator.
Stage 5: Detailed Segment Descriptions
Portray your fragments in plain language so your salesmen and promoters know precisely what sections you will focus on.
Stage 6: Develop Segment Metrics and Fences
At last, you'll make measurements dependent on the sections you've made, and decide how to get your clients to acknowledge the prices you've set for segments.
Price Setting
Stage 1: Define the Price Range
Your price floor for a positively differentiated product is the price of the next-best competitive alternative. It is important to define the viable price range as the first step in order to segment it according to the markets.
Stage 2: Make Strategic Choices
You can either skim the market, penetrate the market or use neutral pricing.
Penetrate the market. This is the place where you set a value sufficiently low to draw in and hold an enormous base of clients.
Skim the market. This is the place where you follow just the most beneficial clients in a market. Extravagance brands follow this system.
Neutral pricing. This implies settling on a choice to not utilize value alone to acquire piece of the overall industry or to confine it. This is the choice that most organizations embrace.
Stage 3: Breakeven Sales Changes
Focus on 2 questions:
• How much sales volume can I afford to lose before a particular price increase would become unprofitable?
• How much sales volume do I have to gain in order for a particular price decrease to improve profitability?
Stage 4: Gauge Price Elasticity
Then, gauge how delicate your market is to evaluating changes. Price experiments and surveys help gather useful information to do that.
Stage 5: Psychological Factors
Consider all the psychological factors that you can think of. It might get confusing, but keep in mind we are dealing with humans that don’t always make rational decisions.
Price and Value Communication
It requires you to clearly communicate the quantifiable benefits you've figured out in the previous steps, but it also requires you to understand the psychological factors that are considered when a person makes a purchasing decision.
Here is a list of things to keep in mind as you decide how to convey value to your customers:
• Price-Quality Effect. In luxury good and exclusive product marketplaces, the price is a measure of quality.
• Expenditure Effect. Customers are more price sensitive when the expenditure is larger.
• Fairness Effect. Customers are more willing to accept market prices for one-time transactions.
• Competitive Reference Effect. If the customer has little knowledge of the category, they'll often pick an option in "the middle of the pack."
• Switching-Cost Effect. Customers are less sensitive to price if there is a high switching-cost between suppliers.
• Difficult-Comparison Effect. Customers are less sensitive to price when they have difficulty comparing alternatives.
• End-Benefit Effect. A customer's price sensitivity is influenced by how important the end-benefit is to them.
Pricing Policy
Great strategies help you to accomplish your goals without causing your clients or salespeople to adjust their conduct that subvert your capacity to meet your profit goals.
Below is a list of items you should have in a policy:
• Transitioning from a flexible to a policy based pricing.
• Strict promotional pricing policies, if you are implementing promotional pricing.
• Implementing pricing increases.
• Responding to price objections.