Page 423 - Marketing Management

400 PART 5 SHAPING THE MARKET OFFERINGS

TABLE 14.4 A Framework of Questions for Practicing Value-Based
Pricing

1. What is the market strategy for the segment? (What does the supplier want to accomplish? What
would the supplier like to have happen?)
2. What is the differential value that is transparent to target customers? (Transparent means that tar-
get customers easily understand how the supplier calculates the differential value between its
offering and the next best alternative, and that the differential value can be verified with the cus-
tomer’s own data.)
3. What is the price of the next best alternative offering?
4. What is the cost of the supplier’s market offering?
5. What pricing tactics will be used initially or eventually? (“Pricing tactics” are changes from a price
that a supplier has set for its marketing offering—such as discounts—that motivate customers to
take actions that benefit the supplier.)
6. What is the customer’s expectation of a “fair” price?
Source: James C. Anderson, Marc Wouters, and Wouter Van Rossum, “Why the Highest Price Isn’t the Best Price,” MIT Sloan Management Review
(Winter 2010), pp. 69–76. © 2006 by Massachusetts Institute of Technology. All rights reserved. Distributed by Tribune Media Services.

matter of simply setting lower prices; it is a matter of reengineering the company’s operations to
become a low-cost producer without sacrificing quality, to attract a large number of value-
conscious customers.
Among the best practitioners of value pricing are IKEA, Target, and Southwest Airlines. In the
early 1990s, Procter & Gamble created quite a stir when it reduced prices on supermarket staples
such as Pampers and Luvs diapers, liquid Tide detergent, and Folgers coffee to value price them. To
do so, P&G redesigned the way it developed, manufactured, distributed, priced, marketed, and sold
products to deliver better value at every point in the supply chain. 57 Its acquisition of Gillette in
2005 for $57 billion (a record five times its sales) brought another brand into its fold that has also
traditionally adopted a value pricing strategy.

Gillette In 2006, Gillette launched the “best shave on the planet” with the six-bladed
Gillette Fusion—five blades in the front for regular shaving and one in the back for trimming—in both
power and nonpower versions. Gillette conducts exhaustive consumer research in designing its
new products and markets aggressively to spread the word.The company spent over $1.2 billion
on research and development after the Fusion’s predecessor, the Mach3, was introduced.About
9,000 men tested potential new products and preferred the new Fusion over the Mach3 by a two-to-one
margin. To back the introduction, Procter & Gamble spent $200 million in the United States and over $1 bil-
lion worldwide.The payoff? Gillette enjoys enormous market leadership in the razor and blade categories,with
70 percent of the global market, and sizable price premiums. Refills for the Fusion Power cost $14 for a four-
pack, compared to $5.29 for a five-pack of Sensor Excel.All this adds up to significant, sustained profitability
for corporate owner P&G. 58

Value pricing can change the manner by which a company sets prices too. One company that
sold and maintained switch boxes in a variety of sizes for telephone lines found that the probabil-
ity of failure—and thus maintenance costs—was proportional to the number of switches cus-
tomers had in their boxes rather than to the dollar value of the installed boxes. The number of
switches could vary in a box, though. Therefore, rather than charging customers based on the to-
tal spent on their installation, the company began charging based on the total number of switches
needing servicing. 59
An important type of value pricing is everyday low pricing (EDLP). A retailer that holds to an
EDLP pricing policy charges a constant low price with little or no price promotions and special
sales. Constant prices eliminate week-to-week price uncertainty and the “high-low” pricing of