Chapter #6: Value Based Pricing Strategies

Question 1

Apple launched a number of different products at different price points. Why?

Answer 1

To cover all price bases of the market.

Lunch iPod with high price and capture high end of the market.

Later added Touch, then Nano and Shuffle.

Question 2

What are types of value based pricing strategies?

Answer 2

Cost based pricing
Market based pricing
Value pricing (value in use, life cycle, perceived value, performance based pricing, customisation pricing)

Question 3

What is cost based pricing?

Answer 3

Starts with cost and desired margin and is marked up along the channel

Question 4

What is market based pricing?

Answer 4

Price is set based on competitive advantage and value and discounts and costs are deducted to arrive at a company margin

Question 5

What is “value in use” pricing?

Answer 5

Price set to provide customers with attractive savings after considering the life cycle costs

(life cycle costs - owning, maintaining, disposing, using of product)

Question 6

What is “life cycle value” pricing?

Answer 6

Price is set with respect to the total cost of ownership over the life cycle (on the basis of net present value of difference between company and competitor’s life cycle ownership costs)

Question 7

What is “perceived value” pricing?

Answer 7

Price is set on value that customers realise when they compare the price and benefits of a product vs. a competitor product

Question 8

What is “performance based” pricing?

Answer 8

Price set based on customer preferences for different price/performance levels

Takes positioning into account.

Question 9

What is “customerisation value” pricing?

Answer 9

Price set by unbundling product features and performance levels and placing a value on each

Customers select the features and performance they want and are willing to pay

Question 10

What are the characteristics of a Quality Conscious Customer?

Answer 10

Place the most value on the quality of the product over the price

Question 11

What are the characteristics of a Price Conscious Customer?

Answer 11

Is very price sensitive and places less value on performance

Question 12

What is top down price presentation?

Answer 12

Price presentation (highest to lowest) results in higher priced purchases

Starts with the highest priced product

Question 13

What is bottom up price presentation?

Answer 13

Price presentation results in lower price purchases

Starts with basic product and tries to upsell

Question 14

What does PLC stand for?

Answer 14

Product Life Cycle

Question 15

What is Product Life Cycle (PLC) Pricing?

Answer 15

Product pricing changes due to time and market demand.

Early market, growth, late growth, maturity and decline.

Question 16

What is skim pricing?

Answer 16

Charge at a higher price and lowers it over time

Employ it in the early growth phase of PLC

Question 17

What is single segment pricing?

Answer 17

Just looking at one segment - value based pricing.

Employ in early growth phase.

Question 18

What is a penetration pricing strategy?

Answer 18

A lower pricing strategy deployed during the product life cycle

Makes more accessible to a wider market

May not even make profit on it - goal is to gain market share

Question 19

What is a “low cost leader” pricing strategy?

Answer 19

1 for selling the lowest cost in the market

Question 20

What is a “multi segment” pricing strategy?

Answer 20

Price based on characteristics of segments in the market. May be different prices for different segments.

Most likely to be used during the growth stage since it’s more profitable

Question 21

What is a “plus one” pricing strategy?

Answer 21

Two for one.

Value based strategy employed in late growth/maturity stages of the product life cycle

Not necessarily making the profit margin but pushing out product (makes sense before the release of a new product)

Question 22

What is a “Reduce Focus Pricing” strategy?

Answer 22

Maturity stage of product life cycle.

Reduce 300g to 250g to make more per cost of product sold.

Reducing volumes and market share in exchange for higher margins.

Question 23

What is a “Harvest” pricing strategy?

Answer 23

Late maturity/decline stages of the product life cycle.

Raise prices to reduce volume but have higher margins.

Question 24

Why do we need to perform a break even analysis?

Answer 24

To see the number of units that need to be sold to produce an operating income equal to zero.

Operating income = Volume x Margin Per Unit - Fixed Expenses

Volume = Operating Income + Fixed Expenses / Margin per unit

Break Even Volume = Fixed Expenses / Margin Per Unit