Session 2 - Value Based Pricing

Question 1

Exchange Value Model

Answer 1

assessing a product´s value to customers

Question 2

1. Utility Value

Answer 2

Consumer utility = utility gain (economist)
Value = total saving, monetary gains, satisfaction
Upper Boundary (can be infinite)
Consumer Surplus = difference between price &value

Question 3

2. Reservation Price

Answer 3

price over which nobody would buy the P/S
level at which demand =0
bottom line - ask an expert

Question 4

3. Exchange value

Answer 4

= comparable alternative (reference price) + differential value
price at which average customers are even
(precio maximo medio que pagarian los consumidores)
always = reference (bottom line) + any additional quality features of new P&S (+/-)
MIDDLE BOUNDARIES

Question 5

3. Reference Price

Answer 5

price of C. best alternative
Factors: 
- C. develop a reference
- fairness
- price last paid of similar item
- competitor
- substitute
worst case = variable cost unitary

Question 6

3. Referential Value

Answer 6

setting the price as high as possible (no direct competitor) - but from buyer´s point of view they will always take a reference

Question 7

3. Differential Value

Answer 7

+ (adds benefits)
- (cost saving, inferior good (looses in value))
value depend on situation

Question 8

4. Lower Boundaries

Marginal Cost

Answer 8

If price is set lower that VCu –> close business (return is not enough to ver activities)

Question 9

Inferior Goods

Answer 9

inferior alternative ( e.g. lower cost but also lower quality)
price must lie between VCu (not reference price) and exchange value (lower than reference price - since features you are offering are lower than reference - competitors)

Question 10

B2B - Direct Estimation

Answer 10

ask directly about exchange value can be very subtly

ask expert about max- wtp makes possible to have a rough estimation about exchange value

Question 11

Costs - overview

Answer 11

fixed cost -doesn´t change with Volume
VCU = Q* unit of variable cost
Average VCu/fixed cost = (TV/TF)/ total units
Average Marginal cost = change it Total cost/ change in volume

Question 12

Price = marginal cost

Answer 12

NO Break Even

because you have not cover fixed cost (you are break even, when ALL (Total) Costs is cover by the price)

Question 13

Price < Marginal Cost

Answer 13

we consider MC as VCu (and thus run out of business ) because this means you price won´t cover the firms operations

Question 14

Optimal Price
Cost Calculations
Service

Answer 14

more realistic to use Total Cost instead of VCu as bottom line (VCu is rather irrelevant)

Question 15

Optimal Price
Cost Calculation
Start-Up

Answer 15

only using VCu - would only max. profit in the ST
(one normally uses Total cost as Variable in the LT - since it makes more sense to look for an optimal price which hold in the LT not ST only)

Question 16

Optimal Price
Cost Calculation
Total cost instead of VCu

Answer 16

use total cost unitary (taking V+FC) at break-even point, since to calculate TC you need to fixed a variable cost (which will lead to a iterative process)

Question 17

Break Even Point

in units

Answer 17

Fixed Cost/ (Price-Variable cost = contribution margin)

Question 18

Marginal Cost

Answer 18

= cost of producing an additional units (so in theory it relates to a variable (not total cost))
However, in the LT you can take the Total cost within the marginal cost calculation calculation as everything is variable)