Sustainable Marketing - Part 4: Price vs. Value

This is the fourth part of a series on Sustainable Marketing. In this installment we continue the comparison of Traditional Marketing (Price) versus Sustainable Marketing (Value). Click here to link to the beginning (Part 1) of the series.

It is difficult to have an intelligent conversation about price and value without quoting Oscar Wilde. A cynic, he wrote, “knows the price of everything and the value of nothing.” In our context, value is often understood by those who make and use products. Price is better understood by those who are involved a transaction: sales, finance, contracts, purchasing, and too often, marketing.

Price is what a customer pays. Value is what they perceive or receive in return. Value-based pricing defines selling prices based on the perceived value to the customer, rather than on traditional measures like cost, competitive pricing, or the historical price.

A key insight in this approach is that pricing may be customized for each customer segment based on the value delivered. Many metrics determine value, such as time, features, discount level, and many other firmographic and demographic factors.

Like most sustainable aspects of marketing, value-based pricing requires a significant level of analysis and customer understanding. It is imperative to know how customers measure value, through evaluation of customer interactions, feedback in surveys, focus groups, and other marketing instruments.

The van Westendorp Price Sensitivity Meter (PSM) is a well-known segmentation process for understanding customer price preferences. The basic assumption is that all customers are capable of envisioning broad pricing schemes and can define their preferences based on a quantifiable measure of value to them. Customers or prospects are asked four price-related questions:

• At what price would you consider the product to be so inexpensive that you would have doubts about its quality? (too inexpensive)
• At what price would you still feel the product was inexpensive yet have no doubts as to its quality? (inexpensive)
• At what price would you begin to feel this product is expensive but still worth buying? (expensive)
• At what price would you feel that the product is so expensive that regardless of its quality it is not worth buying? (too expensive)

Graphing the resulting values from each question helps the marketer identify the range of acceptable prices. In most such exercises, the optimal price band falls between the point of marginal cheapness (the intersection of inexpensive and too inexpensive) and the point of marginal expensiveness (the intersection of expensive and too expensive).

An allied approach, Conjoint Analysis, requires participants to make a set of predefined trade-offs in features, packaging, and price. Attendees are typically asked to rank a series of options or choose their preferences from a list of alternatives. Initial segmentation is important; participants must be grouped according to their identified demographics, objectives, and anticipated values. Analyzing these judgments can reveal the relative importance of the underlying components of value. Other approaches like Gabor Granger and Brand Price Trade Off offer useful additions to these basic themes.

Research in value-optimized pricing supports the assumption that this approach leads to increased revenue and margins. Assuming that costs are fixed, customers who perceive greater value will pay more for the same product and be more profitable. Customers who perceive less value may be targets for increased marketing spend to change their perception. At the other end, customers who perceive the lowest value may not be appropriate targets for the next marketing initiative. They may be incented to move to lower cost sales and support channels like the Internet.

Click here to continue to Part 5 of the Sustainable Marketing Series.