Chapter 2: Value

1. Chapter 2:Value

2. Learning outcomes After this study unit, you should be able to: • Briefly explain the concept of value in a consumer and organisational context. • Discuss the difference between cost-based and value-based methods of determining price. • Explain the three different buying criteria used to purchase. • Compare the 4 views of what value is and what is means. • Discuss the components of the customer delivered value model. • Briefly explain the three factors affecting the evaluation of price. • Discuss the three techniques used by consumers to build their perceptions of price.

3. Introduction • Value is an important concept because consumers are willing to pay for what they value. • Different consumers will have different views bout what is of value to them when referring to the exact same product or brand. • Pricing is the only variable in the marketing mix that actually captures the value back for the organisation.

4. Value in consumer and organisational markets • A consumer in a consumer segment purchases products to satisfy personal needs and wants. • A marketer must be aware of the individuals customer’s dynamics and be able to respond to those. • A business must set prices to be able to sell its product but also make targeted budgets.

5. The difference between value-based and cost-based methods in determining price • Two areas that are considered in terms of setting prices are costs and value. • The cost based approach • Uses the costs of a product or service as a main determinant. • This is an incremental approach where specific costs are identified, quantified and added up. • Profit is added to the total. • Advantages • All costs are covered by the price, as well as a specific level of profit. • Disadvantages • It is hard to allocate costs in multi-product companies. • Ignores the customers willingness to pay.

6. The difference between value-based and cost-based methods in determining price cont… • The value approach • Looks at the customer that has been targeted and the value that they place on the product. • Reflected by how much consumers are willing to pay. • Selling price is determined relative to the position the product will occupy in the market and how much the customer is willing to pay. • This is more difficult because it leaves the comfort of the business and costs to sit in front of a customer to determine what their needs are and what they actually value.

7. The different views of value • Individual customers may have different views as to what they consider a fair price based on their perceptions as to what value is. • Value-conscious consumer worry about the relationship of price to quality. • Price-conscious consumers strive to pay low prices. • Prestige-sensitive consumers look for prominence and status because that is what they call value.

8. The different views of value cont…. • Different views as to what value is • Value = low price • Customers see value if the pay relatively low price. • Value = getting what I want • Buyer sees value in terms of the performance of a product or brand relative to she specific needs or requirements that they have an use to evaluate the potential products. • Value = the quality relative to the price • The buyer is looking for the best expected value, best total value relative to total cost. • Value = what I get for what I give • Customer looks at the benefits relative to the attributes that they are looking for, compared to the total price paid

9. How costs and value are compared • Customer delivered value

10. How costs and value are compared cont… • Components of total customer value • Image value • Is related to the brand name and the prestige benefits associated with the brand. • Consumers are willing to pay for brands that they believe in and those that have established a strong brand image. • People value • Consumers are willing to pay for expertise, and also for the attitude and approach of the persons selling and delivering value. • Process value • Consumers often pay for the way a product or service is delivered by an organisation. • Product value • Value in the product itself or in the attributes of the product

11. How costs and value are compared cont... • Components of total customer costs • Monetary costs • The actual monetary price of the product or item. • Time costs • When waiting time is factored into the overall view of what a customer pays for. • Energy costs • The effort required to be put in by the buyer to actually purchase and get delivery of the product or service. • Psychic costs • The stress and worry about whether the provider will actually perform or if the product purchased was the correct product.

12. How costs and value are compared cont… • Implications of the model are evident • Marketers must constantly look at ways to add value to the consumer, but more importantly that the consumer be aware and perceive that value. • Marketers should constantly work at reducing, amortising, or elimination costs as an ongoing process. • The consumer will compare offers with competitors, so the marketer must be able to win the comparison to encourage the consumer to purchase from them. • Factors affecting the evaluation of price • Type of product • Type of target market • Specific purchase situation

13. How do consumers arrive at their perceptions of price • Three techniques to develop perceptions around price • Reference price • What a buyer considers a reasonable and fair price for product. • These are prices stored in the consumers memory as to the market price or the regular price. • Internal reference prices are price expectations developed in the consumer’s mind through experience with the brand, through actual purchase or awareness of current price levels. • External reference price is a comparison price level provided by others. • Price-quality inferences • Price is often seen as an indicator of quality, especially when there is not much information available to help determine the level of quality. • Pricing cues • These are as results of the organisations pricing strategy and help shape perceptions

14. How do consumers arrive at their perceptions of price cont… • Pricing cues • These are as results of the organisations pricing strategy and help shape perceptions • Recommended when items price knowledge of consumers is weak, infrequently purchased products, new customers not knowing any reference price, seasonal price variations, product design variations and quality or size variations

15. Summary • In the chapter, value that consumers held for products and services were discussed. • An organisation can use either value-based or cost-based pricing as the main determinant for setting prices. • Different consumers have different views of what value is. • Expected customer value compares the perceived total customer value and perceived total customer costs. • There are three techniques to develop consumers perceptions around price.