Getting Price Right by Gerald Smith

Author:Gerald Smith
Language: eng
Format: epub
Tags: BUS016000, Business & Economics/Consumer Behavior, BUS069030, Business & Economics/Economics/Theory
Publisher: Columbia University Press
Published: 2021-10-12T00:00:00+00:00

Figure 6.8

Essential constructs of customer value and price.

The second construct, value in exchange, is operative with the presence of competitive alternatives. It is the value a customer gets from using a product or service, as Mill said, in comparison to those “commodities with which we compare it.”10 In other words, value in exchange isolates what we earlier called comparative reference value, the value that “originate[s] in the very commodity [class] under consideration”11—all competitive diamonds in the jewelry store have this commodity value. It then considers separately differential value, reflecting “all causes [or value drivers] … which originate in [the brand] itself, affect[ing] its value in relation to all [comparative reference] commodities”12—for example, the exceptional clarity, cut, color, and quality of your superior diamond (see figure 6.8, middle).

These customer value distinctions are important. As I noted in chapter 2, pharmaceutical companies routinely target new disease categories, called “indications,” for early governmental approval to establish new frames of reference in the minds of customers with little or no competition while the drug is under patent protection. Why? Because their price is set relative to total customer value in use, as there are no competitive referents. Even Amgen’s Repatha, cited earlier, was first to market with a new PCSK9 inhibitor drug, and with no PCSK9 competitors to compete against, Amgen could set its price at $14,100, relative to the significant value in use that Repatha offered to patients.13 Three years later, with the introduction of a major competitor, Praluent by Regeneron and Sanofi, Amgen had to reduce Repatha’s price by 60 percent to $5,850. Now value in exchange became operative: compared with the competitor, Amgen had to separate out commoditized reference value (what both drugs offered to patients) from its differential value (what Repatha uniquely offered to patients relative to Praluent).

John Stuart Mill made one more important clarification: customer value must “be distinguished from Price.”14 That is, the value you deliver (what customers get) must be estimated and managed separately from the price you set (what customers pay, or give; see figure 6.8, right). This is another reason that in this book, we study separately customer value-driven pricing orientations (which focus on the “get” with customer value) and customer willingness-to-pay–driven pricing orientations (which focus on the “give” with price.

Functionally, then, value illiteracy bias arises when price-setters are unable to do the basic tasks of customer value estimation, or when they confuse value with price. Without these basic value skills, managers fall back on old but mistaken heuristics—price-setting shortcuts such as discounting price because it seemingly is a better value for customers. Consider the financial cost of value illiteracy: unwittingly underpricing customers and leaving money on the table, or naively overpricing customers, who then take their business elsewhere. The impact of value illiteracy is especially visible among the sales force, whose customers regularly push back on price. Andreas Hinterhuber empirically studied value quantification skills among sales managers, writing in summary:

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