Value-Based Pricing by Macdivitt Harry & Wilkinson Mike

Author:Macdivitt, Harry & Wilkinson, Mike [Wilkinson, Mike]
Language: eng
Format: epub, pdf
Publisher: McGraw-Hill
Published: 2011-09-18T14:00:00+00:00

Figure 7.3 Ford car product line.

In product-line pricing, manufacturers recognize that their markets consist of many segments and that each segment has broad expectations from the product it purchases. If designed cleverly, each model in the range can meet the needs of more than one subsegment, thus broadening the appeal and also creating higher demand to achieve scale economies. For example, the Mondeo, with 37 variants in early 2011, can meet the needs of a number of different corporate users (i.e., middle managers, sales representatives, service engineer, taxis, etc.), as well as several consumer segments (e.g., older or larger family user, older driver who likes a bit of comfort, and so on). The trick is to design the model in such a way that the customer is willing to pay for the attributes she wants and is prepared to accept some functionality that she doesn’t really need (i.e., paying a premium for her preferred functionality). A large number of variants makes it possible for the customer to self-select her precise choice horizontally within the specific model with relative ease. Several models, at least in the case of Ford prices, are positioned very closely to one another at each “node” to make the choice as easy as possible.

The pricing challenge is to establish a price level for each model that enables the customer to recognize real value to herself through the performance, specification, and styling of the vehicle while still being profitable for the manufacturer to produce.

Critical decisions that need to be made by the producer include

• Establishing the low-end product in the line and the prices, specifications, and variants to offer.

• Establishing the high-end product in the line and the prices, specifications, and variants to offer.

• Fitting in the other models in the range such that each maps efficiently to its target market while optimizing upgrade choices and variant selection.

Deciding on price differentials is tricky partly because collecting the data required is nontrivial. Assessing the interdependencies of costs and demand and the complementarities is important and necessitates psychological, accounting, and economic analyses.

The following are principles for setting price differentials within a product line:

• Each product must be priced correctly in relation to all other products in the line; any differences should be equivalent to perceived-value differences. The cost of providing these differences should be less than the marginal revenue gained from their sale. This gives the supplier some additional economic gain.

• The highest and lowest prices in the line provide reference points to other models. High and low ends should be priced so as to encourage the perceptions we want. Interestingly, the branded Ford range described earlier fits almost precisely into the £10,000 to £30,000 (about $16,500 to $50,000) corridor with only one model breaking through the top end.

An important question relates to how many models should be included in the range. This question can only be answered on the basis of segmentation analysis and comparisons with competition. At each level in the line, segments targeted should offer broadly similar characteristics, especially in terms of price elasticity of demand.

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