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Value Pricing | Individual assignment

Assignments

THE VALUE PRICING FRAMEWORK IN ACTION

In this assignment, you are asked to use the value pricing framework to price a product you’re familiar with. It is best to choose a product from your current or former employer, or a product that you’ve already researched before (e.g. for a previous assignment like CLV or new product), as long as the product you choose is complex enough so that all the questions below can be answered.

This is an individual assignment because I’d like this to serve as a sort of training in the value pricing framework, should you need to go through a pricing exercise at your workplace in the future. However, feel free to discuss it with your group members or other classmates if you’d like.

 Instructions

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? Before you begin, I strongly recommend that you discuss your product/service with me. You can email me or you can attend this week’s Zoom conference to ask me about your product/service idea.

The following are questions that will help you understand and evaluate the aspects of the value pricing framework. After going over everything, you should be able to create a chart similar to the one about the mussels dish.

Some products are very difficult to price, while others are more straightforward. You can use this assignment on a service as well. You will need to make a lot of assumptions, and they will be acceptable as long as you explain them.

A. Costs

1. What costs are relevant to pricing? To answer this question you will need to list those costs and then estimate them. For example, if your product is enterprise software, then the direct costs may include a dedicated R&D group, if the software runs on external servers then that’s a direct cost as well, further some part of the sales force and the marketing group may also be direct costs. Remember the Uber driving example and ignore the costs you spend anyway.

2. What is the price floor for your product? That would be the price that anything below it would not cover your costs.

B. Customer value

1. Which features are most important to your customers? If you have segments that care about different things, please list them separately.

2. Try to place an economic value on the benefits that you mentioned in #1. Make as many assumptions as you need. 3. How much will using the product save customers (vs. not using it)? This is a hard estimation so to do that try to list the things that can be

saved and if you can, place an economic value on them. Remember the Atlantic computers example from the lecture. 4. Complementary to #2 is the question: how much will using the product increase revenues for your customers? This is only relevant for

b2b products that can increase efficiencies etc. 5. If possible and relevant, build a chart similar to the one about the LED bulb from the lecture. This is not relevant to all products and can

be part of customer value or of reference prices below.

C. Reference prices

1. What do your potential customers use now? (i.e. do they solve their problem with a competing product, or maybe they are unable to solve their problem, or maybe they solve part of it?)

2. Who are your closest competitors, are their offerings comparable, and what are their prices? 3. Have you supplied your customers with some reference prices? These can be list prices (like the MSRP in cars), or through the good-

better-best approach (listing different “levels” of the product and attaching different prices), or anything else (like through advertising). 4. Using 1-3 above, construct the range of reasonable prices for quality levels. Going back to the enterprise software example, one way to

price is by features (think about feature-gating, whereas price increases, the number of features increases). Another example is the LED bulb from the lecture.

D. Value proposition

1. What is the value proposition of the product you’re using for this assignment? If your organization does not have a clear value proposition, then try to infer it from how the organization is managed, and if you know then also use whatever positioning your organization/product occupies in consumers’ minds. For example, do you remember the video about pricing pizza with shrimp? The pizzeria can be positioned as an everyday place, and the shrimp pizza can be the flagship dish.

2. What is the role of pricing in your value proposition? It can be important or irrelevant. Think about companies like Wal-Mart, whose value proposition is around their low prices, vs. other companies such as BMW whose tag line is “The ultimate driving machine” and thus its value proposition revolves around quality.

3. How does the product’s value proposition guide pricing decisions? Remember the mussels dish example where the value proposition guides the weights we put on costs, reference prices, and customer value.

E. Price ladder

Based on your answers to A-D build a pricing “ladder” (to remind you, we did that in the mussels dish example).

F. Price execution

So far your pricing exercise was theoretical in the sense that we build the price we would like consumers to pay. However, this may not be the reality. Let’s estimate what really happens by answering the following questions:

1. Do customers usually get incentives? These can be in any form that ultimately reduces the price. If yes, then please explain which incentives and quantify them (e.g. 20% discount).

2. Who is able to give those incentives to customers? Are these centralized, at the hand of the sales team, at the hand of the wholesaler or retailer?

3. What price do consumers ultimately pay? To answer this question you do not need to give the actual price (unless you know it), but you need to describe the method by which the product is priced (e.g., two-part (when you buy a starter product and need replacements–like with printers and ink, razors, etc.), bundle several things together (as the Atlantic Computers company did in the Harvard case we covered earlier this module: pricing the servers and software), license (like the university pays Zoom), good-better-best (the more customers pay the better the product is. Think about flights: you can fly economy, premium economy, business, first)

G. Recommendation and reactions

After you’ve done the above analysis, you should recommend how to price the product, and then briefly assess customers’ and competitors’ reactions to your recommended price (how would the price you suggested affect the demand and customer satisfaction, would competitors change their price/product?).

Deliverable

Your writeup should include the following aspects:

A description of the company/product/service you’re going to write about Answers to all the questions above, including assumptions you need to make A chart of the pricing “ladder” for your product (like the one for mussels in the lecture) References (number your sources and either use footnotes or endnotes)

Please submit a PDF file with 3-4 pages, not including the cover page and exhibits (you can add as many as you wish). Font type and size should be regular (Times New Roman, Calibri, Arial, etc.). 1.5 line space.

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