Perceived Value Pricing

An increasing number of companies now base their price on the customer’s perceived value. They must deliver the value promised by their proposition, and the customer must perceive this value. They use the other marketing-mix elements such as advertising and sales force, to communicate and enhance perceived value in buyers’ minds.

Perceived value is made up of several elements, such as the buyer’s image of the product performance, the channel deliverables, the warranty quality, customer support, and softer attributes such as the supplier’s reputation, trustworthiness, and esteem. Furthermore, each potential customer place different weights on these different elements, with the result that some will be price buyers, others will be value buyers, and still others will by loyal buyers. Companies need different strategies for these three groups. For price buyers, companies need to offer stripped-down product and reduced services. For value buyers, companies must keep innovating new value and aggressively reaffirming their value. For loyal buyers, companies must invest in relationship building and customer intimacy.

Caterpillar uses perceived value to set prices on its construction equipment. It might price its tractor at $100,000, although a similar competitor’s tractor might be priced at $90,000. When prospective customer asks a caterpillar dealer why he should pay $10,000 more for the Caterpillar tractor the dealer answer:

$90,000 is the tractor’s price if it is only equivalent to the competitor’s tractor
$7,000 is the price premium for Caterpillar’s superior durability
$6,000 is the price for caterpillar’s superior reliability
$5,000 is the price premium for caterpillar’s superior service.
$2,000 is the price premium for Caterpillar’s longer warranty on parts.
$110,000 is the normal price to cover caterpillar’s superior value
— $10,000 discount

$100,000 Final Price

The caterpillar dealer is able to indicate why caterpillar’s tractor delivers more value than the competitor’s. Although the customer is asked to pay a $10,000 premium, he is actually getting $20,000 extra value. He chooses the caterpillar tractor because he is convinced that its lifetime operating cots will be lower.

Yet even when a company claims that its offering delivers more total value, not all customers will respond positively. There is always a segment of buyers who care only about the price. There are other buyers who suspect that the company is exaggerating its product quality and services. One company installed its software system in one or two plants operated by a company. The substantial and well-documented cost savings convinced the customer to buy the software for its other plants.

The key to perceived value pricing is to deliver more value than the competitor and to demonstrate this to prospective buyers. Basically, a company needs to understand the customer’s decision-making process. The company can try to determine the value of its offering in several ways: managerial judgment is within the company, value of similar products, focus groups, surveys, experimentation, analysis of historical data, and conjoint analysis.

For example, DuPont educated its customers about the true value of its higher-grade polyethylene resin called Alathon. Instead of claiming only that pipes made from it were 5 percent more durable, DuPont produced a detailed analysis of the comparative costs of installing and maintaining in-ground irrigation pipe. The real savings came from the diminished need to pay the labor and crop-damage costs associated with digging up and replacing the underground pipe. DuPont was able to charge 7 percent more and still see its sales double the following year.

Value pricing: In recent years, several companies have adopted value pricing. They win loyal customers by charging a fairly low price for a high-quality offering. Among the best practitioners of value pricing are IKEA and Southwest Airlines.

In the early 1990s, Procter& Gamble created quite a stir when it reduced prices on supermarket staples such as Pampers and Luvs diapers, liquid Tide detergent, and Folger’s coffee to value price them. In the past, a brand-loyal family had to pay what amounted to a $725 premium for a year’s wroth of P&G products versus private label low priced brands. To offer value prices, P&G underwent a major overhaul. It redesigned the way it developed, manufactured, distributed, price marketed, and sold products to deliver better value at every point in the supply chain.

Value pricing is not matter of simply setting lower prices but it is a matter of reengineering the company’s operations to become a low-cost producer without sacrificing quality, and lowering prices significantly to attract a large number of value-conscious customers.