Value Pricing

Value Pricing

During the slow­growth 1990s, many companies have adjusted their prices to bring them into line with economic conditions and with the resulting funda­

mental shift in consumer attitudes towards quality and value. More and more, marketers have adopted value­pricing strategies ­ offering just the right combi­

valuta pricing nation of quality and good service at a fair price. In many cases, this has involved

Offering just the right die introduction of less expensive versions of established, brand name products.

combination of quality Thus Campbell introduced its Great Starts Budget frozen­food line, Holiday Inn

and good seroice at a opened several Holiday Express budget hotels. Revlon's Charles of the Ritz offered

fair price. the Express Bar collection of affordable cosmetics, and McDonald's offered 'value

menus'. In other cases, value pricing has involved redesigning existing brands in order to offer more quality for a given price or the same quality for less (see Marketing Highlight 17.2).

730 • Chapter 17 Pricing Strategies

Value Pricing: Offering

Marks & Spencer uses a

More for Less

similar 'Outstanding value' campaign across its European

Marketers have a new buzzword:

stores. It froze prices on 75

V­A­L­U­E. Once marketers pitched

per cent of its items, and

laxury, prestige, extravagance ­

reduced the price of the

even expensiveness — for every­

remainder. It then continued

thing from ice cream to cars. But

to pass on its own efficiency

after the recession began, they

gains and suppliers' price

started redesigning, repackaging,

cuts to the customer. The

repositioning and remarketing

suppliers rose to the

products to emphasise value. Now, challenge, cut their prices and value pricing ­ offering more for a

gained a significant increase

lot less, by underscoring a product's quality while

in sales volume during a recession. Marks &

at the same time featuring its price ­ has gone

Spencer's profits also rose.

from a groundswell to a tidal wave.

• Across Europe discount airlines such as

Value pricing can mean many things to mar­

EasyJet, Virgin Express and other entrants

keters. To some, it means price cutting. To others,

are taking an increased market share. The

it means special deals, such as providing more of main barrier they are now facing is access to

a product at the same price. And to still others, it

airports dominated by high­priced domestic

means a new image — one that convinces con­

carriers.

sumers they're receiving a good deal. No matter

• Most office supplies are now bought direct

how it's defined, however, value pricing has

from warehouses such as Office World, 'The

become a prime strategy for wooing consumers.

No. 1 Office Supplies Discount Superstore'

The up­market tactics have virtually disappeared. or by direct mail from 'Price Busters' such as Marketers are finding that the flat economy

Viking Direct. Software Warehouse has a

and changing consumer demographics have cre­

ated a new class of sophisticated, bargain­bun ting fir

price pledge: 'If you can find it cheaper ­

shoppers who are careful of where and how they pr

GALL US! We will beat ANY advertised

shop. Whereas it used to be fashionable to flaunt fen

price,' The low­cost, high­service approach

affluence and spend conspicuously, now it's fash­ tia

to selling pioneered by Dell is rapidly

becoming the favoured way to buy PCs.

ionable to say you got a good deal. To convince aa consumers they're getting more for their money,

va companies from fast­food chains to stock broker­

• Makers of luxury goods are losing control of

their premium prices and exclusive

ages and car makers have revamped their mar­

distribution. Chanel, Yves Saint Laurent and

keting pitches:

Christian Dior fragrances are discounted along with other goods by discounters sncli

• 'Everyday low prices' is the central

as Superdrug and grocery stores,

philosophy of 'category killers', such as Toys

Littlewoods, a big high­street chain, has

"A' Us and IKEA. These often se!l from low­

struck 25 per cent off dozens of famous

cost out­of­town 'sheds' offering a huge range

brands. Specialist discounters What

arid good value. Economies of scale and

Everyone Wants and Eau Zone are also

buying power help these traders keep costs

entering the fray, Selfridges, the exclusive

down, but they also get customers to do department store, claims that it 'would never more. Buy a bike from Toys "A' Us or

do anything as down­market as discounting', furniture from IKEA and you will have to

but even the snootiest retailers may find that assemble it yourself. IKEA also does not

they have to respond to the discounters.

deliver, so it keeps costs down by having a simple operation where customers work as

Value pricing involves more than just cutting

warehouse, distribution and assembly staff. prices. It means finding the delicate balance A dil

Price­Adjustment Strategies • 731

between quality and price that gives target con­ likely to remain a crucial strategy. Winning over sumers the value they seek. To consumers, Value'

tomorrow's increasingly shrewd consumers will is not the same as 'cheap'. Value pricing requires

require finding ever­new ways to offer them more price cutting coupled with finding ways to main­

for less.

tain or even improve the quality while still making a profit. Consumers who once enjoyed high­quality brand­name products now want the same high quality, but at much lower prices. Thus value pricing often involves redesigning products and production processes to lower costs, while preserving profit margins at lower prices.

Although the trend towards value pricing began with die recession, its roots run much deeper. The trend reflects marketers' reactions to a funda­ mental change in consumer attitudes, resulting from the ageing of the baby boomers and their increased financial pressures. Today's 'squeezed consumers' ­ saddled with debt and facing increased expenses for child rearing, home buying and pending retirement ­ will continue to demand more value long after the economy improves. Even before the economy soured, buyers were beginning to rethink the price­quality equation. Thus value pricing is

In many business­to­busincss marketing situations, the pricing challenge is to find ways to adjust the value of the company's marketing offer in order to escape price competition and to justify higher prices and margins. This is especially true for suppliers of commodity products, which are characterized by little differen­ tiation and intense price competition. In such cases, many companies adopt value­ added strategies. Rather than cutting prices to match competitors, they attach value­added services to differentiate their offers and thus support higher margins.

When General Electric expanded a no­frost refrigerator, it needed more shipping boxes fast. The Irish packaging supplier Smurfit Corporation assigned a coordinator to juggle production from three of its plants ­ and sometimes even divert products intended for other customers — to keep GE's Decatur plant humming. This kind of value­added hustling helped Smurfit win the GE appliance unit's 'Distinguished Supplier Award'. It has also sheltered Smurfit from the struggle of competing only on price. 'Today, it's not just getting the best price but getting the best value ­ and

there are a lot of pieces to value,' says a vice president for procurement at Emerson Electric Company, a major Smurfit customer that has cut its supplier count by 65 per cent, 14

Geographical Pricing

A company must also decide how to price its products to customers located in different parts of the country or the world. Should the company risk losing the

732 • Chapter 17 Pricing Strategies

business of more distant customers by charging them higher prices to cover the higher shipping costs? Or should the company charge all customers the same

geographical pricing prices regardless of location? We will look at five geographical pricing strategies for Pricing bused on "where

the following hypothetical situation:

customers are located. The Tromsp a.s. is a Norwegian paper products company selling to customers all over Europe. The cost of freight is high and affects the companies from whom customers buy their paper. Tromso wants to establish a geographical pricing policy. It is trying to determine how to price a Nkr] ,000order to three specific customers: Customer A (Oslo); Customer B (Amsterdam) and Customer C (Barcelona).

One option is for Tromso to ask each customer to pay the shipping cost from the factory to the customers location. All three customers would pay the same factory price of Nkrl ,000, with Customer A paying, say, NkrIOO for shipping; Customer B,

FOB­origin pricing NkrlSO; and Customer C, Nkr250. ("ailed FOB­origin pricing, this practice means

A geographic pricing that the goods are placed^rce on board (hence, FOB) a carrier. At that point the strategy in which goods

arc placed free on board title and responsibility pass to the customer, which pays the freight from the

a carrier; [he customer

factory to the destination.

pays the freight from Because each customer picks up its own cost, supporters of FOB pricing feel the factory to the

that this is the fairest way to assess freight charges. The disadvantage, however, is destination.

that Troms0 will be a high­cost firm to distant customers. If Tromso's main competitor happens to be in Spain, this competitor will no doubt outsell Tromse

uniform delivered in Spain. In fact, the competitor would outsell Troms0 in most of southern

pricing

Europe, whereas Troms0 would dominate the north.

A geographic pricing Uniform delivered pricing is the exact opposite of FOB pricing. Here, the strategy in ­which the

company charges the same price plus freight to all customers, regardless of their company charges the

location. The freight charge is set at the average freight cost. Suppose this is same price phtsfreight

to all customers, Nkrl50. Uniform delivered pricing therefore results in a higher charge to the Oslo regardless of their

customer (which pays NkrlSO freight instead of NkrIOO) and a lower charge to location.

the Barcelona customer (who pays NkrlSO instead of Nkr250). On the one hand, the Oslo customer would prefer to buy paper from another local paper company

zone pricing that uses FOB­origin pricing. On the other hand, Troms0 has a better chance of

A geographic pricing winning over the Spanish customer. Other advantages of uniform delivered strategy in which the

pricing are that it is fairly easy to administer and it lets the firm advertise its price company sets up tiao or

nationally.

more zones. All Zone pricing falls between FOB­origin pricing and uniform delivered pricing, customers within a zone

The company sets up two or more zones. All customers within a given zone pay a pay the same total price;

the more distant the single total price; the more distant the zone, the higher the price. For example, zone, the higher the

Troms0 might set up a Scandinavian zone and charge NkrIOO freight to all price.

customers in this zone, a northern Europe zone in which it charges NkrlSO and a southern Europe zone in which it charges Kkr250. In this way, the customers

basing­poiiit pricing within a given price zone receive no price advantage from the company. For

A geographic pricing example, customers in Oslo and Copenhagen pay the same total price to Tromsa. strategy in which the

The complaint, however, is that the Oslo customer is paying part of the seller designates some

Copenhagen customer's freight cost. In addition, even though they may he within city as a basing point

a few miles of each other, a customer just barely on the south side of the line and charges all

dividing north and south pays much more than one that is just barely on the customers the freight

north side of the line.

cost from that city to the Using basing­point pricing, the seller selects a given city as a 'basing point' customer location,

regardless of the city and charges all customers the freight cost from that city to the customer location, from which the goods

regardless of the city from which Che goods actually are shipped. For example, are actually shipped.

Troms0 might set Oslo as the basing point and charge all customers NkrIOO plus the freight from Oslo to their locations. This means that a Copenhagen customer

Price­Adjustment Strategies • 733

pays the freight cost from Oslo to Copenhagen, even though the goods may be shipped from Tromsn. Using a basing­point location other than the factory raises

the total price for customers near the factory and lowers the total price for customers i'ar from the factory.

If all sellers used the same basing­point city, delivered priees would be the same for all customers and price competition would he eliminated. Industries such as sugar, cement, steel and cars used basing­point pricing for years, but this method has become less popular today. Some companies set up multiple basing points to

create more flexibility: they quote freight charges from the basing­point city nearest to the customer.

Finally, the seller that is anxious to do business with a certain customer or geographical area might use freight­absorption pricing. Using this strategy, the

freight­absoiptii >n

seller absorbs all or part of the actual freight charges in order to get the desired pricing business. The seller might reason that it' it can get more business, its average costs

A geographic pric­ing will fall and more than compensate for its extra freight cost. Freight­absorption

strategy in which the pricing is used for market penetration and to hold on to increasingly competitive

company absorbs all or markets.

part of the actual freight charges in order to get

the business.