Service Operation Management A Case Study on: Customer Value-Based Pricing Strategies: Why Companies Resist Prepared by : Norsyahida Mohd Maamon 2012183749 Prepared for : Dr Abd Kadir Bin Othman
Background of the Study
The author, Andreas Hinterhuber identified THREE pricing strategies practices by companies which are : Cost-based pricing
Approaches determine prices primarily with data from cost accounting. Mohan et al identified described it as use of cost of production as the basis to determine the price of a product. Competition-based pricing Approaches use anticipated or observed price levels of competitors as primary source for setting prices. Companies will examine competition’s price before set up the price for their own product.
Customer value-based pricing
Approaches use the value a product or service delivers to a predefined segment of customers as the main factor for setting prices. Companies determine the prices of the product based on the value of the product has been created for the customer.
Problem Identification
Author has identified that customer value-based pricing as superior to all other pricing strategies and it will help companies gain high profitability BUT Most of the researchers reveals the number of companies that implement value-based pricing strategy remain in a small number of practices The purpose of this study to identify the obstacle or difficulties that prevent companies from practices valuebased pricing strategy
Problems Analysis and Discussion
From this study, author had identified five main obstacles faced by companies in implementing customer value-based approach
Difficulties in making value assessments Difficulties with communicating value Difficulties with market segmentation Difficulties with sales force management Difficulties with senior management support
Problem Analysis and discussion
Difficulties in making value assessments
Difficulties with communicating value
Companies faced the problem which is they do not know what are the value of its products or services to customers – they do not know what to charge customers for value. Companies sometime fail to communicate the value of its products or services to customers
Difficulties with market segmentation
Needs-based market segmentation enables marketing and pricing strategies to cater to a variety of market segments rather than being restricted to the segment that is presumed to care only about price
Difficulties with sales force management
Value leakage often occurs at the level of sales teams as they attempt to realize annual volume targets and qualify for annual bonuses by extending discounts to customers.
Difficulties with senior management support
Senior management claiming to want price premiums and profitability, but then punishing people for not meeting their volume quota.
Solution and discussion
Difficulties in making value assessments
Methodologies for measuring value to customers
Expert interviews Focus group assessment of value Conjoint (trade- off) analysis Assessment of value-in-use Importance ratings
Difficulties with communicating value
Improve communication by
Communicating product features Communicating customer benefits Communicating benefits in accordance with customer needs
Difficulties with market segmentation
Determine the market segmentation based on
A price-driven segment of customers A mainstream segment A technically sophisticated segment
Level of authority for sales discounts Sales force remuneration systems Fixed and variable remuneration systems Sales force training and development Sales force monitoring
Difficulties with senior management support
Support from senior management can be obtained through
Lobbying Networking Bargaining
Conclusion
Even customer value-based pricing strategy pricing strategy may lead to relatively high prices and it take-long term profitability into account but overall it is considered as best approach Companies will be able to implement and practice value-based pricing strategies if they are able to overcome all the difficulties using appropriate guidelines presented by author.