The performance of competing products can be measured in a variety of ways. One source of product performance ratings is provided by Consumer Reports. CR rates products on a 5-point scale that ranges from poor to excellent for different aspects of performance. We converted the overall performance scores to a zero to 100 scale. A score of 50 would be average. Scores above 50 would be above average on overall performance.
Figure 1 illustrates the product performance ratings for ten digital cameras along with their retail selling price. The ten digital cameras displayed in this table ranged 50 to 90, with an average of 72. Selling prices ranged from $130 to $300 with an average price of $206.
WHAT IS A FAIR PRICE?
When these ten digital cameras are graphed based on performance and price we can see some obvious variance in the relationship, as shown in Figure 2. For example, the four digital cameras rated as 70 in performance vary in price from $130 to $230. The “Fair Price Line” in Figure 2 is a least-squares regression estimate of the relationship between price and performance. All Fair Price Lines run through the average of price and performance (shown in red). The Fair Price line represents what one would expect to pay for a digital camera based on performance. For example, the Canon A590 is priced at $180 with a performance rating of 80. The fair price based on the fair price line would be $223 for this level of performance.
WHAT IS CUSTOMER VALUE?
Customer value is the difference between a product’s fair price based on performance and its selling price. For example, the Canon A590 has a positive customer value of $43 as shown below:
The five digital cameras above the fair price line all have negative customer values as their selling prices exceed their fair price based on performance. The five digital cameras below the fair price line have a positive customer value that ranges $21 for the Pentax M50 to $71 for the Fuji. The fair price, selling price, and customer value is shown in Figure 3 for all ten digital cameras.
CUSTOMER VALUE AND PRICING
Digital cameras with a negative customer value are overpriced for their level of product performance.
Manufacturers have three options in an effort to improve customer value and offer a more competitive product:
- Lower price while maintaining the current level of product performance
- Improve product performance while maintaining the current selling price
- Lower price and improve product performance to achieve a desired level of customer value
Products on or near the fair value line are priced at or close to their fair price add little or no customer value. The three pricing strategies above apply to these manufacturers as well.
What about a product that offers too much customer value? While positive customer value is attractive for customers, it is not beneficial to shareholders. The margins for these products could be higher while still offering an attractive customer value. For example, the Fuji J10 has a performance rating of 70 and is selling at a price of $130. However, the fair price for the J10 is $201, providing positive customer value of $71. At a selling price of $149 the Fuji J10 would still provide a positive customer value of $52 as shown below:
This is still a very attractive customer value and the value provided is still higher than any of the other competing digital cameras. At a selling price of $149, the company is able to add $19 of profit margin to each digital camera sold. In this example, we would argue that the company underpriced their digital camera based on their performance and the price-performance of competing products. The goal in value pricing is to find a selling price the offers an attractive customer value and provides a good profit margin for the company.
EXPERIMENT WITH VALUE PRICING
You can find this example at www.MBM-Best.com under the Chapter 4 Marketing Performance Tools. All the data presented in this blog is provided in tool 4.2, Price-Performance Value Mapping. By changing the price and/or performance of any digital camera you can see how their fair price and customer value changes. This example is also presented in Chapter 4 of Market-Based Management, 6th edition on pages 132 to 134.
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