4-step Method for Assessing a Product’s VTC:  Hedonic pleasures- more sensual pleasures, such

as food and drink.

1. Determine a reference value
 Aesthetic- pleasures of music, art, literature and
2. Identify all of the factors that differentiate the
the performing arts.
product
 Buying Center- people in the buying organization
3. Determine the monetary value
involved in a business-to-business purchase
4. Take all of these differentiation values
decision.
5. Add them to the reference value
 Conjoint Analysis- most commonly used market
Types of Product Characteristics research technique.
 Probability – is a means of quantifying
1. Product quality vs. product feature uncertainty. A measure of likelihood of an event
characteristics to the number of instances.
2. Core vs. augmented benefits  Expected Value- the long-run average of the
3. Describing the various aspects of brand variable. It is equal to the sum of each possible
equality. value of the variable multiplied by the probability
of that value occurring.
Categories of Product Characteristics
 Data Matrix- multiple regression procedure
1. Core-quality Characteristics requires the construction of a rectangular array of
 that affect the product’s ability to accomplish numbers
what is considered by customers to be its primary
Types of Customer Needs
purpose or function.
 1. Need for Objective Performance/ Objective
2. Features and Styling Characteristics Performance Needs
-benefits beyond the product’s primary -the product performance that is important to
function the buyer is objectively measurable
-as “bells and whistles -The needs buyers have for this objective
-includes characteristics related to a product’s product performance.
packaging and appearance.
2. Need for Hedonic and Aesthetic
3. Reputation and Support Service Performance/ Hedonic /Aesthetic
Characteristics Performance Needs
-aspects of the product that communicate its -Products and product characteristics that are
brand and/or the name of the company that valued for the hedonic and aesthetic
produced it. pleasures they create
-support a product’s primary and secondary
benefits and that could be characteristics 3. Need for Social Performance/ Social
Performance Needs
-For the effect it is intended to have on the
 Needs- Strong/ essential opinions and attitudes of people toward the
 Wants- needs that are weaker or more buyer.
discretionary
 Consumer products- products purchased by 4. Need for Performance Reliability/
consumers Performance Reliability Needs
 Business products- products purchased by -The customer’s desire to avoid the expenses
business customers. and anxieties of product inconsistency or
 Subjective performance- results that can be failure.
directly evaluated only by the person consuming
the product.
 5. Need for Product Convenience  Price ceiling- forms the upper bound of its
-prefer a product that is easy to select, easy to form.
obtain, easy to assemble or install, easy to  Price floor- variable costs form the lower
use, easy to maintain, easy to store, and easy bound of its price.
to dispose of when they are finished with it.  Search characteristic- customer can examine
before purchase
-that reduce the effort involved in receiving  Experience characteristic- only after
the product’s benefits. purchasing and using the product.
 Credence characteristic- customer belief or
 User- who use the product faith; cannot be observed even after using or
 Influence- specialists, such as engineers, financial purchasing the product.
analysts, or legal advisors, who have input on the  Innovation- New-to-market products
purchase process  Critical sales level- number of units that must
 Gatekeeper- those who control the flow of be sold for the net profit after
information to other members of the purchase
process, such as those who decide which Basic Strategies for Setting an Initial Price
companies are invited to submit proposals.
1. The Skimming Strategy
 Decider- managers, who rule on whether or not
Setting price so high that most potential
the purchase should take place.
customers will decline to buy the new
 Purchaser- those in the organization who carry product.
out the purchase. -“Skimming the cream of the market.”
2 Approaches to determining the value of a 2. The Penetration Strategy
differentiating Factor in Monetary Terms Setting a price so low that the new product
sells briskly in the market.
1. Identify the monetary consequences of the factor 3. The In-Line Strategy
for the customer. setting the price to be “in line with” the prices
of competing offerings.
2. Use the market research to measure how
customers trade off product benefits against price.
Strategic Factors in Setting an Initial Price
Translating Probabilities Into Profits
Factors Supporting Skimming
-expected value
- the degree to which customers perceive the
Conjoint Analysis product as risky

-carrying out a study where a set of possible 3 Types of Risk

alternative products are presented or described to
1. Economic Risk
respondents and the respondents are asked to rate,
-involving a large expenditure may not
rank, or choose among these alternative products.
perform as expected.
Interpreting the Results - new product’s failure might cause costly
disruptions.
2. Physical Risk
-lead to accidents or that a new medical
BASIC PRICING STRATAGIES
procedure could have serious unforeseen side
 Fixed costs- do not vary with changes effects
 Variable costs- vary directly with the number 3. Social Risk
of units that are sold. - lead to negative reactions among one’s
 Incremental fixed costs- because these fixed peers.
costs will be incurred
Factors Supporting Penetration

1. The ability of low prices to serve as an

incentive to buy.
2. Protection against competitive price
matching.
3. Market conditions favoring a pioneer
advantage

Note: Use in-line pricing when market conditions do

not support skimming or penetration.

Contribution Margin- the amount of a product’s price

that remains after subtracting the product’s variable
costs

In dollar terms, a product’s contribution margin is

equal to its price (P) minus its per-unit variable costs
(VC):

CM=P−VC

It is sometimes useful to talk about the contribution

margin as a percent of the product’s price (%CM). This
is calculated as follows:

%CM = [(P − VC)/P] × 100

Breakeven Analysis

-determination of the number of units of a product

that must be sold so that the organization’s profit
after a managerial decision is equal to that before the
decision.

Breakeven Sales Level

-This number is termed the breakeven units

BE = ΔFC/CM

BENEFITS OF BREAKEVEN ANALYSIS

It reduces the amount of such predictive information

that is necessary for making a well-reasoned pricing
decision (or other business decision).

A breakeven calculation makes a business decision

possible knowing only whether or not a critical sales
level will be exceeded.