Agriculture Reference
In-Depth Information
and (4) environmental safety. This manufacturing fi rm is looking to employ perceived value
pricing, and needs to estimate the perceived value of their new product.
Ni-Tri's closest competitor is a product called Enforce, which is currently priced at
$36.00 per gallon. This $36.00/gallon becomes the reference value for the new product.
Based on an economic assessment of Ni-Tri's benefi ts relative to those of Enforce, the
following information is obtained:
Selling Price of Enforce $36.00/gallon
Perceived positive value of drier corn Ni-Tri attribute $2.50/gallon
Perceived positive value of easier harvest Ni-Tri attribute $2.50/gallon
Perceived positive value of environmental safety Ni-Tri attribute
Unknown
Perceived negative value of yield Ni-Tri attribute
−$3.00/gallon
Total economic value
$38.00/gallon
Here, the makers of Ni-Tri could price the product somewhere around $38.00 per gallon—
$36.00/gallon reference value and $2.00/gallon differentiation value—to refl ect the
economic value the producer would receive from using the product. Note that it proved
impossible to put an economic value on the environmental benefi t in the example above. The
product manager for Ni-Tri will need to make a judgment call as to just what this benefi t will
mean to the target market. Accordingly, the fi nal selling price may be a little higher than
$38.00 per gallon.
At this point, the fi rm's pricing goals haven't been considered and the strategy doesn't
really address the competition to any degree. Let's consider some other ways of looking at
the problem that incorporate pricing goals and competitors in the decision-making process.
One strategic alternative would be to build market share. To increase market share through
pricing, it is important to price at a level where the ratio of perceived value to selling price
is higher than that of the closest competitor—a form of penetration pricing. If Ni-Tri has a
perceived value that is 5 percent higher than Enforce, then Ni-Tri justifi es a higher price than
the competitive product. As long as the actual price premium is less than 5 percent, then
Ni-Tri will be in a position to gain share on Enforce:
Perceived value Ni-Tri
Price Ni-Tri
Perceived value enfor
ce
>
Price Enforce
$/
$. /
42
gallon
$/
4 a
0
llon
for example
:
gallon
>
37 4
0
$/
36
gallon
Here, Ni-Tri will take market share away from Enforce since customers will fi nd they
get more value from every dollar they spend on Ni-Tri relative to Enforce. As the price of
Ni-Tri is reduced, Ni-Tri should pick-up more market share on Enforce.
The same idea could be applied to a situation where Ni-Tri's makers were more con-
cerned with skimming the market and less concerned about market share. Here they would
price the product so that the selling price of Ni-Tri was more than 5 percent higher than that
of Enforce. Ni-Tri will show a higher margin on each sale, but customers will fi nd Enforce
to be the better value over time and Ni-Tri will eventually lose market share.
The fi rm could combine the above pricing approaches with volume and cash discount
programs, and an early order discount program to complete its pricing strategy. One fi nal
