Value-Based Marketing

Chapter 1

Definition of Value:
▪ Value is a concept that bridges marketing and economics into one framework useful for
developing strategy and setting prices. From a marketing standpoint, Value can be
defined as the set of benefits perceived by the customer in relation to the price and effort
invested in obtaining it. Consumers only buy products that have Value for them. It is
important to note the difference between Value and Positioning.
▪ Value expresses a logical relationship between benefits and price
▪ Positioning refers to the image, or perception, of a product, brand or firm.
▪ The current trend is for firms to move from a transactional marketing point of
view to a relationship marketing point of view:
▪ Transactional Marketing: sales ignore the customer´s needs in a quick and
fleeting exchange of money for product
▪ Relationship Marketing: establish a long-term relationship that simultaneously
benefits the customer and the company
▪ The reason is that securing new customers costs more than retaining them; it is not
enough to just satisfy their needs, a step forward is required:
▪ Retaining them long-term must be achieved (customer loyalty); this is the purpose
that links relationship marketing with the concept of Value.
▪ A key issue in relationship marketing is that a product´s price must achieve customer
loyalty and be justified by the benefits it offers. This is only possible with a clear
understanding of his needs, habits and buying behaviors, thus the product must satisfy
them, without losing sight of the market context, the competition and the goals of the
firm. Value may be presented as follows: Value = Benefits / Effort + Price. Value is the
relationship between the sum of all the perceived benefits with the price and effort
required to obtain the product. Value is the force that drives sales and market share and
provides the customer with a strong incentive to make a purchase. Effort is a subjective
and non-quantifiable variable, which points to the fact that obtaining a product consumes
time, energy and work.
▪ Value is also a way of representing the Value proposition: The firm promises customers
a set of benefits at a given price. Consumers will always want to maximize their gains;
this means to obtain the maximum while investing the least. The firm provides output in
terms of benefits and consumers provide the input in terms of their economic sacrifice
(price paid) and effort. Value is therefore a marketing output / input ratio which
 measures the consumer's gain, or "profitability" he obtains from his purchase. This ratio
suggests that Value increases when benefits increase or when the price and/or required
effort decrease. If the price increases in greater proportion than the benefits offered, then
Value decreases and the quantity demanded by the customer segment is reduced.
▪ Value remains unchanged if lower benefits are balanced by lower prices, or if higher
benefits are balanced with higher prices. This definition of “Value” can be equated with
the definition of “Utility” in classical economics, which corresponds to the level
satisfaction an individual obtains from a good or service. A product is purchased only if
customers perceive Value in it. If Value is not perceived, then it will probably not be
bought. This means that the benefits offered must fully justify the price and effort
sacrificed in order to obtain it. High Value is perceived when benefits outweigh price
and effort; the consumer recognizes here a chance to "win" and his purchase therefore
becomes an attractive deal.
▪ This all shows that Value is the real "engine" for increasing market share. High Value
induces greater demand, and thus higher profits and earnings for the company → The
demand for a product is directly proportional to its Value. A product stops to have Value
when the price is too high relative to its benefits, and therefore the customer may be
unwilling to pay for it.
▪ Value can too be used as a source of differentiation. If a product has no significant
benefits relative to its competition, then the only possible differentiation is that given by
its price. A product may be very expensive, but that does not mean that it necessarily has
low Value; on the contrary, despite the high price, if its associated benefits are sufficiently
attractive, then it can be a high Value product. A Rolex watch or a designer bag are good
examples: their price may be very high, but their buyers attach great importance to the
prestige that they provide in their social circles.
▪ Similarly, a low-quality product may have few benefits, but, if its price is low enough, it
can also have a high Value. A cheap pen may do its writing job reasonably well, and if its
price is sufficiently low to attract buyers, then it has Value for them.
▪ Example: Let’s examine the reaction to a new competitor attempting to enter an
established market with a low-pricing strategy. An obvious response by existing
competitors would be to react with discounts, or even reduce prices.
▪ But how about responding with a promotion that offers some extra benefit? One option is
to add a free item to the product, which may be very pleasing to the consumer; this is
likely to be more effective and cost less than reacting with discounts, or low prices.
▪ Another option is to increase the quantity delivered without changing the price. This may
have the same financial effect of a discount; but it is perceived by the customer in a
completely different way; it is clearly viewed as something better in the product; in fact,
the customer is already used to the ongoing price; there is no need to confuse him.
 ▪ These actions may stop the efforts of competitors to gain entry into the market with low
prices. The customer perceives something "better", the product´s positioning remains
intact, and future earnings are not threatened; this may also help avert a "price war".
Resistance:
Sometimes consumers actively resist buying a product due to its perceived high price. As
resistance increases, sales decrease; therefore, sales are inversely proportional to resistance.
More resistance, less sales; and directly proportional to Value: more Value, more sales. In order
to solve this issue of customer resistance to sales and profits, a firm must first identify the causes
and sources for this resistance and then propose solutions to eliminate them. From a pricing
standpoint, resistances may originate from:

1. the market

Brand or Product Distribution

Customer segmentation Competition
Positioning Channels

• a well-chosen target • A strong brand • A wide collection • Competitors offering

market decreases and positioning of distribution products at lower prices
resistance. decreases channels decreases or with more benefits
resistance resistance may increase resistance
• Resistance happen if
market segments don’t • Firms must • Firms sell directly • Firms must analyze
meet the following to customers or competitors’ value
requirements: 1. capture indirectly though
competitor's intermediaries. • This may lead more
1. clear need for the customers benefits, lower prices,
product with similar • Reducing or both.
products distribution costs
2. large number of and finding ways • This increase in Value
customers 2. seek to attract to sell with lower should make the firm
a slightly cost (using the more competitive,
3. minimum buying different internet) will increase sales, and thus
frequency market improve the issue resistance decreases
4. required segment of resistance
purchasing power.
 2. the product

Purchasing Diminishing Product

Price Quality
Experience Returns Packaging

• The interaction • Customers • Humans are • A product´s • Customers

with the will continue visual; therefore, price can be the compare
customer must to purchase the product´s main resistance benefits
be set up so only as long packaging must source against price
that he obtains as pleasure illustrate the key to decide
a high degree exceeds cost signals that link • A price unequal quality.
of pleasure and the product's with product's
satisfaction • Resistance benefits with the benefits will • B>P = high Q
from can be customers’ discourage
mitigated by buyers and • B<P = low Q
purchasing. needs.
continuously prompt them to • Quality below
• This increases adding Value • Dishonest pursue other customers'
Value, and thus to the packaging leads alternatives expectations
decreases customer to resistance, leads to
customer (additional and thus lower • This may lead to
unused resistance &
resistance. benefits or sales lost sales.
lower prices) inventory and
lost sales.
 3. the economy

Monopoly & Oligopoly Pricing Tax and Tariffs

• The lack of competition in monopolistic markets tends to drive up • Any interferences with the
prices, which may prompt buyers to reduce their purchases supply & demand forces (like
tariffs and taxes) lead to
• This adds resistance to the free flow of goods and services. inefficiencies in the form of
• In oligopolistic markets, competition exists among a few companies shortages or surpluses.

• The prices may be relatively high, but this is compensated by a wider • The purchase of a product that
selection of products; this promotes a greater flow of goods than in carries a high sales tax requires
monopoly, and thus less resistance a greater financial sacrifice
than the same product with no
• In extreme cases, customers can stop themselves from buying tax
• This resistance will not allow the sellers to achieve the full revenue • This decreases its Value and
potential that their target segment can deliver. creates resistance.

4. the firm.

Inventory
Cost Methods &
Financial Services Turnover & Service & Warranties
Interpretation
Logistics

• Inflexible credit • Firms with • Warranty and service support play • A product´s
policies increase low a key role in building consumer cost affects its
resistance. inventory confidence in the brand, and in selling price
can push their willingness to pay its price. and thus
• Credit as an alternative customers profits.
payment option can be to • Service can be a very effective
tailored to customers´ competitors tool for differentiating a product or • A
needs, increases their brand misinterpreted
purchasing, and thus • This leads cost may lead
adds Value and to lost sales • It may be a strong competitive to a high price
decrease resistance & increased advantage to reduce resistance and and resistance
resistance enhance customer loyalty.
 Machines &
Teamwork Human Resources Salespersons
Equipment

• Competition • This includes • Firms invest large • If high demand

between employee selection, sums of money on exists, firms must
employees in training and marketing plans increase their
the same area motivation. production
can lead to • However, the entire capacities
resistance in • Lack of strategy may end up
sales understanding of depending on a • This surplus must
marketing and sales single salesperson bring higher benefits
fundamentals or the that may not be and profits than the
right criteria in qualified to sell the cost of buying extra
selecting candidates product machines &
by HR administration equipment for it
can lead to major • Unqualified sales
resistance. force increase • Otherwise, this will
resistance lead to resistance