6-1_Discussion_Thinking_strategically_about_pricing_decisions

Traditional approaches have led to major pricing

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Traditional approaches have led to major pricing errors – Sony overpriced the PS2 in competition with Nintendo and had to quickly bring the price down to stay competitive while more recently repeating the error with the PS3 and cutting prices again; Apple overpriced the first iPhone and very early in the cycle had to reduce the price and apologise to the existing buyers and offer refunds. In fact, important insights are gained by examining companies who have developed new pricing models to more effectively break free of cost and competition models to focus on providing superior value for customers. ‘‘ [. . .] there is a compelling argument that the way prices are set not only influences demand, price also shapes how buyers use the product or service, and can have a lasting impact on customer relationships ’’ PAGE 40 j JOURNAL OF BUSINESS STRATEGY j VOL. 31 NO. 5 2010 Downloaded by Southern New Hampshire University At 12:16 08 March 2017 (PT)
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Customer value challenges Making pricing decisions during economic downturns accentuates the need for examining these decisions strategically with a clear focus on meeting customers’ value requirements. Delivering superior value during and after an economic downturn is a major management challenge. Importantly, pricing strategy is a significant part of the value challenge during economic declines. The value proposition ‘‘explains the relationships among the performance of the product, the fulfilment of the customer’s needs, and the total cost to the customer over the customer relationship life cycle’’ (Payne and Frow, 2005, p. 172). While the role and importance of price varies in the range of pricing situations which span from transactional to strategic partnerships, price becomes particularly important to buyers during demanding economic times. Determining price using the economic value model is very important during demanding economic declines. Economic value consists of the price of the customer’s best competing alternative plus the value of the supplier’s incremental offering over and above the best alternative (the positive differentiation value) (Smith and Nagle, 2005). The economic value perspective shifts price determination away from lower pricing to a focus on strategic value pricing. Innovative pricing models Creative strategic approaches to pricing offer a different way of delivering value to customers which go beyond simple cost-based computations. We examine four innovative pricing strategies which are particularly appropriate during economic declines and recovery. Payment-by-results for medicines . In 2007, British drug company Janssen-Cilag, a subsidiary of Johnson & Johnson, led the way towards ‘‘payment by results’’ for medical treatment. The company offered to cover the cost of a £25,000 cancer drug if the patient failed to show adequate progress. The hospital only pays for the drug if the patient responds well to it. This price strategy allows the company to maintain the nominal price for the product
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  • Spring '09
  • Prof.S
  • Cost Accounting, Pricing, Southern New Hampshire University, Southern New Hampshire, Journal of Business Strategy

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