The Marketing Book 5th Edition

Life cycle cost

12,000 hours

£50 k

£240 k

Price

Labour

cost

Service

and diesel

Market

Leader

New

Product

Advanced

Option

£350 k

£54 k

£216 k

EVC=

£80 k

£54 k

£216 k

EVC=

£130 k

£60 k

Added

value

304 The Marketing Book

model has new digital technology that has the
effect of increasing bulldozer productivity by
10 per cent. The advanced model also has
finishing technology that produces a higher
quality result, which on average should enable
the constructor to charge around £50 000 extra
over 12 000 hours of work.
Figure 11.4 shows the economic value of
the new machines. The basic machine ‘saves’

£30 000, implying that its economic value to the

customer (EVC) is £80 000. The advanced

machine has an EVC of £130 000. At any price

below the EVC, the customer makes more

profit with the new machine, ‘other things

being equal’. How far the new company can

charge the price premium reflected in its EVC

depends on the ability of its marketing and

sales people to convince customers of its

economic benefits. It also depends on persuad-

ing them that the support and service that the

company offers minimizes the costs and risks in

switching from the brand leader.

In consumer markets, emotional added

values can be as important as economic, so that

value-based pricing needs to estimate the

worth of these emotional attributes. Chapter 9

presents some direct and indirect methods for

obtaining information from consumers about

how much a brand is worth to them.

Customized pricing

Customers always differ greatly in the value

they perceive in a particular product or service.

If a company charges a uniform price to all

customers, it loses two sources of income: one

is the revenue lost from customers who find the

price too high and do not purchase; the other is

Table 11.4 An illustration of skimming vs penetration pricing and

shareholder value

Year:

Cash flow (£ million)

1 2 3 4 5 6 7 Cumulative

PV of cont·

value

Skimming pricing 10 11 12 8 6 3 0 50

DCF (r= 10%) 9.1 9.1 9.0 5.5 3.7 1.7 0.0 38.1 0

Shareholder value 38.1

Penetration pricing 0 0 0 4 8 14 24 50

DCF (r= 10%) 0 0 0.0 2.7 5.0 7.9 12.3 27.9 63.2

Shareholder value 91.1

Figure 11.4 Pricing and economic value to the
customer