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s we have seen, knowing a product’s value to the customer (VTC) can provide important guidance for setting an initial price for the product. The first step in our four-step method for assessing a product’s VTC is to determine a reference value—the price of the item that the customer perceives as the next closest substitute of the product. The second step is to identify all of the factors that differentiate the product from this next closest substitute. The third step is to determine the monetary value to the customer of each of these differentiating factors. The fourth step is to take all of these differentiation values (some of which may be negative) and add them to the reference value. This results in an estimate of the product’s VTC.In this chapter, we examine in greater detail the second and third steps in VTC estimation. For the second step, we present a framework to help the price setter identify the full range of a product’s differentiating factors. For the third step, we cover some concepts and methods for determining the monetary value that customers place on a differentiating factor. We discuss a means to quantify uncertainty when estimating the monetary consequences of a differentiating factor and describe a survey method to measure how customers trade off product benefits against price.
A FRAMEWORK FOR IDENTIFYING DIFFERENTIATING FACTORS
To carry out the second of the four steps to estimating a product’s VTC, it is important to consider the widest array of potential differentiating factors. Doing this is often very difficult, because there are a great many aspects of a product that could potentially differentiate it from its substitutes. In fact, the possibilities are probably endless. A checklist could provide the price setter with useful assistance in thinking of these possibilities. A framework is described that can serve as such a checklist. Because this framework is based on types of product characteristics and types of customer needs that these product characteristics could help satisfy, it could be referred to as a “product-needs framework.”
Types of Product Characteristics
Traditionally, marketers have considered the characteristics of products by grouping them into categories such as product quality versus product feature characteristics1 or core versus augmented benefits2 and by describing the various aspects of brand equity.3 These considerations could be integrated to produce three broad categories of product characteristics.
The first category consists of a product’s core-quality characteristics. These are characteristics that affect the product’s ability to accomplish what is considered by customers to be its primary purpose, or function. For example, the primary function of a window cleaning liquid would be to get a window clean. If one window cleaning liquid were formulated to produce fewer streaks than another, then this formulation would be a core- quality characteristic that could serve as a differentiating factor. Core quality also includes characteristics that affect how consistently the product performs its primary function and for how long. For example, a car repair shop may employ mechanics with more expertise so that the shop can diagnose a car’s problem more consistently than do its competitors. A hair spray product may contain an ingredient that enables it to hold one’s hair in place for a longer period of time than its next closest substitute.
The second category consists of a product’s features and styling characteristics. These characteristics contribute to benefits beyond the product’s primary function. This category includes aspects sometimes referred to as “bells and whistles.” For example, a cell phone could also have the capacity to take photographs, an orange juice product could have added calcium, or a soft drink at a fast-food restaurant could come in a reusable cup. This category of product characteristics also includes characteristics related to a product’s packaging and appearance. If appearance is intimately associated with a product’s primary function, such as is the case with men’s suits or designer clothing, then appearance characteristics would be considered in the first category, core quality. However, when appearance characteristics are viewed by customers as secondary to a
product’s main function, they then fall into this second category. For example, the unusual styling of Apple’s iMac personal computer or the attractive appearance of a JanSport backpack would most likely constitute differentiating factors in this second category.
The third category consists of reputation and support service characteristics. These include characteristics that support a product’s primary and secondary benefits and that could be characteristics of the selling company rather than only of the product itself. In this category are aspects of the product that communicate its brand and/or the name of the company that produced it. This category also includes the seller’s services related to the customer’s acquisition of the product—selecting, ordering, delivering, and installing the product—and services related to the customer’s use of the product—operating, maintaining, repairing, and even disposing of the product when its useful life is over. Such product support services are a rich area of possible differentiating factors. It has been noted that even generic commodity goods, such as common industrial chemicals, can be differentiated through product support services.4 For example, one chemical provider could offer customers an easier ordering process or faster delivery times. A software product could offer better technical support than its competitors do or an automobile manufacturer could offer a longer and more comprehensive warranty than others do.
Although these three categories are very broad, they help make possible a framework that can provide structure for the process of identifying a product’s differentiating factors. What needs to be added is how these product characteristics may serve to satisfy customer needs.
Types of Customer Needs
A product characteristic is relevant to the product’s VTC only to the extent that the characteristic has an effect on how well the product satisfies the customer’s needs. It is a basic tenet of the marketing approach to pricing that the product value that can be captured by the product’s price can be appreciated only by considering the customer’s needs. It should be noted that the term need is used here broadly, to include a customer’s wants, preferences, desires, enjoyments, satisfactions, and so on. In everyday speech, needs that are strong or essential are referred to as needs, and needs that are weaker or more discretionary are referred to as “wants.” In this book, all forces within a person that could attract that person to a product will be referred to as needs.5
Just as it is useful to have categories of product characteristics, it is also useful to have categories of product-related customer needs. In the study of consumer behavior, there is a long-established distinction between product needs and benefits that are functional or utilitarian and those that have to do with the consumer’s hedonic or aesthetic experience.6 Even older is the recognition that people can use products as a means of showing social status.7 There has also been work on the importance of the perceived risks concerning product performance8 and recognition that customers often prefer to minimize the effort involved in making purchases.9 For the purposes of identifying a product’s VTC, these observations are combined to divide customer needs into five broadly defined types. Because each of these five types of needs could potentially be addressed by each of the three types of product characteristics, these two dimensions can be crossed to produce the fifteen-cell framework shown in Figure 3.1. This figure also provides examples of how each type of need could be satisfied by each type of product characteristic.
Need for Objective Performance
For a large number of consumer products (products purchased by consumers) and for virtually all business products (products purchased by business customers), the product performance that is important to the buyer is objectively measurable. This will be referred to as a product’s objective performance because it involves results that are a matter of observable facts, as opposed to a matter of opinion. For example, a consumer needs a dishwashing detergent to help get the dishes clean, needs an air conditioner to keep a room cool, and needs an airline ticket to accomplish getting to a faraway destination. A manufacturer might purchase plastic in order to make a children’s toy that retailers will buy and a retailer may purchase the toy in order to be able to sell it at a profit. The needs buyers have for this objective product performance can be referred to as the buyers’ objective performance needs.
Product characteristics in each of the three categories can contribute to improving a product’s objective performance. For core-quality characteristics, a dishwashing detergent could contain a substance that helps keep spots from forming on dishes. A computer could use a more advanced microprocessor to achieve greater computing speed. A toy manufacturer could incorporate a character licensed from a popular children’s television show to make the toy more likely to sell rapidly. For features and styling characteristics, a bottle of liquid window cleaner could be equipped with a powerful spray nozzle, which could increase the cleaner’s ability to remove dirt from the window. For reputation and support characteristics, a room air conditioner could come with detailed installation instructions and a support telephone number to help the buyer to fit it tightly into the window—the tighter its fit, the better would be its cooling performance.
That a product’s objective performance involves observable facts does not necessarily mean that these facts are easy to observe. For example, it might be difficult to measure precisely the amount of foreign substances that remain on dishes after they have been washed. However, the possibility of such objective measurement distinguishes a product’s objective performance from its subjective performance. A product’s subjective performance involves results that can be directly evaluated only by the person consuming the product. This distinction is important because when a product’s performance can be measured objectively, it presents the possibility that there can also be an objective determination of the value of that performance to the customer.
Need for Hedonic and Aesthetic Performance
There are many consumer products that are purchased not for their objective performance but rather for their subjective performance. Very often, this subjective performance is based on what the consumer experiences as he or she consumes the product. For example, food, beverages, music, art, movies, TV shows, games, plays, poetry, and the styles of clothing, furniture, and automobiles are appreciated largely for the feelings of pleasure they create in the consumer. The more sensual pleasures, such as for food and drink, are often referred to as “hedonic” pleasures, while the pleasures of music, art, literature, and the performing arts are often referred to as “aesthetic.” Products and product characteristics that are valued for the hedonic and aesthetic pleasures they create could be said to satisfy the consumer’s hedonic/aesthetic performance needs.
Core-quality characteristics can often help satisfy hedonic/aesthetic performance needs. For example, Papa John’s claims that better ingredients create better tasting pizza. Movies, plays, and concerts will often advertise
widely recognized performers as evidence of having a greater likelihood of satisfying the consumer’s hedonic/aesthetic performance needs. When movie theaters offer particularly comfortable seats or outstanding sound systems, these could be considered product features that enhance the consumer’s hedonic and aesthetic satisfaction. It is also possible to enhance a product valued primarily for its objective performance by adding features that satisfy needs for hedonic/aesthetic performance. A clock radio could have a sleek, modern design, or a pair of children’s shoes could have “fun” shoelaces showing small pictures of popular cartoon characters. Reputation–support characteristics that enhance hedonic/aesthetic performance needs would include favorable brand associations, such as the good feelings one might experience from a familiar can of Campbell’s soup. Need for Social Performance
In addition to hedonic/aesthetic performance needs, an additional area of a product’s subjective performance is the degree to which it leads the buyer to experience increased social acceptance or respect from others. Consumers may purchase an automobile or a fashion accessory such as a watch or a handbag not so much for its objective performance or for the pleasure of experiencing it but rather for the effect it is intended to have on the opinions and attitudes of people toward the buyer. Product characteristics valued by a customer for their expected effects on the customer’s social image are said to satisfy social performance needs.
Core-quality characteristics can enhance the satisfaction of social performance needs by enabling a product to outperform most others in a way that is visible to the people in the customer’s social environment. Thus, an automobile with characteristics that allow it to accelerate faster than others or more effectively negotiate snow or other bad road conditions could lead its customers to feel a pride of ownership. Visible product features could have similar effects. For example, power sliding doors and an on-board television could be prestigious or stylish minivan features. A prestigious automobile brand name could help a customer feel respected by his friends or family members and thus experience greater social performance satisfaction in product ownership. Need for Performance Reliability
If a product that is purchased to accomplish a particular function fails to perform that function, the failure creates a disruption in the life or business activity of the customer. Such a disruption might be expensive, as was seen in the case of Dewey & Almy in Chapter 2. In addition, such disruptions, or the fear of them, might create anxiety among managers and consumers. The customer’s desires to avoid the expenses and anxieties of product inconsistency or failure could be referred to as the customer’s performance reliability needs.
Core-quality characteristics can help satisfy customers’ performance reliability needs by increasing the consistency and/or duration of the product’s performance. Using highly durable materials for product components or instituting more effective quality control processes would decrease the risk that the product will fail. Adding a feature that shows the customer how the product is performing can be effective in minimizing the customer’s anxieties. The ability to track online the progress of a package shipped by FedEx is an example of such a feature. A feature such as a tightly reclosable package could enhance the shelf life of a food product and thus help satisfy performance reliability needs. A warranty is an example of a reputation–support characteristic that would help protect buyers against the consequences of a product failure.
Need for Product Convenience
Customers who are interested in the benefits of a product tend to prefer to expend as little effort as possible to receive these benefits. Customers would prefer a product be easy to select, easy to obtain, easy to assemble or install, easy to use, easy to maintain, easy to store, and easy to dispose of when they are finished with it. Product characteristics that reduce the effort involved in receiving the product’s benefits are satisfying the customer’s product convenience needs.
Core-quality characteristics that lead a product to function with less routine maintenance would help satisfy product convenience needs. Products often have features that make them more convenient to use. For example, a vacuum cleaner could have a spring-loaded retractable power cord, which would make it easier to use than a model where the cord must be wrapped by hand. A product with a familiar brand name could satisfy product convenience needs by making possible an easier product decision process. The availability of 24-hour live customer service for a bank or a large online retailer would be a service support characteristic that would satisfy the customer’s product convenience needs.
Framework for Identifying Differentiating Factors
Each of the fifteen cells in the product-needs framework shown in Figure 3.1 illustrates a potential differentiating factor for a product that might need to be priced. Whether the product is being newly developed or modified or is simply new to the organization, this framework can serve as a checklist for identifying possible sources of value to the customer. It is important that the VTC analysis include consideration of all of the customer benefits that can potentially be captured in the product’s price.
It should be noted that a particular product characteristic could contribute to satisfying more than one need. For example, superior telephone customer service could impact objective performance, performance reliability, product convenience, and perhaps even social performance needs. Recognizing the full range of needs that could be served can help the seller avoid underestimating the value produced by such a characteristic.
UNDERSTANDING THE INDIVIDUALS INVOLVED IN THE CUSTOMER’S BUYING DECISION Because the nature of the customer’s needs is so important in identifying differentiating factors and estimating their value, it is important to also understand the various individuals who may be involved in the customer’s purchasing decision. Each of these individuals may have different needs, and thus each may differently value any particular differentiating factor. In some cases, it might even be worthwhile to consider the product-needs framework shown in Figure 3.1 separately for each person involved in a purchase decision. In such a case, the set of individuals involved could be considered a third dimension of the framework.
When the customer is a business, there is almost always more than one member of the business organization involved in the decision process. The set of people in the buying organization involved in a business-to- business purchase decision is referred to as the organization’s buying center. To help identify these people, it is useful to consider the decision process roles that have been described.10
User—those in the organization who use the product
Influencer—specialists, such as engineers, financial analysts, or legal advisors, who have input on the purchase process
Gatekeeper—those who control the flow of information to other members of the purchase process, such as those who decide which companies are invited to submit proposals
Decider—managers, who rule on whether or not the purchase should take place Purchaser—those in the organization who carry out the purchase
Asking questions, such as who are the users or who are the influencers, helps identify people whose needs should be considered. For example, when Aluminum Corporation of America (Alcoa) was offering to General Motors (GM) a new lighter and stronger aluminum alloy, it recognized that a design engineer in the GM organization (an influencer) would value the new alloy more than GM’s production manager (user). For the engineer, proposing the new alloy meant an opportunity to show his resourcefulness. For the production manager, using the new alloy meant changes that could produce problems. By appealing first to the design engineer, Alcoa was able to help the GM organization more fully appreciate the value of the new alloy.11
When there is more than one person involved in a consumer purchase, the people involved are usually members of the same household. For example, a wife may be the decider on a new set of dining room furniture while the husband might be an influencer, perhaps pointing out the importance of durability given how the kids