Question

After you have completed your research, answer each of the following questions in turn following all the general guidelines or written assignments posted in the syllabus.

1. Brief overview of the organizations service/products and a description of their target market. This is important to ensure that your analysis considers the needs of the target market in evaluating their pricing and channel decisions.

2. How do you think the organization arrives at its price? Refer to the Week 6 Overview for a framework of some of the pricing considerations and discuss those that appear relevant to your organization.

3. Do you think the pricing strategy is appropriate? Can it be improved to better meet its customer’s needs?

4. Is the organization hindered or helped in their pricing decisions by government or payer restrictions. If so, how do these restrictions impact their pricing strategy?

5. What kind of value delivery network does the organization employ, e.g. horizontal or vertical, and what is their distribution strategy, e.g. exclusive, intensive or intensive? What factors influence the distribution strategies of this organization? Are they customer-focused? If possible, outline all of the channel members and what function they perform to serve the customer? 6. Can you recommend any changes to the value delivery network that would serve customer needs better?

Answer 1

1) In a perfect world, every single human would love your product. But, as we all know – life isn’t perfect.

Although your products might appeal to a large group of people, it doesn’t make sense to market to everyone. If you did, it would be like playing darts while being blindfolded. Not very effective and, quite literally, a shot in the dark. What your brand needs is a target market: your guiding light that tells you who to go after with your marketing campaigns.By adding a target market into your strategy, you’ll be able to more effectively market to customers while pinpointing their exact needs and reducing ancillary spend. Let’s dive into what a target market is and how you can craft one that’s unique to your business.

Target Market

You need to identify the people who really want or need what you’re offering.

Targeting, or segmenting, these people means you’ll be able to build your store for the right audience, efficiently using your resources to impress and attract your potential customers.

To begin, you’ll want to establish the need for your product or service, focusing on what problem it can solve.

Then refine your target market by identifying who has bought your product or service already.

This includes target demographics, audience type, and any other attributes associated with your target customer. If your product or service is brand new, you may want to look to your competitors to gain additional insights.

In all transparency, the toughest part of this process is to avoid making assumptions. This is vital to the quality of your customer targeting, because if your assumption is incorrect – it’s a direct hit to your conversion rates.

For example, if you want to start a handmade pet biscuit business, you are probably an expert on your products’ many benefits. But don’t assume consumers know these things as well as you do. They may not even know such a product exists. As tempting as it is to fill in the blanks, you should engage with your potential customers and conduct as much research as possible. As your business grows, you should continue to evaluate and stay up to date with your target market.

Your target market is absolutely dynamic. It’s always evolving and taking new shapes.

For instance, down the road you may want to expand and sell internationally.

Or you might think you are catering specifically to men, when in actuality you are selling to wives and girlfriends who are shopping for their fellas. Knowing who you’re targeting, and continually refining it, will ensure you’re on the right track.

How to Identify and Analyze Your Target Market

By the end of this chapter, you’ll be prepared to answer these key questions:

• What are the features of your business, products or services?
• What are the benefits of these features?
• How do the benefits help the user?
• How does your target market shop?
• What is the typical age and gender of your target market? Do they usually have children? What is their average income and education?
• What are their common interests? These can include attitudes, values and lifestyle.
• Is your target market comfortable with online? What web and offline marketing methods engage them?

2) The Pricing Model is the overall scheme of how an organization captures revenue for its products or services. The model should make economic sense to the seller and be acceptable to the customers. There are many types of creative and sophisticated pricing models. The three types of pricing models most relevant to CBOs are discussed in this guide:

1. Fee-for-Service

2. Capitation

3. Incentive Based

Each of these models yields different patterns of profits and has different risks.

Basic Cost Structures

The profit patterns for Fee-for-Service and Capitation are affected by cost structures. Basic categories of costs are Fixed and Variable Costs.

Fee-for-Service (FFS) :contracts pay set rates each time the service is utilized. For example, pricing for cab service is based on the number of miles driven where the unit of service is the “mile.” Figure 2 illustrates how FFS pricing performs under fixed and variable cost structures. Higher utilization increases profits for the seller as long as the fee covers the variable cost of the service. The seller has a financial incentive to provide as many services as possible. Utilization management and authorization systems need to be implemented to prevent over-utilization by the seller, while maintaining quality of care.

Capitation: Capitation contracts pay a set periodic rate for each covered person. There is no fixed cap on the amount of services an individual can receive during a given period. Figure 3 illustrates how Capitation pricing performs under fixed and variable cost structures. Contrary to FFS, high utilization decreases profits. The seller has a financial incentive to keep the number of services low. Utilization management and authorization systems need to be implemented to prevent unnecessary utilization from the buyer, while maintaining quality of care.

Incentive Model : Also referred to as “pay-for-performance” or “royalty” models, incentive-based contracts pay a percentage of resulting revenues or profits, or a percentage of resulting cost savings (for example from reduced hospitalizations of a client). Revenue may not be directly related to the volume of services. The financial goal is to generate the largest incentive payment with the lowest total costs. The operational goal is to align the interests of the buyer with the seller so that both parties strive for the same results. This model is high risk, high reward for sellers and low risk, low reward to buyers. Sellers only get paid if the buyer receives resulting benefits from the purchase. For the seller, this creates uncertain revenue, delays cash flows (as incentive payments are usually made long after the service has been delivered), and creates monitoring costs. Sellers will have to monitor and track resulting profits or cost savings. There is a risk that buyers will intentionally or unintentionally underreport the profits, revenues, or cost-savings for the incentive calculation. Sellers may also have to bear the upfront costs of generating a benefit to the buyer. On the other hand, a properly executed pay-for-performance contract can allow sellers to share in substantial successes. Buyers may also be more willing to accept this payment model since it reduces their risks.

3) Pricing is one of the most under looked aspect of a business’s’ operations. Yet pricing strategies are a key way for organizations to improve their bottom line. Research indicates that by properly managing pricing strategies a company can increase profitability by 25 to 60 percent. Unfortunately, many businesses overlook pricing and miss out on these potential profits.

Look past cost-plus pricing

Many pricing strategies stop at cost-plus pricing (the practice of setting prices based on material costs, labour costs and then applying a markup). What this method fails to do is capture the perceived value of a company’s products or services. By implementing a value-based pricing model, an organization can dramatically improve their profitability.

Focusing resources on re-strategizing your pricing scheme can yield great returns. In the case of some Pricing Solutions clients, we have seen that a one percent price increase can yield a 12.5 percent profit increase. We think that your business can achieve these results as well here are 5 ways to leverage your pricing to deliver more profitable results.

1. Develop a ‘1%’ pricing mindset

Pricing managers must not underestimate the importance of one-per-cent. Discounted prices of five to ten percent can dramatically affect profitability and can actually deter future customers. It is crucial that everyone in the company understands the gravity of every percent in pricing and fight for it. “It’s not about nickel-and-diming your customers”, says Paul Hunt, president of Pricing Solutions. “It’s about focusing on the value you deliver, so you don’t have to compromise on price.”

Take for example company X, which in its early days had the founder and CEO acting as the de facto pricing manager. As the organization grew, so did the CEO’s responsibilities. Consequently, the pricing responsibilities fell by the wayside. In the absence of a coordinated strategy, prices were all over the board — the finance department wanted prices to go up, sales wanted them to go down, and marketing was caught in the middle. As a result, profits suffered.

In reaction, the CEO reaffirmed the importance of developing a pricing policy, adjusting compensation, and assigning clear responsibility for pricing. These actions cemented the 1% pricing mindset. Leading the organization to achieve higher profits

2. Consistently deliver more value

The most successful organizations consistently deliver more value to their customers and are able to capture improved margins as a result. Best-practice-pricing strategies excel at the three key stages of value management:

Creation

During product-development organization’s must be rigorous in their pricing assumptions. Extreme attention must be targeted to understanding customer’s pricing sensitivities and to what they value. Avoid developing products with ‘bells and whistles’ that customers do not value and are unwilling to pay for. Compaq Computers, for example, implemented a ‘design to price strategy’ after realizing their traditional high-end market was disappearing. Compaq in response set a price-point of $2,000 and built the best computer they could for that price.

Communication

An organisation should sell on value not price. It is imperative that when you communicate with customers that you focus on how the products and services uniquely meet their needs. “To be able to do that effectively, you have to get inside your customer’s head. Getting close to your customer is the single most critical factor in value-based pricing,” says Hunt.

Delivery

The moment of truth is when the customer uses your product or service (delivery/aftersales stage). A satisfied customer is a profitable one. Customer satisfaction means clients value your firm’s offering, which leaves room for higher prices.

Each of these stages presents unique pricing challenges, but all centre on creating and delivering more value.

3. Price strategically, not opportunistically

Organizations must be cautious about pricing to price-conscious customers in an attempt to boost volume. This tactic will put your core business at risk by pursuing customers who don’t value the product or service but only the price. Companies must identify who their core customers are and keep the pricing integrity of that market.

A company specializing in storing and distributing high-end pharmaceutical products once contemplated selling its services to a more price-sensitive segment of the market. However, offering lower prices to non-core customers created the risk of alienating the company’s core customer base. Fortunately, before making this potentially disastrous decision, the company adjusted their pricing structure. It decided to reduce the level of service it would provide to the price sensitive segment. Enabling the company to still provide fair value to its core customers at higher prices while gaining new business.

4. Diplomacy with the competition

Diplomats avoid wars, generals fight them. No one wins in a pricing war, and the key to preventing one is by understanding the competition around your organization. Gathering and processing information about competitors is the foremost tool of a diplomat. This ensures that your pricing strategies are driven by knowledge rather than fear.

Information is pointless unless an organization as the systems in place to mine, manage, and disseminate it. For example, one company set up a toll-free telephone number for salespeople to report competitive information rather than writing reports. It also built an incentive program for the best tips of the month. The company built a culture that motivated salespeople to share their information and streamlined the process to consolidate knowledge. All of which gave the company an edge over their competition.

An organization can spend years building up value for its product or service, but if their pricing is not calibrated with competition, it can squander investments and miss out on profits. Competitive pricing is critical to value-based pricing

5. Pricing is a process

Pricing is not a single hyperbolic strategy, it is a continual process. Decisions cannot be implemented and then forgotten about.

In the absence of a solid pricing process, one major consulting firm reverted to ad hoc or ‘gut pricing. The result? “I’ve seen two people sell the same services and price them 100 percent differently,” says Hunt. “It’s because they don’t understand the value, don’t understand the customer, so they rely on their own perceptions of the world.” Active and coordinated pricing management is essential. This means establishing a pricing policy, using analytical tools, and training personnel.

Just because one strategy has been implemented successfully does not mean it will always be effective. Best-practice pricing is an involved process, where strategies must always be revisited and optimized.