A frequent question from our clients is “What is the maximum price that I can sell this at?”. At Anova group, we frame this question within the concept of a price-value equilibrium line. The price-value equilibrium line helps our clients answer three fundamental questions:
- Are you pricing competitively?
- Are you profit maximizing?
- How can you receive a price premium?
Our first step maps both our customer and the competitors into a price-value matrix which crystallizes equilibrium prices that the consumer should be charged. 
To illustrate the benefits of this analysis, I have pulled prices (including tax & shipping) for Apple’s iPOD Touch 32 GB (3rd Generation) creating the diagram to the right.
The diagram shows a wide price range (i.e.$260 to $320) even though the product configuration was specific. This dispels a misconception that the value an online retailer provides is limited to the product. For example, Apple (like most manufacturers) may command higher prices because consumers usually perceive value in avoiding the middle man. Specialty retailers often also have higher perceived value (in their specialty), perhaps due to critical knowledge if support is needed, and thus may command premiums.
As an anchor point, Anova Group often views Amazon as a value-neutral player in online retailing. To charge more than Amazon, a retailer has to have additional perceived value such as brand power or customer service. In this example, MacMall can charge a very slight premium to Amazon due to their specialty focus. Additionally, BestBuy may also have some pricing power due to their concentration in electronics. Best Buy receives a higher specialty premium than MacMall due to a more powerful brand. On the other hand, Overstock sells a refurbished iPOD Touch which has a perceived lower value than a new iPOD Touch. As a result, the Overstock price is lower than all new iPOD prices.
This example demonstrates a price-value equilibrium line upon which Apple, Best Buy, Amazon, MacMall and Overstock lie. These retailers should sell their share of iPOD Touch’s at these prices. The exception, in this example, is Babies ‘R Us who has a price above the price-value equilibrium line. From a value standpoint, consumers assign negative value to specialty retailers who attempt to sell products outside their category. Given this problem, Babies ‘R Us’ perceived value is likely less than Amazons. Being off to the high side of the equilibrium line, Babies ‘R Us, outside of a few ‘lucky’ sales, will not sell many iPOD Touches.
While I have just scratched the surface on pricing analysis, this price-value mapping exercise provides critical strategic insight to any online retailer. If you would like assistance in a competitive pricing study, please contact Anova Group.
Posted by Jeff Aliotta
