[MUSIC] So now that we're familiarized with the cost and the margin of contribution, we know how to setup a price so that a company can generate a certain economic value about a certain level of activity. Okay. But, you might be thinking, what do costs have to do with setting prices. And you would be right. If we had started simply with cost, this would be a bottom up approach to pricing. In principle, however, you should not be thinking just about cost. It is much better to think about what is ultimate objective of marketing, which as you recall, is to generate value for customers. The best way to price, if you possibly can, is to first begin with the customer and try to think, how much value can I actually create. Often times value is unrelated to the cost that it we have just explained, but you will see why both are important. Okay? Value to customers. The more value you generate for them, the more you exceed their expectations, the higher the price you will be able to charge. So thinking in terms of value or a top-down approach is probably, is a better strategy also known as value pricing, trying to charge as much to each customer as he or she values your product or service. So, doesn't mean that all the value that you generate for consumers you will be able to capture for yourself in the form of a price. Not necessarily, because different customers or different segments will not necessarily perceive the value in the same way. Some people who value the product more, other people who value the product less. But irrespectively who values more or less the product or service, what is critical for you, is to be able to communicate clearly and consistently some of the value that you had created to the customers. If you don't communicate the value properly, there is going to be a lower perception of what the value is of that particular product or service. Communication, though, will be the focus of week number four of this course. But why is the value perception important? Well it's because people will typically have a willingness to pay for your product or service that normally is lower than their perceived value. Otherwise they would not get any value themselves for the product if you're trying to charge them all. So the willingness to pay for the product of service is typically lower than the absolute perceived value. And once the people set in their minds this level of willingness to pay your actual price will be actually inferior to the maximum willingness to pay. Okay? So, if your price is above the total cost for the company, then you will have captured some value for the enterprise and for yourself. In the mean time, what is the value to the consumer? Obviously there is difference between the price you decided to charge for your product or service and their perceived value of the product. So the aim of marketing is not only to create the value for the consumers. But to also be able to communicate it in a compelling and clear way, so as to maximize the perceived value of your product or service. And in essence being able to create more value for the consumers and for yourself. [MUSIC]