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MARKETING MANAGEMENT - Pricing Decisions

Customer value - Pricing Decisions

   Posted On :  18.06.2018 10:19 pm

Some business managers set prices simply by adding a percentage over costs to provide an acceptable profit.

Customer value

Some business managers set prices simply by adding a percentage over costs to provide an acceptable profit. That approach has two advantages. Price is simple to calculate and if a firm is a low-cost producer, relative to competitors, so-called ‘cost-plus’ pricing may seem to provide some protection from competitive attack. The trade-off for simplicity and security may be lost profits. In theory, the amount of profit that is sacrificed is the difference between what customers actually paid and what they would have been willing to pay. Compared with cost-plus pricing, pricing according to the value of the product to the customer is more difficult and speculative. The challenge is to determine what the value of the product is in the customer’s mind.
 
First, it is useful to distinguish between perceived value and potential value. Perceived value is what the buyer now recognizes. Potential value is what the buyer can be educated to see in the product. That is the task of marketing. It may be accomplished through advertising, personal selling and getting the buyer to try the product.
 
Second, product value may be perceived differently by different customer groups or market segments. Different segments may place different values on the several elements that make up the set of product (which in the broadest sense, includes the product or service itself, its brand image, its availability, and the service that the seller provides) attributes.
 
For example, a large firm may place little value on the technical service a supplier offers it (the large firm) has comparable or superior technical resources of its own. But a small company may be highly dependent on the supplier’s technical services and place high value on them in making purchasing decisions.
 
A third factor to consider in establishing customer value is the options that a potential buyer may have. Clearly, if the buyer can purchase a product at a lower price from one source than another, the lower price sets the upper bound in the marketplace. But for the buyer to have such effective options, he/she must have knowledge of them.
 
Another option the customer has may be not to buy the product at all but to make-do with what one has. Given this choice, the buy-not buy decision may be made by comparing the outcome of one course of action with the other.
 
These actions are quantifiable. One may calculate the operative savings in either instance and relate this to the cost of buying new, as the case may be. The anticipated savings may be expressed as a percentage return on investment (ROI). This, the amount of realizable savings establishes the value of a product to the customer. Calculated for each of several possible uses for available funds, ROI measures may serve to establish the buyer’s purchasing priorities. The choice between buy-not buy, of course, may not always be easily quantified with reference to expected savings. Nevertheless, it is a real and important consideration.
 
Finally, the price set by the seller is often taken by the potential customer as one measure of the value of the product. It is often interpreted by buyers as the supplier’s estimate of the worth of the product it sells. If the seller does not value the product highly, it is not likely that the buyer will. Therefore, pricing a product significantly below what the buyer might pay for its functional equivalent can be self-defeating. The buyer may infer that value is, in fact, connoted by price and choose the higher-priced option.
 
Value, then, for a given product tends to be a function of (1) the utility of its several attributes to the prospective buyer, (2) the options the buyer has and is aware of (i.e. the offerings of competing suppliers and the option of not buying at all), and (3) the extent to which the buyer perceives price itself as a measure of product value.
 
If the seller truly value-prices, then different prices would be charged for the product to different customer groups. It is referred as price discrimination. A relevant consideration in thinking about price as an expression of product value is how sensitive is the buyer to price. Price sensitivity will vary considerably among purchasers and, for the same purchaser, it will vary from one time and one set of circumstances to another. Buyers who can pass on the cost of the purchase are less sensitive to price than those who cannot.
 
Price sensitivity also relates to the performance standards by which the purchaser measures. Viewed differently, performance measures effectively establish the relative worth of different product attributes for the manager who has to make the decision and be judged for it. Another factor in price sensitivity is the uncertainty that attends switching from one supplier to a lower-priced source. Modest price differences are often insufficient to overcome the purchaser’s uncertainties about an untried supplier’s product quality, reliability and service.
Tags : MARKETING MANAGEMENT - Pricing Decisions
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