Core Concepts of Marketing by John Burnett - HTML preview

CHAPTER 9

PRICING THE PRODUCT

PR ICE

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VALUE =PERCEIVED BENEFITS - PERCEIVED COSTS

FIGURE 9 .1

The customer's vi ew of price

To a certain extent, perceived benefi ts are the mirror image of perceived costs. For

example, paying a premium price-e.g. , $650 for a piece of Lalique crystal-is

sated for by having this exquisite work of art displayed in one's home. Other possible

ceived benefits directly related to the price- value equation are status, convenience, the deal , brand, quality, choice, and so forth. Many of these benefits tend to overlap. For instance,

a Mercedes Benz E 750 is a very high-status brand name and possesses superb quality. This

makes it worth the $100,000 price tag. Further, if Mark Smith can negotiate a deal

ing the price by $ 15,000, that would be his incentive to purchase. Likewise, someone

ing in an isolated mountain community is willing to pay substantially more for groceries

at a local store rather than drive 78 miles to the nearest Safeway. That person is also

ing to sacrifice choice for greater convenience. Increasing these perceived benefits is rep-

resented by a recently coined term-value-added. Thus, providing value-added elements

to the product has become a popular strategic alternative. Computer manufacturers now

pete on value-added components such as free delivery setup, training, a

help line,

trade-in, and upgrades .

Perceived costs include the actual dollar amount printed on the product, plus a host

of additional factors. As noted, these perceived costs are the mirror-opposite of the

fits. When fi nding a gas station that is selling its highest grade for 6¢ less per gallon, the

customer mus t consider the

drive to get there, the long line, the fact that the

dle grade is not available, and heavy traffi c. Therefore, inconvenience, limited choice, and

poor service are possible perceived costs. Other common perceived costs include risk of

making a mistake, related costs, lost opportunity, and unexpected consequences, to name

but a few. A new cru ise traveler discovers she really doesn' t enjoy that venue for several

reasons-e.g., she is given a bill for incidentals when she leaves the ship, she has used up

her vacation time and money, and she receives unwanted materials from this company for

years to come.

In the end, viewing price fro m the customer's

pays off in many ways. Most

notably, it helps define value-the most important basis for creating a competitive advantage.

Price from a Societal Perspective

Price, at least in dollars and cents, has been the historical view of value. Derived from a

bartering system-i.e., exchanging goods of equal value-the monetary system of each soci-

ety provides a more convenient way to purchase goods and accumulate wealth . Price has

also become a variable society employs to control its economic health. Price can be

sive or exclusive. In many countries, such as Russia, China, and South Africa, high prices

for products such as foo d, health care, housing, and automobiles, means that most of the

population is excluded from purchase. In contrast, countries such as Denmark, Germany,

and Great Britain charge little for health care and consequently make it available to all .

There are two different ways to look at the role price plays in a society: rational man

and irratio nal man. The former is the primary assumption underlying economic theory, and

PRICE DEFINED:THREE DIFFERENT PERSPECTIVES

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suggests that the results of price manipulatio'1 are predictable. The latter role for price

acknowledges that man's response to price is sometimes unpredictable and pretesting price

manipulation is a necessary task. Let's discuss each briefly.

Rational Man Pricing: An Economic Perspective

Basically,

the consumer is a rational decision maker and has per-

fect :nformation.

if a price for a particular product goes up and the customer is

aware of all relevant information, demand will be reduced for that product. Should price

decline, demand would increase. That is, the quantity demanded typically rises causing a

downward sloping demand curve.

A demand curve shows the quantity demanded at various price levels (see Figure 9.2).

As a seller changes the price requested to a lower

product or service may become

an attractive use of fin ancial resources to a larger number of buyers, thus expanding the

total market for the item. This total market demand by all buyers for a product type (not

just for the company 's own brand name) is

primary demand. Additionally, a lower

price may cause buyers to shift purchases from competitors, assuming that the competitors

do not

the lower price. If

demand

not expand and competitors meet the

lower price the result will be lower total revenue

all sellers.

Since, in the U.S., we operate as a free market economy, there are few instances when

someone outside the organization controls a product's price. Even commodity-like prod-

ucts such as air travel, gasoline, and telecommunications, now determine their own prices.

Because large companies have economists on staff and buy into the assumptions of eco-

nomic

as it relates to price, the classic price-demand relationship dictates the eco-

nomic health of most societies. Alan Greenspan, Chairman of the U. S. Federal Reserve,

determines interest rates charged by banks as well as the money supply, thereby directly

affecting price (especially of stocks and bonds). He is considered by many to be the most

influential person in the world.

o

100

140

Quantity demanded in a given period of time (# of units)

A

reduction in price unit would cause a 40-unit increase in the

quantity demanded assuming no other variable changes.

FIGURE 9.2

Price and der;land

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