Economic and Perceived Value Pricing
Order Instructions:
Economic and Perceived Value Pricing
It is important for a firm to get its pricing strategy right because the potential impact on its net revenue is enormous. Traditional pricing models advocate an economic approach that involves computing the firm’s cost of goods sold (COGS) and a required profit margin that is added on top of the costs to determine the price of the product.
Recently there has been an abundance of journal articles that advocate a perceived value approach, whereby the value of the product to the consumer is quantified and then a profit margin is added on top of this quantified value to determine the price of the product. For example, if the cost to make a gallon of a radically new biocide product is $5 and the required profit margin is 100% of cost, then, using the economic approach, the suggested price per gallon would be $10.
On the other hand, if consumers perceive that the biocide is valued at $100 because of cost savings to the consumers, and a margin, say $10, is added on top of it, this perceived value approach would suggest pricing the biocide at $110. Five-dollar cups of coffee or three-dollar bottles of water are prime examples of this perceived value approach. The assumption with the perceived value approach is that the consumers are not likely to know the cost structure of the product.
After reviewing the resources for this week, respond to the following:
• Should prices reflect the cost of making the product, as suggested by the economic value approach, or should prices reflect the perceived value of the product?
• What are some advantages and risks of each approach, and what implications do they have when crafting marketing strategy?
• How does the approach differ if you are marketing a service rather than a product?
• Be sure to give specific examples to illustrate your answers.
Resources:
Articles
Garbarino, E., & Lee, O. (2003). Dynamic pricing in Internet retail: Effects on consumer trust. Psychology & Marketing, 20(6), 495–513. Retrieved from Business Source Premier database.
This article discusses individual price discrimination, particularly on the Internet, as well the affect this type of pricing has on the trust level of the consumer.
Vesanen, J. (2007). What is personalization? A conceptual framework. European Journal of Marketing, 41(5/6), 409–418. Retrieved from Business Source Premier database.
The new buzzword in marketing is personalization. This article presents a framework for the concept of personalization as this term tends to be defined differently by different marketers, causing confusion.
Avlonitis, G., & Indounas, K. (2007). An empirical examination of the pricing policies and their antecedents in the services sector. European Journal of Marketing, 41(7/8), 740–764. doi:10.1108/03090560710752384
After surveying 170 service companies regarding factors that influence and determine pricing, the authors conclude that a unique combination of environmental and organizational characteristics affects each individual pricing decision.
Balabanis, G., & Diamantopoulos, A. (2008). Brand origin identification by consumers: A classification perspective. Journal of International Marketing, 16(1), 39–71. doi:10.1509/jimk.16.1.39
This paper focuses on the ability of consumers to identify the country where an item is produced, the factors that help or hinder the identification, and the consequences of the brand origin on consumer behavior.
Calantone, R., & Di Benedetto, C. (2007). Clustering product launches by price and launch strategy. Journal of Business & Industrial Marketing, 22(1), 4–19. doi:10.1108/08858620710722789
In this research, the authors study over 200 new product launches to look for similarities in launch strategies and methods of pricing.
SAMPLE ANSWER
- Decision on whether prices should reflect the cost of making the product, as suggested by the economic value approach, or whether prices should reflect the perceived value of the product
Pricing is a critical strategy that influences the demand for a company’s products or services and hence affects its profitability at the end of each financial year. Price plays a very important role in influencing the buying decisions of customers. Competition, costs and price sensitivity are some of the known parameters that influence the pricing strategy of a company. Economic value approach is one the methods that companies use to set prices for their products and /or services (Vesanen, 2007). This method uses accounting data which enables a company to set prices that will enable it to achieve a certain mark up on costs which in turn assist in realizing a desired return on investment. The main advantage of this price setting method is that it is easy to calculate since accounting data is readily available. It is easy to forecast into the future and to budget. It however ignores certain aspects of demand as it does not take into account consumer willingness to pay the price and price elasticity of demand. It also ignores industry forces such as the competition. Perceived value pricing quantifies data on perceived customer value of a product in setting prices for a product (Smith, 2011). This method is concerned with creating additional customer value to increase customers’ willingness to pay more in spite of competitor prices. This approach is driven by a deep understanding of customers’ needs, customers’ willingness to pay, price elasticity and customers’ perception of value. The main weakness of perceived value pricing is that data on customer preferences, willingness to pay and price elasticity are not readily available and tends to be subjective. This approach also tends to set ridiculously high prices that encourage entry into the industry by new players. It is apparent that none of the two pricing strategies is without weaknesses. The best pricing strategy is one that takes into account costs of goods sold, competitors pricing and price sensitivity parameters (Pancras, 2010).
- The advantages and risks of each approach, and implications they have when crafting marketing strategy?
Economic value approach is very easy to use as it relies on readily available accounting data on costs. The approach also aids in planning and is a good method in countering competitors pricing strategies. This strategy can assist in achieving a cost leadership marketing strategy. In the event that a company wants to offer its products at the lowest price possible, this strategy will assist in achieving this goal. This strategy can however ignite unsustainable price wars that may be detrimental to the company. It should therefore take into consideration competitor pricing strategies before setting prices. This strategy is most ideal in fast moving consumer goods targeting the mass market (Avlonitis &Indounas, 2007). Perceive value pricing is a subjective pricing method since it is difficult to quantify perceived customer value. Getting data from all actual and prospective customers of a product or service is difficult. However the method is ideal for differentiation marketing strategy. This strategy is whereby a company intends to differentiate itself and the products it serves in a given market segment. This strategy is ideal for unique and specialized products and services targeting distinct market segments. It can be used in high end markets offering unique products such as high end wines and super luxurious cars (Garbarino & Lee, 2003).
- How the approach differs if you are marketing a service rather than a product
Unlike products which are tangible, services are intangible. It is therefore difficult to calculate costs of goods sold in a service to enable a cost accountant set a mark up. Perceived value pricing is most ideal for services since the quality of a service is mainly perceived but cannot be measured(Vesanen, 2007). Economic value approach even though easy to use may not be ideal because of challenges in getting data on costs. Even when the costs can be found, the value that clients attach to a service will definitely determine whether they will buy a service or not. For example in a hotel, the aesthetics, ambience, friendliness of waiters, speed at which service is offered and manner in which complaints are addressed will influence the prices set for the various services (Calantone & Di Benedetto, 2007). Perceived value pricing even though ideal for service should not ignore competitor pricing strategies since competitive pricing can bring down a company. The other reason why perceived value pricing is ideal for services is because this method is concerned with creating additional customer value to increase customers’ willingness to pay. This approach is also driven by a deep understanding of customers’ needs, customers’ willingness to pay, price elasticity and customers’ perception of value (Anuwichanont, 2011).
References
Anuwichanont, J., PhD. (2011). The impact of price perception on customer loyalty in the airline
context. Journal of Business & Economics Research, 9(9), 37-49. Retrieved from http://search.proquest.com/docview/892713889?accountid=45049
Avlonitis, G. J., &Indounas, K. A. (2007).An empirical examination of the pricing policies and
their antecedents in the services sector. European Journal of Marketing, 41(7), 740-764. doi:http://dx.doi.org/10.1108/03090560710752384
Calantone, R. J., & Di Benedetto, C. A. (2007). Clustering product launches by price and launch
strategy. The Journal of Business & Industrial Marketing, 22(1), 4-19. doi:http://dx.doi.org/10.1108/08858620710722789
Garbarino, E., & Lee, O. F. (2003). Dynamic pricing in internet retail: Effects on consumer trust.
Psychology & Marketing, 20(6), 495-513. Retrieved from http://search.proquest.com/docview/227715378?accountid=45049
Pancras, J. (2010). A framework to determine the value of consumer consideration set
information for firm pricing strategies. Computational Economics, 35(3), 269-300. doi:http://dx.doi.org/10.1007/s10614-009-9193-3
Smith, T. J. (2011, Jul). PRICING STRATEGY: PRICKING THE VEIL OF VALUE
EXCHANGE. Cost Management, 25, 34-37. Retrieved from http://search.proquest.com/docview/893907812?accountid=45049
Vesanen, J. (2007). What is personalization? A conceptual framework. European Journal of Marketing, 41(5), 409-418. doi:http://dx.doi.org/10.1108/03090560710737534
We can write this or a similar paper for you! Simply fill the order form!
