Customer Oriented Pricing
Posted on October 26th, 2008
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As the name suggests, it is an approach to pricing that examines the intensity of demand expressed by customers for a given product. The objective is to set price at a level which reflects the intensity of demand; a high price might be charged where there is a high degree of interest in the product and a low price charged when demand is weak even though unit costs may be the same in both instances.
Frequently, these approaches are referred to under the heading ‘price according to what the market will bear’. It is difficult, however, to price according to the value to the customer since it is difficult to determine that value. The perceived value of the product may be different for different market segments. Different market segments may place different values on the different attributes that constitute the product or service.
In industrial markets technical services may be more important for the small under-resourced company than the large technically competent enterprise. The level of competition in the market helps to determine the level of perceived value. If a buyer faces a number of options and can purchase a product at a lower price from one supplier than another, the lower price sets the upper band of the perceived value range.
In such circumstances the ability of the buyer to substitute one competitive offering for another helps to determine the effective upper band to perceived value. In many circumstances the buyer may be able to avoid purchasing altogether or to postpone the purchase. The price set by the selling firm is often taken by the customer as a measure of value of the product. The price quoted is taken by buyers as the seller’s estimate of the product’s worth.
The company may wish to avoid pricing a product significantly below what the buyer might pay for its functional equivalents. Buyers often infer that value is reflected in price; for these people higher prices mean higher value. In many situations prices reflect values and quality in items purchased. Price also reflects the newness of technology and the degree of finish and styling in industrial equipment and consumer durables.
Price–quality relationships are an important feature of many markets. In the market for consumer electronics quality and price are important discriminating variables. In this case suppliers of electronics were evaluated by store buyers to determine similarities and preferences. Using multidimensional scaling the two most important underlying evaluative criteria were price and quality. These two variables serve to discriminate simultaneously among suppliers and buyers and a number of groups or segments are identified.
ABC Durables was perceived to be a high quality supplier with price on the high side. Two department stores, A and B, also positioned themselves in this segment. The two discount stores were clearly seen as low price but medium level of quality. The three general merchandisers were seen at a slightly higher price–quality level.
The brand leader and two other major competitors were judged to supply high priced products at a relatively low level of quality. This would give considerable concern to each of these suppliers particularly the brand leader who may have been living on past investment in a brand now in need of renewal. In some circumstances it may be possible for the firm to base its pricing decision on the product’s perceived value.
Here the buyer’s perception of value and not the seller’s level of cost is taken as the key to pricing. The firm develops a product for a particular target market with a particular market positioning in mind with respect to price, quality and service. The firm thus makes an initial decision on the value of the product to the customer and the acceptable price level. The next step for the firm is to estimate the volume it can sell at this price and cost.
If the result is positive, the product is selected for development; if negative the idea is dropped. The R. & A. Bailey and Company Limited followed such a pricing strategy for Baileys Original Irish Cream Liqueur. The firm decided to position the new brand in the exclusive end of the liqueur market and accordingly charged a relatively high price. Imitators, economy products and other substitutes have come and many have gone but the successful high price quality image has stood this now universally known brand in good stead. The key to perceived value pricing is to make an accurate determination of the market’s perception of the value of the total offer, i.e. product and accompanying services.
