Pricing 349
includes not only the monetary price, but also
the time and effort that the buyer must invest’
(Morris and Morris, 1990, p. 3). Thus, the
purchaseprice alone may notfully capture the
buyer’s total sacrifice; things like start-up costs
(e.g. transportation and installation) and post-
purchase costs (e.g. maintenance and risk of
failure) may also be important and should be
borne in mind by the price decision maker.
Failure to consider the buyer’slife cyclecosts is
a common pricing mistake and – particularly in
industrial markets – can result in lost opportun-
ities for gaining/keeping customers (see, for
example, Forbis and Mehta, 1978; Shapiro and
Jackson, 1978; Christopher, 1982).
Second, in incurring a ‘sacrifice’, the
buyer must be ableto do so. The ability to pay
is a function of the particular customer’s
economic circumstances (e.g. disposable
income) and can be viewed as a constraining
factor on the type and amount of purchases a
particular customer can make over a partic-
ular period; thus, the ability to pay reflects the
‘budget constraint’ often mentioned in con-
ventional micro-economic theory. In practice,
obstacles relating to the ability to pay may be
overcome by changing the time of payment
(e.g. providing a period of interest-free credit),
the method of payment (e.g. offering an instal-
ment plan) or the form of payment (e.g.
providing a trade-in facility).
Third, not only must a potential buyer be
able to pay the price, he/she must also be
willingto do so. Willingness to payis a complex
function of a particular buyer’s perceived
evaluation of the product/service involved, the
actual price, competitive offerings, and his/her
reference price. The latter is ‘an internal price to
which consumers compare observed prices’
(Winer, 1988, p. 35) and represents the amount
that the customer regards as fair/appropriate/
acceptable for the particular purchase. Refer-
ence prices are influenced by such factors as the
last price paid, an ‘average’ price based on
historical experience of purchases, the prices of
competing products, and expectations about
future prices (Kalynaram and Winer, 1995).
Note that it is not necessarily the actualprices
of previous purchases and/or competing offer-
ings that combine to form a reference price, but
prices as recalled/perceivedby the buyer. Indeed,
the price decision maker should appreciate
that ‘buyers do not have perfect information
regarding available products and their prices.
Even if such information were available, peo-
ple are not perfect information processors...
As a result, buyers are not always very price
aware’ (Morris and Morris, 1990, p. 60). Obsta-
cles related to the willingness to pay are much
more difficult to identify and overcome than
obstacles relating to the ability to pay. Not only
must the potential buyer be convinced that he/
she can affordto buy the product, but also that
he/she will be making the right choice. Thus,
non-price instruments (such as advertising and
promotion) must be employed to convince the
buyer that the product offers superior value
(see below) and/or to influence the reference
price used by the buyer (e.g. as when a
‘regular’ price is advertised alongside the ‘spe-
cial deal’ price at which the product is actually
offered).
Fourth, the extent to which a buyer will
decideto incur the sacrifice implied by the price
depends on how he/she will judgewhat he/she
will get in return. This is the essence of the
notion of value: a trade-off between the bundle
of benefits to be received (as reflected in the
product) and what has to be given up (as
reflected in the price). In seeking particular
benefits, the buyer focuses on a desired set of
attributes (which typically differ in their rela-
tive importance) and subjectivelyevaluates dif-
ferent products on these attributes (Monroe and
Krishnan, 1985). The outcome of this evaluation
is then compared to the price of the product
and the ‘best value’ is the one that offers the
most benefit (in terms of the customer’s desired
set of attributes) for the least price. Put simply,
‘the customers’ goal is to obtain the most value
for their money... Their concern is to get their
money’s worth’ (Nagle, 1987, p. 2).
Fifth, and related to the previous point, to
provide value from a buyer’s perspective, it is