350 The Marketing Book
necessary that ‘the benefits delivered by the
products or services match the benefits wanted
by the customers or users... a product or
service is purchased because of its ability to
perform a certain function, solve a particular
problem, or provide specific pleasures. It is
what the product or service does and how well
it does it that provides value’ (Monroe, 1990,
pp. 91–92). This is, of course, a central tenet of
marketing; however, its price-specific implica-
tions – as reflected in buyer deliberations
regarding value – are often forgotten (if ever
realized in the first place).
Sixth, given that ‘if the customer can select
between different competitive products, he will
most likely prefer the one which offers the
highest net value’ (Simon, 1989, p. 1), the aim of
the price decision maker must be to offer
superior value (Gale, 1994; Holbrook, 1996).
Creating and sustaining superior value lies at
the heart of developing (and maintaining)
competitive advantage and there only two
ways to it: ‘either offering customers lower
prices than competitors for equivalent benefits
or providing unique product benefits that more
than compensate customers for paying a higher
price’ (Morris and Morris, 1990, p. 3). In
following the first route, the control of costs
becomes crucial, as offering a lower price than
competitors while maintaining adequate profit
levelsrequires ‘aggressive construction of effi-
cient-scale facilities, vigorous pursuit of cost
reductions from experience, tight cost and
overhead control, avoidance of marginal cus-
tomer accounts, and cost minimization in areas
like R&D, service, sales force, advertising, and
so on’ (Porter, 1980, p. 35). In following the
second route, the firm strives for uniquenessin
some respect, which usually involves ‘a trade-
off with cost position if the activities required in
creating it are inherently costly, such as exten-
sive research, product design, high quality
materials, or intensive customer support’ (Por-
ter, 1980, p. 38). Note that costs are still
important, as any ‘premium prices will be
nullified by a markedly inferior cost position’
(Porter, 1985, p. 14).
Finally, it is important to realize that
buyers often have absolute limitson what they
are prepared to pay for a particular product.
The upper limit (known as the reservation price)
reflects the maximumprice that a customer is
willing to pay (Thaler, 1985) and represents the
marginalvalue of the product to the buyer over
other consumption alternatives. If the actual
price exceeds the reservation price, then no
purchase will take place. The lower limit
reflects a minimumprice below which ‘quality is
regarded as unacceptable’ (Simon, 1989, p. 185);
if the actual price falls below that limit then – in
the absence of any other information – the
customer will also not make a purchase. Lower
limits are particularly important when price is
used – at least partly – as an indicator of quality
(see also next section). For a review of the
conditions that are likely to encourage such a
function of price and the relevant empirical
evidence, see Rao and Monroe (1989) and
Zeithaml (1988).
From the above, it can be seen that under-
standing the role of customer considerations in
pricing is much more complex than might be
initially thought. Of particular importance, in
this context, is the fact that customers are likely
to be very heterogeneous in terms of their
knowledge, perceptions of, and reactions to
price (Rao, 1993). Differences in the nature,
number and relative importance attached to
different product attributes, differences in the
nature, level and stability of reference prices
used, and differences in the magnitude of
reservation prices all combine to produce dif-
ferent value perceptions of a particular offer by
different buyers (and hence different like-
lihoods to buy). Thus, one challenge for price
management is to capitalize on such differences
bycustomizingprices; in this context, ‘different
customers have different levels of willingness
and ability to pay. A common failing in pricing
practice is not to adapt prices to these realities,
thereby foregoing significant profit opportun-
ities’ (Dolan and Simon, 1996, p. 116). Price
customization can take place according to
customer characteristics, geographic location,