ALTERNATIVEAPPROACHESTODETERMININGPRICE 245- Tothe customer,priceis the onlyunpleasan t partofbuying.
- Priceisthe easiestmarketing tooltocopy.
- Pricerepresentseverythingabouttheproduct.
Still , value-based pricingisnot altruistic. It asks andanswer~twoquestions:(1)whatis
thehighest priceI cancharge and stillmakethesale?and (2)amI willingtosellatthat
price? Thefirstquestionmust taketwoprimaryfactorsinto account:customersandcom-
petitors.Thesecondquestionis influencedbytwomore:costsandconstraints.Let'sdis-
cu sseachbriefly.
M anycustomer-related factorsareimportantinvalue-basedpricing.Forexample,
it is criticaltounderstandthecustomerbuyingprocess.Howimportantis price?Whenis
it considered? Howisit used? Anotherfactoris thecostofswitching.Haveyoueverwatched
theTVprogram"ThePriceisRight" ?Ifyouhave,you knowthatmostconsumershave
poorpriceknowledge.Moreover,the ir knowledgeofcomparablepriceswithina product
category--e.g.,ketchup-istypicallyworse. Sopriceknowledgeisa relevantfactor. Finally,
themarketermust assess thecustomers 'priceexpectations.Howmuchdoyouexpectto
pay fora largepizza? ColorTV?DVD? Newspaper?Swimmingpool?Theseexpectations
createa phenomenoncalled"sticker shock"asexhibited bygasoline,automobiles, and
ATMfees.
Asecondfactorinfluencingvalue-basedpricingiscompetitors.Asnotedinearlier
chapters, definingcompetition isnotalways easy.Ofcoursethereareli ke-categorycom-
petitors suchas Toyotaand Nissan.We have alreadydiscussedthenotionofpricingabove,
below,andat thesame levelofthese directcompetitors.However,therearealsoindirect
competi tors th atconsumers mayuse tobase pricecomparisons. Forinstance,wemayuse
theprice of a vacationas a basis forbuyingvacationclothes.Thecostofeatingoutis com-
paredtothecostofgroceries.Therearealsoinstanceswhena competitor, especiallya mar-
ketleader,dictatesthepricefor everyoneelse.Weyerhauserdetenninesthepriceforlumber.
Kelloggestablishesthepricefo r cereal.
Ifyou're buildinga picnictable,it is fairlyeasytoaddupyourreceiptsandcalcu-
lateco sts. Foraglobalcorporation, determiningcostsisa greatdealmorecomplex.For
example, calculatingincrementalcostsandidentifyingavoidablecostsarevaluabletasks.
Incrementalcostis thecost of producing eachadditional unit.Iftheincrementalcostbegins
toexc~edtheincremental revenue,it is a clearsigntoquitproducing.Avoidablecostsare
thosethatareunnecessary or canbepas sedontosomeotherinstitutioninthe marketing
channel.Addingcostlyfeatures t o a productthat thecustomer cannotuseis anexampleof
theformer. Astothelatter, thebanking industryhasbeenpassingcertaincostsontocustomers.
Anotherconsiderationisopportunitycosts.Becausethe companyspentmoneyon
store remodeling,theyare notableto takeadvantageof a discountedproductpurchase. Finally,
costsvary frommarket-to-marketas wellasquantitiessold.Researchshouldbeconducted
toassess thesedifferences.
Althoughit would benicetoassumeth at a businesshasthefreedomtosetanyprice
it chooses,thisisnot alwaysthecase. Therearea varietyofconstraintsthatprohibitsuch
freedom.Some constraintsareformal,suchasgovernmentrestrictionsinrespecttostrate-
gieslikecollusion andprice-fixing. Thisoccurs whentwoormorecompaniesagreetocharge
the sameor verysimilarprices.Other constraintstendtobeinformal.5xamplesinclude
matching the priceof competitors, a traditionalprice chargedfora particularproduct,and
charginga price that covers expectedcosts.
Ultimately,value-based pricingoffers thefollowingthreetacticalrecommendations:
- Employa segmented approach toward price,basedonsuchcriteriaascustomertype,
location,and ordersize.