Recently, I have noticed a website that talked a great deal about pricing strategy: http://bx.businessweek.com/pricing-strategy/blogs/. The topic ranges from pricing strategy to new entrants to general discussion about other pricing strategies. There ‘s one that caught my attention: pricing to consumers expectation which is the same as the book definition of consumer value pricing.
Now first of all , this is a rather difficult pricing strategy to find the customer’s perceived value for a particular product, let along the fact that everyone has a different perceived price as well as reservation pricing. Technically speaking, individual pricing, charging each customers his/her reservation price is the best strategy for the firm since it can capture both the consumer as well as producer’s surplus. However, it is impossible to put to reality, the only example would a very good second car dealer which still might not exact such a pricing strategy. Also there’s risk involved with customer value pricing, not only the information is too hard to collect and are usually incomplete, but also the fact that if consumers’ perceived value for the products is lower than the production cost for it will result the firm suffering from a loss.
Pricing, when done properly, is one of the most difficult tasks any business faces. Yet it is usually only given a perfunctory once-over. Customers have a range in mind that they’re willing to pay, but if you ask them, cheaper is always better. Ask a customer what they paid for something after the fact, and they’ll probably have a hard time remembering exactly. Price something too low, and people wonder about the quality. Price too high, and you’re out of budget. How can you meet your customer’s expectations without directly asking them? But come to think about it why not asking them, indirectly of course. For instance, a questionnaire regarding their purchasing pattern such as for substitute products or supplements, as well as their household income to determine the approx amount their are willing to pay for the product.
Also segmenting the market into small segments, then target a specific one using this pricing strategy is not such a bad idea. If extract every customer’s perceived value is too hard then narrow the customer numbers down, such as by house hold income, geographical (nation’s GDP to estimate), etc.
Given that, even if a firm’s not going after this pricing strategy, it is still a wise idea to consider what’s customers’ perceived value.
Everyone has a certain quality vs price tradeoff that they’re willing to make for any given product or service. There’s a quality level below which no one will pay. Same as a high quality level. In order for someone to be willing to pay for your product, you need to be within their range.
Think about the different stores where you can buy groceries. There’s Trader Joes, Whole Foods, Kroger, Hiller’s, Walmart, Meijers, etc. There are also more direct sources such as farmer’s markets and co-ops. Each of these locations targets a specific price vs. quality niche. For customers willing to pay for top quality foods and convenience, Whole Foods is their store of choice. For those who are more price sensitive, Walmart is the choice (where there is still a certain threshold for quality). Even lower on price are discount food stores where people are willing to pay even less for less quality.