Foundations of Pricing Objectives

    The foundations underlying pricing strategy can be described as a tripod, with the three legs being named costs, competition, and value to the customer.

    The costs to be recovered set a floor to the price that may be charged for a specific product; the value of the product to the customer sets a ceiling.

    Whereas the price charged by competitors for similar or substitute products may determine where, within the ceiling-to-floor range, the price level should actually be set.

    The foundations of service price are as follows:

    1. Cost

    Companies seeking to make a profit must recover the full costs associated with producing and marketing services, and then add a sufficient margin to yield satisfactory profit.

    An exception occurs in the case of “loss leaders,” designed to attract customers who will also buy profitable products from the same organization.

    But even with such loss leaders, managers need to know the full costs associated with these products, so that the amount of promotional subsidy is fully understood.

    Price may also play a role in communicating the quality of service. In the absence of tangible clues, customers may associate higher prices with higher levels of performance on service attributes.

    Pricing Tripod

    2. Value

    The term “value” is one that is rather loosely used. Research by Zeithaml found that “what constitutes a value – even in a single product category – appears to be highly personal and idiosyncratic.

    In exploratory research on beverages, she found four broad expressions of value:

    1. Value is the low price
    2. Value is whatever want in a product,
    3. Value is the quality get for the price I pay, and
    4. Value is what I get for what I give.

    If the sum of all the perceived benefits (gross value) minus the sum of all the perceived costs, it follows that the greater the positive difference between perceived benefits and perceived costs, the greater the net value.

    If the perceived costs of using a service are less than the perceived benefits, then it will possess negative net value; customers will probably describe the service as “poor value” and decline to purchase it.

    Marketers can think of calculations that customers make in their minds as similar to a pair of scales, with product benefits located in one tray and being offset to some degree by the weights in the other tray representing the costs associated with obtaining those benefits in the other tray.

    Net Value = (Benefits-Costs)

    3. Competition

    Firms with relatively undifferentiated services need to monitor what competitors are charging and should try to price accordingly.

    When they see little or no difference between competing offerings, customers may choose what they perceive as the cheapest. Price competition increases with:

    1. An increasing number of competitors
    2. An increasing number of substituting offers
    3. Wider distribution of competitors and/or substitution
    Disclaimer: While we make every effort to update the information, products, and services on our website and related platforms/websites, inadvertent inaccuracies, typographical errors, or delays in updating the information may occur. The material provided on this site and associated web pages is for reference and general information purposes only. In case of any inconsistencies between the information provided on this site and the respective product/service document, the details mentioned in the product/service document shall prevail. Subscribers and users are advised to seek professional advice before acting on the information contained herein. It is recommended that users make an informed decision regarding any product or service after reviewing the relevant product/service document and applicable terms and conditions. If any inconsistencies are observed, please reach out to us.

    Latest Articles

    Related Stories

    Leave A Reply

    Please enter your comment!
    Please enter your name here

    Join our newsletter and stay updated!