Price Communication
One of the strategies to influence the consumers’ willingness-to-pay is through the use of price communication. In order for companies to gain their market share they need to ensure that consumers understand the value of the company’s products both economical and psychologically.
In studies conducted by researchers many business managers have noted that the most important capability in their pricing strategies is accurately “communicating value and price”. On the other hand, they also note that it is one of the weakest capabilities for most organizations to perform (Nagle, Hogan & Zale, p. 72). Although communicating price can be difficult at times, given that many people perceive prices differently, careful analysis suggests that by using the four key aspects of proportional price evaluations, reference prices, perceived fairness, and gain-loss framing can help make the pricing strategy process easier and more effective for companies no matter what the economy is doing.
Proportional Price Evaluations
Rather than evaluating price differences in absolute terms, buyers typically evaluate proportionally, which is also known as the Weber-Fechner effect. The Weber-Fechner effect indicates that consumers tend to evaluate price differences relative to the level of the base price. In other words, consumer’s perceptions of price changes depend on a percentage not an absolute difference (Nagle, Hogan & Zale, p. 88).
In this scenario consumers typically see thresholds above and below the products price and then either do not notice or ignore the rest. For example, the textbook author’s noted automobile companies often use this tactic by offering free financing compared to a fixed dollar rebate. Consumers wil...
... middle of paper ...
...er through effective price communication, especially in today’s poor economy.
Works Cited
Nagle, T. T., Hogan, J. E., & Zale, J. (2010). The strategy and tactics of pricing, a guide to growing more profitably. (5th ed.). Upper Saddle River, NJ: Pearson P T R.
Haws, K. L., & Bearden, W. O. (2006). Dynamic Pricing and Consumer Fairness Perceptions. Journal of Consumer Research, 33(3), 304-311, Retrieved from http://web.ebscohost.com.library3.webster.edu/ehost/pdfviewer/pdfviewer?sid=e97e4379-43ce-49ac-9775-40eb641ade60%40sessionmgr115&vid=9&hid=112
Kahneman, D. (n.d.). Behavioural finance. Retrieved from http://prospect-theory.behaviouralfinance.net/
Khaneman, D., & Tversky, A. (1979). Prospect theory: An analysis of decision under risk. Econometrica, 47(2), pp. 263-291, Retrieved from http://www.princeton.edu/~kahneman/docs/Publications/prospect_theory.pdf
A couple of Squares has a limited capacity for which to produce their products and smaller companies tend to have larger fixed costs than bigger companies. Therefore, A Couple of Squares must maximize profits in order to ensure that they will stay in business. A profit-oriented pricing objective is also useful because of A Couple of Squares’ increased sales goals. A Couple of Squares increased their sales goals due to recent financial troubles. Maximizing profits is the easiest way to meet these sales goals due to the fact that A Couple of Squares has limited production capacity. The last key consideration favors a profit-oriented pricing objective because A Couple of Squares offers a specialty product. A specialty product often has limited competition, therefore can be priced on customer value. Pricing at customer value will maximize profits as well as customer satisfaction. A Couple of Squares’ lack of production capacity, increased sales goals, and specialty product favor a profit-oriented pricing
As we learned from Chapter 12, price must be carefully determined and match with firm’s product, distribution, and communication strategies. (Hutt & Speh, 2012, p. 300) Therefore, there should be a strong market perspective in pricing. In order to build an effective pricing policy, marketers should focus on the value a customer places on a product or service. One of the most effective ways to do so is differentiating through value creation.
Setting prices too high would discourage purchasing and setting prices too low negatively affects revenue. While several pricing strategies exist, the use of a value-based pricing system, as implemented at Cabela’s, offers an optimal strategy that meet both customer expectations and company requirements.
Price can sometimes be an indicator of quality with a higher price indicating higher quality (Mowen & Minor, 1998). Consumers perceive that a higher price can be attributed to the higher cost of quality control. Some consumers are highly price sensitive (elastic demand), whereby a high price may shift consumers to competitive brands (Mowen & Minor, 1998). Therefore, price can have a positive or negative influence on customers.
Engage with lower demographic customers for expanding opportunities by modifying prices to reasonable fair value
Bargaining power of customers looks at the power of the consumer to affect pricing and quality. (Arline,
Pricing is an important aspect of every business. Chief Financial Officer’s (CFO) use pricing to create financial projections, establish a break-even point, and calculate profit and loss margins (Power Point, 2005). It is the only element in the marketing mix that produces revenue. Price is also one of the most flexible elements of the marketing mix as it can be changed very quickly. This is usually done to beat competitor prices in an attempt to fix the product’s market value position very low (Anderson & Bailey, 1998). After all, high prices make it difficult to become the market share leader. The leading US retailer, Wal-Mart, is an expert at low product pricing as evident in 2004 with $250 billion dollars in sales to their 138 million weekly shoppers. However, they are also responsible for reducing prices so low that it drives specialty stores out of business. This is the effect Wal-mart has had on many toy stores and has almost closed the doors of the famous toy store Toys “R” Us Inc.
Participative pricing mechanisms, depending on its innovativeness, can be an advantageous promotion tool to catch potential customers? attention. Moreover, it gives seller a unique data regarding consumers? willingness to pay for a specific product or a service (Kim, Natter & Spann, 2009; Spann, Skiera & Schaefers, 2004). These data can be used as a forecast when predicting future sales of a product or a service (Kim, Natter & Spann, 2009).
Prospect theory is a descriptive model concerning the issue of decision making under risk. The theory stated that people tend to made decision by examining the potential gain and loss comparing to reference point and exhibit certain kinds of heuristics and biases in this process such as certainty effect, reflection effect, probabilistic insurance and isolation effect. It also divided choice process into editing phases and the subsequent phase of evaluation, which were modified to framing and valuation phases in the later version (Kahneman and Tversky, 1979, Tversky and Kahneman, 1992).
Elasticity from a demand perspective refers to the response of the demand for a good as it relates to the changes in the price. When the consumers are responsive to a price change of a good or service it means the demand is relatively elastic. Conversely, when consumers are less rseponsive to a price change a good or service this demand situation is described as inelastic. More specifically, our text defines price elasticity as “the relative amount by which the quantity demanded will change in response to change in the price of a particular good” (Miller p. 415). Consumer’s tend to be sensitive to large price changes of common goods and may choose to purchase other goods and services or refrain
Human psychology has conditioned the mind to correlate the price of a good with its quality superiority, even if the actual excellence promised is not present. Therefore, for a customer to automatically perceive the branded product as premium, a high-price must be associated with the proposal. For a brand in the packaged food and beverage industries, though, price should be closely tied towards valorizing the benefits it is providing its customers. Emphasizing the importance the roles of product, production and distribution actually play in premiumization
price as the major decision-making tool for customers (“Global Consumer Electronics”, 2013). This lack of
Olson, J. C. (1977). Price as an informational cue: effects in product evaluation. In A.G. Woodside, J. N. Sheth, & P. D. Bennet, Consumer and Industrial buying behaviour (p. 267-286). New York: North Holland Publishers.
The modern theory of price discrimination began with the work of Arthur Cecil Pigou (1877- 1959) and is defined by Machlup (1955): "Price discrimination may be defined as the practice of a firm or group of firms of selling (leasing) at prices disproportionate to the marginal costs of the products sold (leased) or of buying (hiring) at prices disproportionate to the marginal productivities of the factors bought (hired)". But in simpler terms, "price discrimination is often defined as charging different customers different prices for the same or highly similar offering" (Smith, 2004). The motive behind this is to increase profit by reducing consumer surplus. If the same price is charged to all consumers, some potential revenue is lost since some of the consumers would have been prepared to pay more. But before answering the question of whether firms should price discriminate or not, we will have to distinguish between the various types of price discrimination and before that it is important to note that there are three necessary conditions for a firm to practise price discrimination, namely, the firm must be a price maker, the elasticity of demand must be different in the different markets and finally, the market must be clearly separated.
...e enough because the company has chosen the best possible way to increase the company performance. The pricing strategy is the company’s best strategy from all because it affected the sales revenue a lot. Although fluctuating the price is quite risky for a business since the customers might order from other companies if the company doesn’t do it properly, but XXX Company manage to done it well so far. The effectiveness might also be seen by the average of sales revenue between January to August from 2011 to 2013.