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Anytime anything is sold, a price is involved. Recall that during the exchange process, a seller is offering something of value to a buyer in exchange for something else of value. This value to the seller is often referred to as price.
You may recall that price is one of the 4 Ps of marketing, or one element in the marketing mix. Once a product has been developed, marketers must determine at which price the product or service will be offered to the target market. Today, pricing is one of the more difficult decisions that marketers must make in the marketing mix because it directly impacts the perception of value from the customer as well as the company’s bottom line.
Simply put, price refers to the exchange of something of value between a buyer and a seller. The price determines how much revenue the company will earn and drives the financial health of the organization. However, marketers cannot simply price products and services based on the expected revenue of the organization. The price must be set so that the buyer sees value in the product offering and the price they will pay for it. In other words, marketers must put the perception of value in the product’s price at the forefront while also considering the financial impact on the organization.
IN CONTEXT
While price is what is referred to when discussing most goods and services, price can take on many terms depending on the exchange that is taking place. In higher education, you are paying tuition—the price—in exchange for your education. If you need an attorney, you are likely going to pay a fee—the price—for services rendered. When you are traveling and have to pay a toll, it is the price you pay for using the road or bridge. Regardless of the exact terminology used, pricing of goods and services have the same basic elements.
While a marketer is determining the price of goods and services, they must keep in mind that pricing must benefit both parties involved in the exchange process: the seller (company) and the buyer (customer). Both parties must see value in the product process through pricing for the exchange process to be successful.
We’ll first discuss how price is an indicator of value to the buyer and then turn our attention to the seller.
When a buyer purchases a product or service, they seek to satisfy a need through the purchase. The customer will, consciously or not, use several criteria to determine the amount they are willing to spend to satisfy that need. These criteria ultimately lead to the value that the customer sees in the product.
.If a consumer purchases a high-end designer Chanel handbag for $11,000, they might equate the value to a beautiful, high-end, well-made handbag that will last for many years. They may also subconsciously believe the bag will portray a certain social status while carrying it. For them, there is value and quality in the product, and they are willing to pay the high price.
EXAMPLE
Consider another example: you are in the middle of fixing dinner, and you realize you don’t have enough milk for the dish you are preparing. There is a convenience store just a block away from your house and a grocery store five miles away. If you send your partner to walk to the closer convenience store, they will pay more for the milk than if they were to drive the extra five miles to the grocery store, which would be less expensive. With the higher-priced item at the convenience store, you are paying for the convenience. The value in this scenario is in the time saved even at a higher price.With these two examples, the perceived benefits are directly related to the price-value equation. Perceived benefits of cost can include status, convenience, brand, quality, etc. and can vary from buyer to buyer or even situation to situation.
Perceived costs can also include a host of criteria in addition to the price printed on the price tag.
You will still consider other factors before making the decision. How long does it take for you to drive that extra five miles? Is the grocery store known for having long lines during the time you will be shopping? Do you need other items you can only get at that store? Does the store carry the brand of milk you prefer? These are only a few of the many considerations you make before you decide to make the purchase. These are all perceived costs and are weighed against the perceived benefits the buyer considers when determining value.
From a marketer’s standpoint, these are all factors that must be considered when setting price. In addition to the value perceived by the buyer, the marketer must also understand other psychological factors that influence the buyer’s perception of price. Several psychological pricing examples are discussed next.
Price Anchoring: When Steve Jobs introduced the Apple iPad during a Keynote in 2010, he showed off the high-resolution screen and talked about its revolutionary features. “What should we price it at?” he asked. “If you listen to the pundits, we’re going to price it at under $1,000, which is code for $999.” He put a giant $999 on the screen. He finally went on: “I am thrilled to announce to you that iPad pricing starts not at $999, but at just $499.” The screen then showed the $999 price being crushed with the $499 price. The crowd went wild!
The concept of price anchoring relies on the first piece of information that a buyer sees. This acts as an anchor, or a frame of reference for what the buyer expects a price to be. Steve Jobs used this concept in his introduction of the iPad. The anchor price he quoted was $999. This immediately made buyers believe the product should be priced around $999. However, when Jobs showed the actual price, starting at $499, the buyers immediately believed, psychologically, that it was a great deal. Viewers did not know what the worth of the iPad was; they just believed they were saving nearly $500 by having the initial anchor of $999.
Artificial Time Constraints: Marketers—particularly retailers—often use the psychological strategy of artificial time constraints that trigger a sense of urgency in the buyer; if they don’t buy today, they’ll miss out on a great deal. Whereas a consumer may have been on the fence about spending money, these artificial time constraints act as a catalyst for consumers to spend money right now. And there is a lot of power in artificial constraints: consumers are afraid of missing out and don’t want to regret not buying later. However, consumers can often find the same prices many times throughout the year because retailers use this tactic frequently.
Price Appearance is how the price looks to the customer. A study on the effects of verbal representation in pricing showed that buyers believed $1,555.83 was a very complicated price and difficult to comprehend quickly. The study further outlined that a price of $1,555 (no cents) was better and that buyers were able to more easily and quickly comprehend a price of $1555 (no commas) and thus more likely to pause and consider the product.
IN CONTEXT
If you’ve ever gone to a fancy restaurant, you may have noticed the prices on the menu are in a small font and don’t have zeros at the end. The price will be listed as $29 instead of $29.00. Psychologically, longer prices appear to be more expensive because they take longer to read. This effect is augmented by the use of a dollar sign. Similarly, the use of prices with multiple syllables seems more expensive because consumers pronounce the prices in their heads. In short, the longer it takes to read and pronounce, the more impact the buyer believes it has on their wallet, which is explained by price appearance.
Price gouging is when companies or individuals take advantage of a situation, typically an emergency or natural disaster, and charge exceptionally high prices for products or services. In some states, like New York, it’s illegal for businesses to price gouge during a state of emergency.
During the COVID-19 pandemic, several states posted on their government websites lists of items that couldn’t be subject to price gouging. Currently, the U.S. Department of Justice provides a list of items that can’t be hoarded or subject to price gouging due to COVID-19 precautions, including masks and other personal protective equipment (PPE), respirators, ventilators, and medical gowns. There have been other instances where price gouging was an issue. According to AccuWeather, “some of the most rampant examples of price gouging came during the most destructive storms in recent years, such as Hurricane Katrina, Hurricane Sandy, Hurricane Harvey, and Hurricane Irma.” After Hurricane Katrina, a hotel manager boosted room prices and was sentenced to five years in jail.
Source: THIS TUTORIAL HAS BEEN ADAPTED FROM OPEN STAX’S PRINCIPLES OF MARKETING COURSE. ACCESS FOR FREE AT https://openstax.org/details/books/principles-marketing. LICENSE: CREATIVE COMMONS ATTRIBUTION 4.0 INTERNATIONAL.
