Page 236 - DECO101_MICRO_ECONOMICS_ENGLISH

Unit 14: Pricing Decisions

Notes

Case Study Value Based Pricing: “We are not the cheapest but….”

n this highly competitive online marketplace, it can be difficult to persuade customers
to buy from you when you offer a similar product to your opposition but with a higher
Iprice tag. And trying to beat competitors on price alone is a cut-throat business, very
risky and not recommended. It attracts bargain hunters ready to defect to competitors for
a better deal.

Using a value-pricing strategy is a better proposition because it attracts loyal customers.
Why do customers buy designer-labeled clothes and luxury cars? Why are those items more
expensive when they don’t cost so much more to make? The answer lies in the perceived
value. Value is not an inherent attribute of the product but it commands a higher price.
Customers do not buy features and benefits, they buy VALUE.

Value is subjective. Value is a benefit but a benefit is not necessarily of value to all

customers.
For example, a vendor offers free installation and free updates for his software. Customer-A
considers ‘free installation’ as ‘value’ because he has no technical knowledge and this
will save him time and effort. Customer-B rates the free installation as ‘nice to have’ but
the drawcard or ‘value’ is the free updates that will save him money in the long run.
Customers do not assign value to the same benefi ts.

Source: www.content4reprint.com
14.4 Summary

Price is referred to as the market value, or agreed exchange value, that will purchase a

definite quantity, weight, or other measure of a good or service. Price plays a crucial role
in both commodity as well as branded product market.
Pricing decisions are usually considered a part of the general strategy for achieving a
broadly defi ned goal.

Cost based pricing is the most common method used for pricing. Under this method, the
price is set to cover costs (materials, labor and overhead) and pre-determined percentage

or profit. Target based pricing is to maintain a constant percentage mark-up over costs.

Under marginal cost pricing, fixed costs are ignored and prices are determined on the
basis of marginal cost. Under going rate pricing, the firm adjusts its own pricing policy to

the general pricing structure in the industry.
However the second category of methods is competition based or market based methods,
in which the prices are decided on the prevailing market condition and customary pricing
methods.

There are specific pricing methods like value pricing, sealed bid pricing, price-quality
based pricing and psychological pricing.

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