Understanding Product Pricing and Customer Perceived Value

If you run a business, other than increasing your market share and maintaining a robust competitive advantage, you also want to improve your cash flow and profitability.

Pricing plays a critical role in achieving your goals. The aim is to lower your costs and maximize your sales. However, care should be taken that in a bid to cut costs you are not compromising the quality of the product or service.

If you charge very high prices with the aim of making a quick buck, you will be the first one to see your customers back.

If you charge very low prices, you might increase your sales but this reduces profitability. The key to successful pricing is optimizing sales volume, revenue and profitability.

Customers always want “value for money”. This value goes beyond price and looks into other issues such as quality, packaging, design, and reputation.

Understanding what customers perceive as value is crucial to achieving financial success for your organization.

Some of the issues that customers consider before placing a value on your products or services are:

Functional attributes: This include things like size, colour or credit terms. For example, one consumer might prefer a black suit to a brown suit.

Functional benefits: This is what the consumer expects to gain from the product. It concerns all the advantages your product offers as compared to similar product offerings.

For example, easy to use, design meets the expectations of the customer, easily available and has a long life.

One consumer might prefer an iPhone 3G to a simple Nokia phone because of its functions and mobile apps whereas the other customer might prefer the simple Nokia phone because it is easy to use and also intends to use the phone for calls and messages only.

Emotional benefits: This looks at the feelings stirred up in customers after buying your product or service. The quality and reputation of your brand and also social responsibility play an important role in stirring feelings in customers.

The feeling can be contentment, angry, sad etc. For example a customer who supports charity work will feel delighted to purchase a product that has a certain amount of contribution going towards charity work.

The opposite is true, a customer who does not support charity work might feel disinterested in buying such a product.

Aspirational benefits: Does the product offer the benefits that will help customers fulfil their dreams? Most consumers are prepared to pay a premium price for a product that they know it will help them enhance their status.

For example, one customer will be willing to pay £1500 for a pair of Dolce & Gabbana suit because it gives them the look they have always aspired, whereas the other customer will not mind wearing a cheap £100 suit from an unknown manufacturer.

The difference is that, one customer aspires to stand out, whereas the other is not status-conscious.

Costs: Price is not the only cost that consumers place on a product. For example if you go to IKEA to purchase an office desk, the price will be lower than say one from Staples.

This is because from Staples, you are buying an already assembled desk whereas the one from IKEA is not.

This is a typical example which illustrates how some customers are willing to pay less at the cost of being inconvenienced by assembling the desk.

Another example would be when one visits a fruit market, the price is cheaper when compared to supermarket prices where the fruit is already packaged. So other than price, customers look at other factors like time and energy (say for assembling the desk).

By taking into consideration the above factors and comparing the alternatives and substitutes in the market place, it makes it possible to price your products or services appropriately.

There is also need to constantly engage with your target and existing customers to find out what they want and also what they perceive provides them with value.